The Dangers of Rising Oil Surpluses
Blog Post
April 6, 2011
Oil prices are rising due to strong demand from emerging economies, the risk premium from unrest in the Middle East, and monetary easing at the Federal Reserve and other central banks. The rising price of oil reduces the discretionary income of consumers and squeezes the profits of businesses, sapping demand from the world economy. But rising energy prices pose another threat – namely, that the accumulation of surpluses in oil exporting economies may be recycled into developed markets and contribute to excess lending and asset bubbles. Similar to the imbalances that helped to fuel the housing bubble before the Great Recession and the surpluses during the late 1970s that led up to the Latin American Debt Crisis, the current flows from oil exporting economies into asset markets may once again destabilize the global financial system.
Many have recognized the dangers of recycling large amounts of capital across national borders, but few have attempted to address the dilemma of how to monitor rising surpluses. Evidence suggests that the capital accumulated by oil exporters far exceeds current estimates and that the threat of rising surpluses may be much larger than the policy community is considering.
According to the IMF’s October World Economic Outlook, the cumulative current account surpluses in oil exporting economies is projected to be less than 0.5% of global GDP from 2010 to 2015, down from a double peak of 0.94% of global GDP in 2006 and 0.92% in 2008.
*Oil exporting surplus economies include: Kuwait, Nigeria, United Arab Emirates, Saudi Arabia, Algeria, Qatar, Norway, Venezuela, Iran and Russia.
But already, these estimates look too low. In many oil exporting nations, the actual trade surpluses are diverging from the IMF's predictions of current account surpluses. (For many oil exporters the largest portion of the current account balance is the goods account which is dominated by net exports of oil.)
In Saudi Arabia, the world’s largest oil exporter, the IMF estimates that the current account surplus is far below the actual trade surplus. Historically, these two figures stayed very closely linked, particularly during the period from 2004-2008, when the trade balance exceeded the current account balance by about 12% of GDP. But in 2010 the trade surplus was 32.9% of GDP while the IMF estimated the current account balance was only 6.7% of GDP, a difference of $114 billion. Other factors could reduce Saudi Arabia’s current account balance, such as increasing transfers (transfers are defined as government transfers or income remittances). But it is highly unlikely that these transfers would leap from 5% of GDP to 20% of GDP in one year. In sum, it appears that the IMF estimates of Saudi Arabia’s current account balance for 2010 are far too low. The same goes for 2011. Prices are likely to remain elevated and the current account balance is likely to be well above the IMF’s estimate of 6.2% of GDP.
According to some private estimates, Saudi Arabia’s current account surplus will be 18-21% of GDP in 2010, higher than the IMF’s current estimate by a factor of three. It is hard to understand how the IMF arrived at their figures. Given that oil prices were around $80 per barrel in October when the World Economic Outlook was released, which was the average price of crude in 2010, the IMF should have been closer to the mark. It is true that in addition to the price of crude, there are a number of factors that can have an impact on current account balances. Hanan Morsy, an IMF economist, found that the most significant determinants of current account balances among oil exporters were the fiscal balance, the oil balance, oil wealth, age dependency, and the degree of maturity in oil production. But the fact is, many of these factors have not changed significantly since last October.
There is one exception. Social unrest has caused Saudi Arabia to plan on running more expansionary fiscal policy. King Abdullah announced a $36 billion fiscal stimulus in February and another $93 billion package in March. Expansionary fiscal policy has consistently been shown to reduce a nation’s current account surplus, and will likely do so in Saudi Arabia. Perhaps oil exporters in the Middle East and elsewhere will massively expand government spending and reduce taxes? Probably not.
Until the official current account figures are released, the extent of the imbalance between oil importers and exporters will remain unknown. But evidence suggests that surpluses in energy exporters will be a major concern going forward. The global economy remains deeply wedded to fossil fuels and yet the there is little attempt to properly manage, much less accurately monitor, the financial implications of the current energy paradigm. The capital accumulated from the sale of crude oil may reverberate back through developed markets and amplify risks in asset markets. Given the potential impact of such imbalances it is essential that we get the monitoring systems in place that forewarn policy makers of these risks and encourage changes in surplus economies that reduce external imbalances.