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Section 5: Oil and the Debt Crises

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GEOG 216
Geraldine Akman

Oil and the Debt Crises 12/5/12 1:02 AM Shows how the global economy can work around one commodity The US does not get large quantities of oil from the middle east The US is the largest consumer of oil, and then China The Middle East is the largest producer P. 265 of course pack à oil crisis to debt crisis map Lender: charges the borrower ‘interest’ on a % of the outstanding loan each year Borrower: pays back part of the money borrowed, ‘principle’ plus interest Generally speaking, the lender is the bank. Concessional Lending: loans at below-market rates of interest or interest free loans and grants • Typically goes to poorer countries • stabilize financial situations • development money FDI: does not create debt, not part of this story Background 1950s-1970s • directly out of the war • time of a lot of production and consumption • Baby boom • economic activity and economic growth • Western banks invest little in poorer regions (get 'concessional’ lending, e.g. IMF and World Bank) o concessional lending has certain conditions, is usually smaller amounts of money, has fixed interest rates o money to promote financial stability or for infrastructure projects • Wealthy countries amass surplus $ o Period of buildup of Eurodollars in West European banks o if put in American banks, it would attract taxes and such Oil Price Shocks 1970s: OPEC cartel decreases oil supply à an increase in oil prices OPEC revenues skyrocketed ('petrodollars') OPEC surplus $$ is deposited in the Western banking system Some $$ ended up in an unregulated offshore banks • In American dollars • Couldn't be traced • America couldn't trace their own money supply Origins of the Debt To recycle Eurodollars and Petrodollars, Banks pour loans into OECD economies • goes into wealthy countries because they go into a recession • recession was caused by oil price increases • Keynesian Economics à government steps in to create jobs Then Banks pour loans into NICs and LICs • The West can’t absorb all the money Here, some loans are used for necessary imports and economic expansion but… • Some is invested poorly e.g. military projects and luxury goods Inflation and low interest rates The Debt Crisis Begins OECD incomes plunge à oil consumers OECD goes into a recession Demand is down fo
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