When oil prices fell out of bed last winter there was much hand-wringing
over the fate of the former beneficiaries of high-priced crude. Trillions of
dollars of junk bonds issued by frackers, for instance, might default, oil
field services companies could fail, and layoffs in the oil patch might swamp
the nascent employment recovery.
Some of this has happened, though not on the apocalyptic scale the
worst-case scenarios suggested. More might be coming, but right now it's not
headline news in North America.
For OPEC, however, the sudden 50% diminution in export revenue is a clear
and present danger, and the response is noteworthy:
Oil-Rich
Nations Are Selling Off Their Petrodollar Assets at Record Pace
Now that oil prices have dropped by half to $50 a barrel,
Saudi Arabia and other commodity-rich nations are fast drawing down those
"petrodollar" reserves.
In the heady days of the commodity boom, oil-rich nations accumulated
billions of dollars in reserves they invested in U.S. debt and other
securities. They also occasionally bought trophy assets, such as Manhattan
skyscrapers, luxury homes in London or Paris Saint-Germain Football Club.
Now that oil prices have dropped by half to $50 a barrel, Saudi Arabia and
other commodity-rich nations are fast drawing down those
"petrodollar" reserves. Some nations, such as Angola, are burning
through their savings at a record pace, removing a source of liquidity from
global markets.
If oil and other commodity prices remain depressed, the trend will cut
demand for everything from European government debt to U.S. real estate as
producing nations seek to fill holes in their domestic budgets.
"This is the first time in 20 years that OPEC nations will be sucking
liquidity out of the market rather than adding to it through
investments," said David Spegel, head of emerging markets sovereign
credit research at BNP Paribas SA in London.
Saudi Arabia, the world's largest oil producer, is the prime example of
the swiftness and magnitude of the selloff: its foreign exchange reserves
fell by $20.2 billion in February, the biggest monthly drop in at least 15
years, according to data from the Saudi Arabian Monetary Agency. That's
almost double the drop after the financial crisis in early 2009, when oil
prices plunged and Riyadh consumed $11.6 billion of its reserves in a single
month.
In Angola, reserves dropped last year by $5.5 billion, the biggest annual
decline since records started 20 years ago. For Nigeria, foreign reserves
fell in February by $2.9 billion, the biggest monthly drop since comparable
data started in 2010.
Algeria, one of the world's top natural gas exporters, saw its funds fall
by $11.6 billion in January, the largest monthly drop in a quarter of
century. At that rate, it will empty the reserves in 15 months.
Excluding Iran, whose sales are subject to some sanctions, members of the
Organization of Petroleum Exporting Countries are expected to earn $380
billion selling their oil this year, according to U.S. estimates. That
represents a $350 billion drop from 2014 -- the largest one-year decline in history.
"The shock for oil-rich countries is enormous," Rabah Arezki,
head of the commodities research team at the IMF in Washington, said in an
interview.
Oil-rich countries will sell more than $200 billion of assets this year to
bridge the gap left between high fiscal spending and low revenues, Spegel
said.
Good, Bad, or Irrelevant?
When a central bank wants to tighten monetary policy, it sells bonds from
its portfolio to investors in return for cash. That shrinking supply of
spendable funds slows the economy down, moderates inflation -- and frequently
causes a recession.
Saudi Arabia selling bonds has exactly the same effect, but on a global
scale, depending on which bonds are being sold for which currency. So the
projected $200 billion of annual asset sales by oil exporters will be a
modest (compared to US, Japanese or European QE programs) tightening of world
monetary policy, other things being equal.
In ordinary times this would push interest rates up a bit. But with
central banks and their unlimited currency creation machines now dominating
the market it may not make much of a difference.
And in a perverse way these bond sales provide more liquidity to a tight
part of the market. It seems that central banks have been buying up all the
high quality debt in the global financial system, leaving pension funds and
bond funds that need such paper unable to get enough of it (an astounding
situation when you think about it: Governments around the world are borrowing
trillions of dollars each year but there's not enough of that debt to satisfy
pension funds). See The
Worldwide Deficit of High-Quality Debt.
So, a non-event? Let's not go that far. Oil exporting countries have
designed their budgets around the assumption of much higher oil revenues. And
many of them have failed to diversify their economies and create
entrepreneurial cultures for the day when the oil is gone. So if prices stay
low for a few more years they'll start to run out of reserves, default on
their debt, etc., etc. Maybe that's the oil market black swan that we should
be worried about.
