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Petrodollars, where are they going?

The rise in oil prices during the last four years has led to important income transfers from oil consuming countries to oil producing countries. Oil prices have gone from 20 $ up to 60 $ a barrel in this period generating important current account surpluses in oil producing countries. These important income transfers have consequences in terms of financial flows, asset allocation and worldwide asset prices.

I would like to focus here on where the money has gone, and leave the issue of asset prices for another time, even if both issues are much related. According to figures from the International Monetary Fund (IMF) the combined current account surpluses of oil exporters are closed to $ 577 billions in 2006. This is a big number that might mean little to many readers. Just to see how big this number is, if we compare it with US current account deficit, it is approximately 2/3 of it. This represents an important part of worldwide savings and implies an important process of asset re-allocation. Beneficiaries of these surpluses are not only OPEC producers but also non-OPEC producer such as Norway or Russia. The big heterogeneity of oil producing countries means that they also have different investment patterns. This has been discussed in a recent report from PIMCO, a large bond investment fund that draws interesting conclusions. First, low risk assets dominated purchased assets. Among them most of the flows went into US treasuries and these purchases were mainly originated in Russia. Fear from potential asset freezing after Patriot Act has led many Middle Eastern oil-producing countries either to move away from US government assets or do this purchase in a more secretive way. Second, middle-eastern countries seem to be more diversified and aggressive in their asset allocation compared to non-OPEC countries. Russia