Greasing the Wheel: Oil’s Role in the Global Crisis

Between January 2002 and August 2008, the nominal oil price rose from $19.7 to $133.4 a barrel. This led to a large increase in oil revenues for oil exporters and a deterioration of the current account for oil importers (Figure 1). Between 2002 and 2006, net capital outflows from oil exporters grew by 348%, becoming the largest global source of net capital outflows in 2006 (McKinsey 2007).

Capital outflows from oil exporters therefore played an important role in the global liquidity glut during the build-up to the US subprime crisis. Analysis of direct capital flows is hampered by the lack of reporting transparency and the use of foreign financial intermediaries. Indirect recycling also took place, i.e. direct oil-revenue investment in a given financial market led to corresponding knock-on flows towards the ultimate net borrower. Nonetheless, analysis from the US Federal Reserve suggests that “…most petrodollar investments [found] their way to the United States, indirectly if not directly” (Federal Reserve Bank of New York 2006). In short, the US was the ultimate net borrower, in order to finance its growing current account deficit.

via The Oil Drum | Greasing the Wheel: Oil’s Role in the Global Crisis.

Categories: Energy, Transportation