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GEOG 216 (241)

Oil and the Debt Crisis

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GEOG 216
Geraldine Akman

Oil and the Debt Crisis - Relationship b/w OPEC + OECD - OPEC: Saudi Arabia, Kuwait, Iran, Iraq, Qatar = maj oil producers - OECD: 24 wealthiest countries in world = maj oil consumers - Lender: charges borrow interst/% of outstanding loan ea/year - Borrower: pays back part of the borrowed $, ‘principle’ + interest - Concessional lending: loans below market rates of interest/interest-free loans + grants 1950s to 1970s Background to the Crisis - Rapid wealth accumulation in wealthy nats, N Am not damaged by war - Western banks invested very little in poor nats (maybe in their colonies) - Would only loan small amounts of $ over long periods of time - Strict + fixed condits for these risky loans - Large loans only for necess infrastruc projects - H: these regions could get ‘concessional lending’ fr/IMF/WB - Poor nats didn’t hav enough collateral to get investment fr/normal banks (risky investment) - Wealthy economies amass surplus of $ - Period of building of Eurodollars in W Eur bnks - Individs, firms, nats, move $ into W banks w/more relaxed regulations (off paper trail) - USA not able to track all their currencies Oil Price Shocks (1970s) - OPEC cartel decreases oil supply, oil prices rise - OPEC revenues skyrocket (‘petrodollars’) - OPEC surplus $ deposited in W banking sys (a lot in Eur, s/in USA, s/unregulated off-shore accounts) - Put $ into banks to earn interest The Origins of the Debt - To recycle Eurodollars + petrodollars, banks pour loans into OECD econs - OECD nats pushed into recession b/c high oil prices (needed loans to cover costs) - Then, banks pour loans into NICs + LICs - S/loans were used for necessary imports + econ expansion - H: s/invested poorly (ex: mili projects, lux goods, siphoned away by corruption of govs) - Private banks giving loans to e/1 w/lax condits b/c surplus of $ - High infla period, free market, not fixed (not as strict as previous loans) The Process of the Debt Crisis and its Effect on OECD Countries - OECD incomes plunge (consumers of oil, high oil price)  go into recession - B/c recession, demand decreases for exports fr/NICs + LICs - Aid flownddecrease to NICs + LICs - 1979: 2 oil s
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