An assessment of international liquidity and higher oil prices
| Pages | 161-180 |
| Published date | 01 June 2010 |
| DOI | https://doi.org/10.1108/20425961201000013 |
| Date | 01 June 2010 |
| Author | Amer Al‐Roubaie |
| Subject Matter | Public policy & environmental management |
World Journal of Enterprenuership, Management and Sustainable Development, Vol. 6, No. 3, 2010
AN ASSESSMENT OF INTERNATIONAL
LIQUIDITY AND HIGHER OIL PRICES
Amer Al-Roubaie1
Ahlia University, Bahrain
Abstract: Energy represents an important component of production costs and
therefore, an increase in energy prices directly impacts economic productivity, un-
employment, inflation, and balance of payments equilibrium – often engendering
currency devaluations. Until recently, the growth in demand for conventional fuels,
mainly oil and gas, has widened imbalances between demand for and supply of en-
ergy. The effects of the surge in oil prices ripple across the entire global economy re-
sulting in a redistribution of international liquidity. The latter creates global
imbalances characterized by increasing balance of payment deficits and deteriorating
the terms of trade, reducing the flow of non-energy goods and services and
increasing uncertainty of future global transactions. The aim of this paper is to shed
some light on the impact of higher fuel prices on global liquidity management.
Keywords: oil revenues; price volatility; global liquidity; balances of payments; global-
ization; the Middle East; China; India.
Copyright © 2010 WASD
INTRODUCTION
In this age of industrialization, transporta-
tion and mass production of goods and
services, energy and energy prices play a
crucial role in the overall development of all
societies. Modernization and future
prospects of rapid and sustained growth de-
pends on the supply of energy. In other
words, such high dependency on energy has
linked the future development of mankind
to the existence of conventional energy
sources to ensure the meeting of human
needs and the enhancement of productivity
growth. Exacerbating matters, the prospect
of developing alternate sources of energy to
substitute for fossil fuel has shown very little
sign of encouragement. Despite investment
in technologies geared to developing non-
fossil fuels, the potential for finding a sub-
stitute for hydrocarbons remains unachieved
and illusive.
Currently, most production and exports
of oil and gas come from developing coun-
tries with low population density. The gap
between production and consumption of
energy stems from the uneven distribution
of fossil fuels where most consumers are
highly industrialized countries with heavy
dependence on imported oil to meet do-
mestic requirements. Due to the narrow
economic base and small absorptive capacity
of most oil exporting countries, they are
able to accumulate large reserves and enjoy
current account surpluses. Such trends could
have spillover effects by creating global im-
balances through higher prices, liquidity
shortages, inadequate global demand and
currency devaluations.
Prof. Amer Al-Roubaie, Dean, College of Business and Finance, Ahlia University, Bahrain, Email:
amer@ahliauniversity.edu.bh
161
International liquidity is important for
maintaining balance of payments equilib-
rium, strengthening global economic man-
agement and enhancing international
financial stability. Higher petroleum prices
could produce adverse effects on global sta-
bility by redistributing income in favor of
oil producing countries and reducing flows
of international transactions. The main ob-
jective of this paper is to highlight the im-
portance of liquidity imbalances and its
impact on global trade and finance.
THE OIL QUESTION
During the last few years, oil prices have
been volatile rising to over US$140/bbl. in
July 2008 and declining to $35/b by De-
cember in the same year. However, higher
oil prices could engender substantial nega-
tive financial, social and economic imbal-
ances, particularly in non-oil producing
countries. In addition, rapid economic
growth, especially in Asia in recent years,
has widened the gap between the demand
for petroleum products and the existing ca-
pacity of supply. Heavy dependence of many
industrialized and non-industrialized coun-
tries on imported oil to meet their demand
requirements could impose constraints on
government budgets, balance of payments
equilibrium, aggregate expenditures, human
development, poverty alleviation programs
and economic growth. The negative impact
of rising energy prices will be on low income
countries as well as on industries which rely
on oil as a key input in production.i
In developing countries, earning of for-
eign exchange depends largely on produc-
tion and export of a limited number of
primary products, mainly minerals and agri-
cultural-based products. As a consequence,
higher petroleum prices could weaken the
ability of these countries to increase pro-
duction for exports and promote global
competitiveness. In addition, higher oil
prices weaken the effectiveness of national
economic policies by reducing the country’s
capacity to import, especially capital goods
and raw materials. Economic development
underscores the importance of access to
global knowledge, skills, technology and in-
formation for building capacity capable of
increasing productivity and sustaining eco-
nomic growth.
Petroleum and petroleum products are
among the most important commodities
traded globally; therefore, the stability of
the oil market is essential for international
financial flows, promoting trade and ensur-
ing global economic growth. It is estimated
that the primary demand for oil is to in-
crease by 1.3 percent per year over 2005 –
2030 or the equivalent of 99 million barrels
in 2005 and 116 million barrels in 2030.
About two thirds of this increase in demand
will originate in developing countries. Meet-
ing such demand requires that the oil in-
dustry invest a total of $4.3 trillion over the
period 2005 – 2030 or $164 billion per
year.ii In addition, most of the known-re-
serves of oil and gas are located in non-in-
dustrialized countries with low population
density and low economic productivity. It is
unlikely that a substitute for fossil fuel will
be found in the near future and, therefore,
the risk of imbalances between demand and
supply is expected to continue keeping the
global energy market volatile.iii
Table 1 illustrates that world proven re-
serves of oil amounted to 1,295 billion bar-
rels in 2008, about 60 percent of which is
located in the Middle East and North Africa.
Table 1 also shows that the Middle East en-
joys the largest share of world proven re-
serves of natural gas amounting to more
than 42 percent.
162 A. Al-Roubaie
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