What is "petrodollar recycling"?
It refers to the use of dollars for the purchase of oil and the subsequent reinvesting of those same dollars by oil exporting nations back into the US financial markets.
Many hundreds of billions of US dollars have flowed from its shores only to come back in the form of oil and purchases of Treasury and Agency debt.
That mechanism is certainly wounded now…
Crude falls on speculation OPEC won’t cut production
Nov. 28, 2008 NEW YORK (MarketWatch) — Crude-oil futures fell Friday on speculation that the Organization of Petroleum Exporting Countries won’t cut its production at Saturday’s meeting. Crude for December delivery fell 73 cents, or 1.3%, to $53.71 a barrel in early electronic trading. OPEC has not ruled out cutting output at the meeting, but several delegates have said they were likely to only measure compliance of previous cuts and leave the decision on cuts till December.
Making a rough assumption that 1/2 of the world’s oil that is produced is exported (I think this is reasonably fair), we can calculate the "loss" of extra dollars that are no longer available for oil exporting countries to use for such things as, say, buying all the new US Treasury issuances that are coming up.
(86Mbd * 365 * $147) = $2,300 billion dollars [this is the peak amount]
(86Mbd * 365 * $53) = $830 billion dollars [this is the current amount]
Subtracting these two, we find that there is a nearly $1,500 billion dollars ($1.5 trillion) difference between the rate of dollar accumulation at the Peak Oil price, compared to today.
This is a massive difference, and it makes me wonder from whom it is exactly that the US plans on borrowing nearly $2 trillion this year. Certainly OPEC and Russia would be bad candidates, as they may find their export revenues barely sufficient to keep the lights on at home.
This provides one more bit of confirmation that the most likely source for all the required US borrowing is going to come from printing out of thin air, as opposed to the much less inflationary source of honest-to-goodness production.
More immediately (and more certain) is the loss of buying pressure for the US dollar that will result from oil exporting nations curtailing their purchases of US financial instruments because they no longer have the money to recycle. If it gets bad enough, they could even sell their existing holdings to meet local needs for funds.
This will add pressure to the dollar.