The Global Imbalances Black Hole

Free Exchange April 27, 2012

Apr 26th 2012, 20:54 by R.A. | WASHINGTON

FOR much of the past few years, China has been at the centre of heated rhetoric over its contribution to global imbalances and a corresponding shortfall in global aggregate demand. As this week's Free exchange column explains, the surpluses of oil exporters are the bigger culprit:

The biggest counterpart to America's current-account deficit is the combined surplus of oil-exporting economies, which have enjoyed a huge windfall from high oil prices (see left-hand chart). This year the IMF expects them to run a record surplus of $740 billion, three-fifths of which will come from the Middle East. That will dwarf China's expected surplus of $180 billion. Since 2000 the cumulative surpluses of oil exporters have come to over $4 trillion, twice as much as that of China.

For the past two years, China's surplus has been falling. Oil exporters's surplus dropped sharply along with the price of oil during the global recession. It has come roaring back, however, and is now higher than ever.

The bad news is that oil exporters are mostly sitting on their wealth. What they do spend flows more to Asia and Europe than America:

The impact of higher oil prices on the world economy depends on whether oil exporters spend or save their petrodollars. If they recycle them by buying more from oil-importing countries, this cushions global demand. But if they save them, income is permanently transferred from oil consumers to oil producers, depressing global demand. After the oil-price shocks in the 1970s, about 70% of the increase in export revenues was spent on imports of goods and services. But IMF figures suggest that less than 50% of the windfall is likely to be spent in the three years to 2012.

Moreover, whatever recycling of petrodollars occurs is unevenly distributed. Oil exporters buy a lot more of their imports from Europe and Asia than from America, so a shift in the "terms of trade", which redistributes income from oil consumers to oil producers, tends to reduce the relative demand for American goods. According to research by the International Energy Agency, for each dollar America spent on oil imports from OPEC countries last year, only 34 cents came back in exports, whereas the European Union got back more than 80 cents. For each dollar China handed to OPEC, 64 cents flowed back in increased exports.

It's a problem without an easy solution, as the column explains. From the perspective of the rest of the world, however, the more oil exporters splash out on public investment, the better.

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my idea would be to reduce the oil import and to focus more on alternative energies. well if the oil importers really think that they can´t do without oil, they may buy from smaller exporters and progressively step away from the bigger ones. A fact, is the biggest oil exporters form clusters and drive the oil prices to increase because they know they are in position of force

Natural resource exporting countries don't take away American jobs by hollowing-out America's manufacturing sector, Einstein.

There is always a problem with such a mechanical approach to the issue of trade balance. Let me expose this approach a little bit. Oil exporters earn income from the exports of limited un-replaceable natural resources. Do people with this approach really think that those oil exporters should consume all their export earnings now? What will they live when their oil reserves run out in the future? Why shouldn't they save most of their exports for future use to smooth out the effect of limited natural resources? Economists or any professions, one should be with a reasoning mind, not a mechanical robot just does the task according to a single command.

OPEC has been waging economic war on the rest of the world since 1973. If I had had an army in Kuwait in 2003, I'd have gone the other way.

We should just jack up the price of oil so we can have incentive to develop good and more green energy alternatives

Not entirely fair to show the right hand chart showing exports as a % of GDP.

Since we are talking about the impact on the world, it is better to use absolute export $ to see which countries are the main components of that $600bn surplus pa.

Or America can just drill more, duh.

The solution would be for America to develop a top-flight domestic football (soccer) league whose players and clubs could be sold, thereby diverting some of the petrodollar flow into Europe. (Arsenal fan speaking)

In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts. Adam Smith argued that in a free exchange both parties benefit, and this blog's aim is to encourage a free exchange of views on economic matters.

The Global Imbalances Black Hole

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