Recycling OPEC Oil Revenues and Resurrecting the Dollar, and the U.S. International Payments Position in American Foreign Policy, 1970-1975

This article first briefly outlines a deep-seated U.S. tendency, since the very beginning of the 1970s, to make the financial resources of the OPEC countries finance U.S. exports to the Middle East region through the intermediary role of American banks that at the time began branching out in the region: that approach aimed at getting the OPEC countries involved in propping up the U.S. current account position. Thereafter, it explores the intertwining between the increased financial wealth of the OPEC oil-producing countries and developments in the international capital markets from the beginning of the decade through the first oil shock in 1973. The upward-trending interest rates in Eurodollar markets prompted the oil producers to increase their financial placements with such short-term, unregulated money markets. Thereafter, this analysis focuses on the U.S. strategy to reduce the balance of payments deficit and to restore stability in international trade through the recycling of OPEC funds into international financial arrangements set up under the aegis of the International Monetary Fund, geared to favor longer-term investments. Finally, the article investigates the ways in which the OPEC countries reacted to this U.S. strategy to urge the oil producers to shift from short-term, inflation-sensitive placements in the Eurocurrency markets to long-term investments. Both historians and social scientists have so far argued that the investments of the oil producers’ oil revenues in foreign markets, the so-called petrodollars, by and large were channeled to finance either the U.S. foreign debt and stock markets, or short-term assets. Neither historians nor economists have focused specifically on the topic of petrodollars from the viewpoint of U.S. foreign economic and financial relations with the oil producers.