It is good to be the king …
Of oil, that is.
The Saudis just released data showing just how much foreign exchange they added to their stockpile in 2007. Jim Hamilton (cool photos) reports that the Saudis now seem to be working a bit harder than in the past to get the same amount of oil out of their biggest — actually the world’s biggest, by a substantial margin — oil field. But they certainly aren’t short on cash. The foreign accounts of the Saudi Arabian Monetary Agency (SAMA) swelled by over $75b this year. If oil stays at $90, only the creation of a Saudi SWF will keep the 2008 total under $100b.
SAMA’s foreign assets were up $16b in December, and $42.6b (valuation adjusted) in the fourth quarter.
With Rachel Ziemba of RGE, I am trying to better understand how the Gulf — which invests buys equities as well as bonds — is managing its money. Our latest effort — which builds on our past work– is only just starting. But here is a graph showing the foreign equities the Saudis would have needed to buy if wanted to maintain a 20% equity share of SAMA’s reported securities portfolio.
A couple of things stand out in the graph.
The first is that the Saudis never would have needed to spend more than $15 over a 12 month period to keep a constant 20% equity share in their portfolio. Of course, if the Saudis were increasing the equity share of their portfolio rather than holding it constant they would have had to buy more, but the lion’s share of their swelling coffer was still being invested in bonds.
If the Saudis– and indeed other central banks that have been buying a lot more bonds than equities — shift course and start putting say 80% of their funds in equities and 20% in bonds, it would be a big shift. Ask the investment banks. They are hoping the sale of (over-priced?) US equities to sovereign funds replaces the sale of (over-priced) bonds to central banks as a key source of financing for the US current account deficit.
The second is that from q3 2006 to q3 2007 Saudi foreign asset growth — on a rolling 12m basis — was falling. Why? It wasn’t because the average price of oil was falling. It was actually remarkably stable at around $60 a barrel (the 12m average that is) over that period. Rather, I suspect domestic spending and investment rose, reducing the funds the Saudis had left over to place with SAMA. The burst in spending explains why inflation started to pick up in 2007 — though the falling dollar clearly didn’t help.
The recent uptick in oil prices has, though, has led SAMA’s foreign asset growth to shoot up again. The pattern here is quite clear. A shock to oil revenues is followed by a rise in spending, but with a lag.
Even so, the Saudis are unlikely to add as much to SAMA’s foreign assets as Norway will add to its government fund.
Both Saudi and Norwegian foreign asset growth is tied to moves in the price of oil, as one would expect. But Norway has — apart from a brief period in late 2005 and most of 2006 — added more to its government fund than the Saudis have set aside at their central bank even though it produces and exports significantly less oil than the Saudis. Norway’s oil also costs more to produce than Saudi oil.
So what explains the difference?
Two things:
First, Norway collects taxes, and generally finances its government with tax revenue not oil revenue. That means that almost all the surplus oil revenue goes to the government fund and is used to build up Norway’s financial portfolio. The government can spend — in theory at least — only the interest income from its financial portfolio, not the current oil revenue. That effectively converts a variable oil revenue stream in a theoretically more stable financial revenue stream. The Saudis by contrast don’t collect taxes and rely on oil revenues to fund their government budget. Higher spending (and more government-led investment) consequently means less for SAMA. Institutions — including fiscal institutions — matter. Norway exports fewer barrels of oil, but saves more of the revenue from each barrel of exported oil.
Second, the Saudis have — to use a wonderful phrase — gone further in "privatizing" the management of their oil windfall than the other Gulf states. The increase in SAMA’s foreign assets has generally lagged Saudi Arabia’s current account surplus. That implies that a range of "private" Saudi investors — including, one would assume, members of the royal family — have also been building up their foreign assets.
I would guess that those private accounts have been invested more aggressively that SAMA’s public accounts.
The US could have addressed its energy deficit a long time ago with a mixture of nuclear, wind, solar, and geothermal power sources.
- France obtains 80% of its electrical power from Nuclear energy.
- Denmark obtains 20% of its electrical power from Wind energy.
- Iceland obtains 100% of its electrical power from geothermal sources.
- China has more rooftop solar energy hot water systems than the rest of the world combined. Wind power increased by 95% in China last year. Over 60 Nuclear power plants are planned over the next two decades. Along with mass transportation such as the 300km/hr Shanghai-Beijing railway, per capita energy consumption growth can be minimized. From energy efficiency, Beijing eliminated 1000 MWatts consumption over the past year.
U.S. Arrests 4 in China Spy Cases
The U.S. charged a government official and two Chinese nationals with giving military secrets to Beijing. Separately, a former Boeing engineer was arrested on charges that he passed secrets about the Space Shuttle to China.
The arrests mark China’s latest attempts to gain top secret information about U.S. military systems and sales, said Assistant Attorney General Kenneth Wainstein. He described China as “particularly adept, and particularly determined and methodical in their espionage efforts.”
“The threat is very simple,” Mr. Wainstein said at a Justice Department news conference in Washington. “It’s a threat to our national security and to our economic position in the world, a threat that is posed by the relentless efforts of foreign intelligence services to penetrate our security systems and steal our most sensitive military technology and information.”
Huawei rails at 3Com deal security concerns
The Chinese company participating in the planned buy-out of a US telecoms equipment maker has angrily rounded on US politicians who claim the deal could endanger US national security.
Xu Zhijun, chief marketing officer at Huawei Technologies, told the Financial Times that the concerns expressed by some US lawmakers were “bullshit”.
The deal has sparked concerns in the US because 3Com supplies intrusion prevention technology to the US defence department, designed to protect the Pentagon against cyber attack. The Pentagon believes that hackers in China conducted a massive cyber attack on its systems last year.
I’m not sure what the excitement is about, no one cared when they bought/moved with US Govt approval the company that made round magnets used in guidance systems. Oh that right it’s an election year.
jo6pac
DC — I agree with your critique of the (absence of) US energy policy. I would take issue though with China — which continues to keep domestic petrol prices below world market prices and is far more noted for its use of coal than its solar power.
Oh those nasty Chinese. Always doing something to annoy us. Never doing what we tell them to do. Who do they think runs the world? If they don’t shape up and obey us, then we will have to……er…..give me a week and maybe I’ll think of something.
“the gulf funds invest in HFs, PE funds and pay deal fees.”
then might we assume (mostly democratic nation based) hfs and pe funds, along with their lawyers and auditors, both know of and influence the allocation of these funds? why the need for separate studies - and speaking of fees - might we ask about the size of the swf research industry and where the money comes from to fund it?
“I agree with your critique of the (absence of) US energy policy. I would take issue though with China — which continues to keep domestic petrol prices below world market prices and is far more noted for its use of coal than its solar power.”
Brad overall China is still a developing nation so coal can’t be eliminated overnight. Only recently did relatively wealthy Beijing switch major heating furnaces from coal to expensive natural gas. Nuclear and Hydroelectric power will be replacing coal over the next 20 years simply because China will run out of domestic coal over the coming couple decades at the present rate of consumption. Already China has to import coal from Australia and South Africa. The US with the largest coal supply in the world will be burning the stuff for far longer than China. China has the largest hydroelectric capacity in the world that is only 20 percent utilized today.
and what is funding this blog’s resident troll and why do you encourage him brad?
China Spurs Coal-Price Surge
By becoming a net importer of coal, China is doing for coal what it once did for oil: helping push prices to new highs, adding more pressure to the creaking global economy.
NASA photo of China: (no Renminbi!).
“The ninth annual Hedge Funds World Middle East Conference will play host to some of the leading figures in the global alternative asset industry, a sign of the region’s increasing sophistication in financial investments…” http://www.ameinfo.com/146617.html
How much do the princes skim?
Off-topic:
US Financial Meltdown Coming
http://globaleconomicanalysis.blogspot.com/
There are $45 trillion of credit default swaps out there. A default on a mere 10% would cause an economic disaster. Unfortunately, it’s guaranteed to happen.
Companies like Citigroup (C), AIG (AIG), Merrill Lynch (MER), Lehman (LEH), Morgan Stanley (MS), might think they are hedged. If so they are only fooling themselves. Just what is a guarantee from someone like MBIA (MBI) or Ambac (ABK)? The answer is nothing.
There are countless hedge funds out there, leveraged to the hilt in garbage that has not been marked to market. The same holds true for banks and as we have seen today, insurance companies like AIG.
At some point, some company will declare bankruptcy or a debt downgrade will trigger a claim. That claim will not be paid because the hedge fund does not have the means to do so. A cascade of defaults will occur up the line on any corporation counting on that claim as part of their hedge.
Consider GM. The market cap of GM is $15 billion or so. There are about $1 trillion in credit default swaps bet on the success or failure of GM. It is virtually impossible for this to be hedged because there is not $1 trillion in GM bonds available as collateral.
The credit swaps on MBIA, Ambac, and the homebuilders trade deep into junk, some priced outright for default. Is there any wonder Moody’s, Fitch, and the S&P are reluctant to downgrade MBIA and Ambac? The AAA ratings assigned to Ambac and MBIA are a joke.
If you think the US banks are a mess, try taking a quick look at the balance sheets of companies like Lehman (LEH) and Bear Stearns (BSC). These companies have balance sheets that are literally 40 times their shareholder equity. They also own 3 times their equity in what is known as ‘Level 3 assets’ — those that can’t be priced, and can’t even be estimated based on a model.
Cash is king or King is cash?
http://www.atimes.com/atimes/Global_Economy/JB13Dj05.html
Following upon the fall of the Soviet Union came a new American attitude as to how developing nations in economic distress should be handled. During the Cold War, these countries were treated gingerly, for the fear was that if these societies were pushed into deep penury they might be tempted to “flip” over to the side of the Communists. With the end of the Communist threat, that fear disappeared, as did the velvet glove. Out came the iron fist.
For about 20 years now, poorer nations in economic distress seeking assistance have had the misfortune to have been subject to what is called the “Washington Consensus.”
The core mandate of the Washington Consensus demanded that the supplicant nations severely cut their government social welfare spending in order to generate budget surpluses. Also, the depreciation of these countries’ national currencies, and the Washington Consensus demand that the governments stop subsidizing prices of necessities such as imported food and medicine meant that the less fortunate in these societies were subject to substantial hardship in meeting their needs for the daily necessities of life.
Hausmann’s quip about the “same voices” advocating the stimulus package for America is a particularly pointed jab at Summers who, as Treasury Secretary, was the hanging judge who sentenced the poor unfortunate nations caught up in the East Asian financial crisis of 1997-98 to the Washington Consensus.
Saudi Arabia just promised another $1b to Lebanon’s central bank.
http://www.menafn.com/qn_news_story_s.asp?StoryId=1093184923
Higher oil prices is going to make american military to have more focus on middle east since they now face not only supply threat but also financial threat.
i think that opec, who are a tolerated cartel producing 40 % of the world’s oil, contain nations from venezuela to saudi arabia with very different attitudes towards the united states (and allies.)
so an opec agreed communique is not going to read like - e g - a chavez election speech. it’s going to be more like a greenspan classic, well hedged and oblique.
when the euro to dollar rate approached $1.50 the saudis issued a finely judged statement, no shouting, but the dollar never sank below the psychological level, since then.
now a statement warns that opec might part company with pricing in dollars only, some time within the next ten years. what does that mean ? is it some kind of a compromise statement cobbled together to cover over different views in the organisation ? and now that oil production may be entering an era of long term decline - who needs a cartel ?
america, as pointed out above, could have gone for wind energy and alternative strategies. perhaps this is a mirror image of the chinese reserves conundrum ? -
we look on, and wonder why a more rational strategy is not followed. we are being obtuse. in each case it is not advantage which is sought, but relative advantage. a collapsing dollar will hurt chinese savings - but not as much as a collapsing dollar discredits the u s. likewise, high oil prices hurt the u s, but threaten a military superpower less than those oil importers with less clout in an energy crunch.
finally, a reminder that the opec investment in various u s markets rises more for a given rise in the price of oil, than is lost to opec by u s purchases of imported oil.
.
Peak oil has finally flashed a shy grin on this site. Brave coal steps forward, ready to cover any shortage in the demand for energy.
But, the wild card: A new study to appear in the Proceedings of the National Academy of Science states that the world may will pass any or all of nine global warming tipping points before 2100, including: Greenland, Amazonian Forests, and the West Antarctica Ice Sheet, Arctic Ice Melt….
Any projections–for any country beyond 10 or 15 years–is pure fantasy, making assumptions that the world will continue to function as it has for the past 100 years.
I do realize that a superb site such as this is not designed to consider seriously the prospects of global warming, certainly not anything as catastrophic as Greenland passing the tipping point or Amazonian die-off. Once these tipping points are passed, there is no returning. In some cases, the transition to a new state will be abrupt and immediate (a few years); in others, it make take a few centuries to complete. Nonetheless, any one of them may be in the offing.
Projections and solutions to immediate problems may well have to be couched appropriately.
Anonymous on 2008-02-12:
Because Brad is always very polite, and this makes these forums better (my favorite ones on intertubes), as most commenters are at least trying to emulate host manners.
The worst message the US is sending to rest of the world is that the policy of delibrate inflation is ok and a way to achieve growth. How many more years is the world going to keep this up before we risk a global hyperinflationary scare? Cant pay the bills inflate! Not enough growth lets deficit spend. This is not acceptable for the entire world to try and its going to lead to a modern clash for resources.
gillies — could you spell out your thesis about opec investments in the US rising as the price of oil rises. Not sure why this should be the case — if OPEC is buying a basket of the US economy, higher oil should hurt not help.
Stormy — all the flash and glitz of Dubai will be underwater if Greenland melts. I do worry that we are approaching a tipping point. Hopefully, the US policy approach will change in 09.
Dump your US Dollars soon. Helicopter Bernanke’s plan to monetize bad debt at US Banks and leveraged Hedge Funds. When Robert Rubin’s Citicorp loses money, the taxpayers of America will pay for his bailout. - DC
Depression risk might force U.S. to buy assets
Tue Feb 12, 2008 4:19pm EST
http://www.reuters.com/article/ousiv/idUSGOR27660220080212
NEW YORK (Reuters) - Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.
Can you imagine those nasty Chinese buying all that coal and pushing up the price? After they have had the effrontery to buy all that oil and do the same thing? Washington needs to do something to stop this. LOL.
I blame China for holding its currency down, but not for pushing energy prices up b/c China’s energy use (per capita) is coming up from a low level– what washington needs to do is to reduce the energy intensity of the US economy.
bsetser,
Don’t believe everything you read. Two words: Climate Audit.
right, climate change is a universalist conspiracy theory…
Don’t forget that China is now buying all the cheapest oil in the market. This oil has many times the allowed sulphur content according to European and US standards. While they are subsidizing the oil I don’t think it is realistic that they will put in the cost of cleaning it. This is the cause for a substantial part of Chinese discomfort associated with pollution.
brad, my understanding is, that a ten dollar rise in the price of a barrel of opec oil, causes not only a rise in the opec surplus reinvested in the united states markets, of various kinds, but in addition a portion of other nations ‘extra’ ten dollars goes that way also. no figures. i am open to correction - perhaps someone can direct us to the numbers ?
as a more general point, i see people focus on transactions, but understanding requires a broader perspective on financial flows. i have long disputed DC’s belief that fiat currency is ‘free’, it is free in the intiial transaction - but the same dollars get spent again, and of course, again.
.