Oil, Dollars, Debt, and Crises_ The Global Curse of Black Gold

Oil, dollars, debt and crises: The global curse of black gold

Oil, dollars, debt and crises: The global curse of black gold studies the causes of the current oil and global financial crisis and shows how America’s and the world’s growing dependence on oil has created a repeating pattern of banking, currency, and energy-price crises.

tag: gold

Category: Forex

Author: Mahmoud A. El-GamalRice University
Amy Myers JaffeRice University 

Language: English

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Introduction

Oil, Dollars, Debt, and Crises studies the causes of the current oil and global financial crisis and shows how America’s and the world’s growing dependence on oil has created a repeating pattern of banking, currency, and energy-price crises. Unlike other books on the current financial crisis, which have focused on U.S. indebtedness and American trade and economic policy, Oil, Dollars, Debt, and Crises shows the reader a more complex picture in which transfers of wealth to and from the Middle East result in a perfect storm of global asset and financial market bubbles, increased unrest, terrorism and geopolitical conflicts, and eventually rising costs for energy. Only by addressing long-term energy policy challenges in the West, economic development challenges in the Middle East, and the investment horizons of financial market players can policy makers ameliorate the forces that have been causing repeating global economic crises.

Foreword

The current economic and financial crisis – by all appearances, the worst since World War II – has already generated a vast amount of commentary. Some have been polemical. Some have been measured. Analysis has ranged from the wellinformed to the superficial. But most have, understandably, focused on the immediate causes of the crisis. An unsustainable real estate bubble, shoddy credit standards, disastrous risk management by major banks, counterproductive incentives for managers, the rise of esoteric and unregulated financial instruments, and broad-scale failure by regulatory agencies are just a few of them. All are important. And all will need to be addressed by policy-makers and financial executives as they forge strategies to avoid similar crises in the future.

Yet there are even larger factors at work. A number of observers, for instance, have stressed the role of structural global imbalances in creating an environment conducive to the world-wide financial turmoil witnessed in 2008. Surely, the perverse Sino-American financial relationship – under which, essentially, relatively poor Chinese loan their savings to relatively affluent American consumers – played an important part in fostering the loose credit that helped precipitate the current crisis.

Oil, Dollars, Debt, and Crises by Mahmoud A. El-Gamal and Amy M. Jaffe addresses another structural global imbalance. Their subject is the huge transfer of resources from energy-importing to energy-exporting countries. This transfer, prompted by the rise in petroleum and natural gas prices that began in the late 1990s and sharply accelerated in the middle of the present decade, created giant reserves of petrodollars that, in turn, helped to overheat financial markets in the United States and elsewhere.

The book is remarkable on several counts. First is its timing. Begun in 2006, before today’s financial turmoil exploded into public consciousness, Oil, Dollars, Debt, and Crises is impressively prescient in highlighting the risks associated with major imbalances in the global financial system.

Second, the book moves well beyond economic analysis to assess other factors that shape production decisions by major energy exporters. These factors include institutional weakness, domestic constituencies, internal opposition movements, and, not least, an often harsh geopolitical environment. The last is particularly salient. The world’s most important energy producing region – the Middle East – is one long characterized by simmering animosities and outright conflict.

Third, El-Gamal and Jaffe detail the role of international energy markets – largely denominated in dollars – in sustaining the United States’ unique role as supplier of the world’s reserve currency. Ironically, the current crisis has seen a flight to the dollar, as international investors lower their exposure in riskier currencies. But the long-run viability of the dollar as the de facto reserve currency of the world (absent a sustained increase in our national savings rate) is for the first time beginning to be an open question.

Above all, the authors continually – and rightly – stress the global nature of the challenges confronting us. Even so large an economy as the United States can no longer be analyzed in isolation. Chinese fiscal policy matters. So do European interest rates. And so does military conflict in major energy producing regions such as the Persian Gulf. The integration of the world economy has led to substantial gains from increased trade and investment. But it has also raised the risk of financial contagion. And it has made international coordination all the more important and difficult.

Such cooperation was hard enough when I was U.S. Secretary of the Treasury from 1985 to 1988. Today, with immensely greater capital flows, critical new players like China, and a plethora of opaque financial instruments, the task is even more daunting. The hard reality – rather than the easy rhetoric – of globalization infuses Oil, Dollars, Debt, and Crises.

I know and admire both the authors. Mahmoud is a brilliant scholar with an impressive background that includes work as the International Monetary Fund’s desk economist for the West Bank and Gaza. Amy is one of the nation’s top energy experts, with decades of experience with oil and gas markets. Together, they give Oil, Dollars, Debt, and Crises a richness of analytic texture rare in books of its kind. Both, I am proud to say, are affiliated with the James A. Baker III Institute for Public Policy at Rice University.

We may be certain that economists and historians will be assessing today’s crisis for years to come. Indeed, the current turmoil has revealed the extent to which, seventy years after the event, informed observers still differ sharply on the causes of the Great Depression. In short, the debate about today’s crisis has just begun.

Oil, Dollars, Debt, and Crises will surely hold an early and estimable part in it.

James A. Baker, III, Honorary Chair
Baker Institute for Public Policy, Rice University

Table of Contents

1 The Challenges of Resource Curses and Globalization 1

Volatilities: Financial, Economic, and Geopolitical 10

Petro-States, Hydrocarbon Dependence, and Resource Curses 14

Geopolitical Conflicts and the Politics of Discontent 16

Mounting Debt and Fragility of the Global Financial System 18

Constants and Variables in the Cycle: 1970s to the Present 19

2 New Middle East: Childhood 1 973–84 and Adolescence 1 985–95 25

OPEC’s Market Power: Economics, Politics, and Volatility 26

Middle-East Flows of Labor, Capital, and Cultural Norms 31

Oil Price Collapse and the Politics of Discontent 33

The Rise of National Oil Companies 40

Militarism, Debts, and Global Finance 44

3 Road to the Status Quo: 1 996–2008 51

Changing OPEC Politics and Renewed Oil Revenues 52

The Other Black Gold: Natural Gas 60

The Economics and Geopolitics of Middle-East Discontent 65

Déjà Vu: Overgrown Children of the 1970s? 71

4 Globalization of Middle-East Dynamics 75

Hedge Funds and Sovereign Wealth Funds 76

Increased Financial Integration and Contagion 80

Liquefied Natural Gas and Globalized Energy Markets 85

Conflicts, Economic Sanctions, and the “War on Terror” 90

5 Dollars and Debt: The End of the Dollar Era? 97

The Dollar as Reserve Currency 97

Bretton Woods and Beyond: The Primacy of U.S. Debt 99

Global Economic Growth, Interest Rates, and Debt 101

Uneasy Symbiosis: U.S. Consumers and Asian Savers 103

Contagion: Sequential Bubbles and Crashes 107

The Dollar and Bets on Chinese Growth and Oil 110

6 Motivations to Attack or Abandon the Dollar 117

America’s “Exorbitant Privilege” and Geopolitics 119

Petrodollar Recycling and the Dollar-Pricing of Oil 121

Saddam Hussein, Ahmadinejad, and Dreams of Petroeuros 122

The Paradox of Pegged Currencies 125

Pegged Currencies and “The Balance of Financial Terror” 130

The Threat of Renewed Protectionism and Mercantilism 134

Globalization with Multiple Currencies: Bretton-Woods III? 139

7 Resource Curses, Global Volatility, and Crises 143

Continued Regional and Global Resource Curses 144

The Global Resource Curse 147

Continued Global Dependence on Oil 150

Global Conflicts, Radicalisms, and Terrorism 159

Serial Amnesia, Greed, and Financial Crises 164

Peaks and Troughs: The Need to Ameliorate the Cycle 167

8 Ameliorating the Cycle 171

Technical Solutions and International Cooperation 175

Attenuating the Energy-Markets Cycle 177

Energy Market Regulation and Multilateral Intervention 181

Petrodollar Recycling and International Lender of Last Resort 184

Managing Geopolitical Conflicts 188

Conclusion 191

Notes 193

Bibliography 210

Index 216

Reviews

“Oil, Dollars, Debt, and Crises is impressively prescient in highlighting the risks associated with major imbalances in the global financial system. The book moves well beyond economic analysis to assess other factors that shape production decisions by major energy exporters. Above all, the authors continually – and rightly – stress the global nature of the challenges confronting us. The authors give Oil, Dollars, Debt, and Crises a richness of analytic texture rare in books of its kind.”

Praise for Oil, Dollars, Debt, and Crises

“A boldly original and provocative display of the mutual amplifications since the 1970s of a global energy price cycle, a global finance cycle, and geopolitical turmoil in the Middle East into a super cycle that is ‘endogenous and self-perpetuating.’” ― Clement M. Henry, University of Texas at Austin

“In today’s geo-strategic environment, few threats are more perilous than the potential cutoff of energy supplies. Unfortunately, recent experience provides us little reason to be confident that market rationality will always win the day where petro-politics is concerned. El-Gamal and Jaffe offer a timely analysis of the potentially perilous interaction of oil insecurity, mounting U.S. debt, and Middle East geopolitical conflicts. They argue that the future stability of the dollar and financial markets remains very much tied to the fate of oil, a sobering reflection on a key challenge to U.S. foreign policy and international financial diplomacy. Scholars and statesmen alike should take note of the provocative analysis in Oil, Dollars, Debt, and Crises.” ― Senator Richard Lugar, Ranking Minority Member, U.S. Senate Foreign Relations Committee

“Oil, Dollars, Debt, and Crises is compelling reading, not simply because it clearly explains the global curse of ‘black gold.’ It also weaves together the interdependent relationships binding the inherently cyclical foundations of the petroleum sector with global currency dislocations, wealth transfer adjustments impacting emerging markets, radical income disruptions in countries that produce oil (and other commodities), and the domestic and international repercussions for geopolitics and global violence. No other study articulates so pointedly the core global issues that impact today’s global political economy. It takes the combined talents and analyses of two leading scholars from the overlapping professions of economics, Middle East studies, and energy studies to be able to provide the general public, scholarly professionals and policymakers alike with this seminal, pioneering study of the issues at the heart of today’s globalized world.” ― Edward L. Morse, Managing Director at Louis Capital Markets, former Chief Energy Economist at Lehman Brothers and publisher of Petroleum Intelligence Weekly

“El-Gamal and Jaffe have written a timely, provocative book that students and scholars in several fields will find useful…. Recommended.” ― Choice

About the author

Mahmoud A. El-Gamal , Ph.D, is Chair of the Department of Economics and Professor of Economics and Statistics at Rice University in Houston, Texas, where he also holds the endowed Chair in Islamic Economics, Finance, and Management. Before joining Rice in 1998, he was an Associate Professor of Economics at the University of Wisconsin in Madison. He has also worked as an Assistant Professor of Economics at the University of Rochester and the California Institute of Technology. During 1995–6, he worked as an Economist in the Middle East Department of the International Monetary Fund. During the second half of 2004, he served as scholar in residence on Islamic finance at the U.S. Department of Treasury. He has published extensively in the areas of econometrics, economic dynamics, financial economics, economics of the Middle East, and the economic analysis of Islamic law. His most recent book is Islamic Finance: Law, Economics, and Practice (Cambridge University Press, 2006).

Amy Myers Jaffe is the Wallace S. Wilson Fellow for Energy Studies at the James A. Baker III Institute for Public Policy and Associate Director of the Rice University Energy Program. Her research focuses on oil geopolitics, strategic energy policy, and energy economics. She is coeditor of Natural Gas and Geopolitics: From 1970 to 2040 (Cambridge University Press, 2005, with David G. Victor and Mark W. Hayes) and Energy in the Caspian Region: Present and Future (2002). She has published widely in academic journals and edited collections, including the keynote article “Energy Security: Meeting the Growing Challenge of National Oil Companies” in the Whitehead Journal of Diplomacy and International Relations (Summer 2007) and “The Persian Gulf and the Geopolitics of Oil” in Survival (Spring 2006).
Ms. Jaffe served as project director of the Council on Foreign Relations task force on strategic energy policy. She currently serves as a strategic advisor to the American Automobile Association on developing an AAA members’ voice on U.S. energy policy debates.

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