Petro Dollars & World Economy

The ever increasing prices of oil has strengthened the hold exercised by petro dollar holders on the world economy.High oil prices are a sort of tax on oil importing nations but they generate windfall revenues for the oil exporting countries specially in the gulf region. In 2006 petro dollars were the single largest source of net global capitalin flow. A major chunk of these revenues are recycled into the global market , making petro dollars a strong player in the market.
Where are these petroldollars used ??

Central Banks
Part of petrodollars end up in the cenral banks ,which invest in foreign assets to stablize foreign currencies against balance of payment fluctuations.

Sovereign Wealth Funds
These are state owned investment funds , used to invest oil surpulses into the global financial markets.

Goverment Investment Corporations
Increasingly, oil exporters channel some of their wealth into smaller, more targeted funds, such as Dubai International Capital (DIC) and Istithmar. These entities invest directly in domestic and foreign corporate assets, shunning the portfolio approach of the sovereign wealth funds.

Goverment Controlled Companies


Fueling Liquidity
In fixed income markets this increased liquidity has significantly lowered the interest rates.
Its estimated that total foreign net purchases of US bonds have brought down long-term rates by about 130 basis points.Taking into account the allocations of GCC investors,it is estimated that each year equity markets receive $200 billion in petrodollars, accounting for about $2 trillion—or 4 percent—of their capitalization
Some observers worry that this new liquidity is having an inflationary effect on asset prices, perhaps fueling bubbles.

Concern Is ....
Despite the many beneficial effects of petrodollars in increasing global liquidity and spurring the growth of various financial-asset classes throughout the world, the rise of investors in oil-exporting countries has created concerns.
One worry is that the huge size of petrodollar sovereign wealth funds, coupled with their relatively high appetite for risk, could make global capital markets more volatile. The limited transparency of these funds amplifies the anxiety.
A final concern: the long-term economic impact of higher oil prices. In the 1970s their rise sparked inflation in the major oil-consuming economies and sent global banks on a petrodollar-fueled lending spree in Latin America