Subpriming the Pump

Oil wealth used to hurt only those who had it. Now, it’s hurting everyone.

The resource curse has gone global.

For years, oil wealth was mostly a danger to those, paradoxically, who possessed it. Resource-rich Middle Eastern countries, and their labor-exporting neighbors, failed for decades to invest adequately in their people or to diversify their economies. A massive influx of oil receipts and worker remittances discouraged investment in sectors conducive to steady long-term growth, fostered corruption and patronage, inflated regional real estate and stock markets, and provided irresistible incentives for governments to spend with wasteful, shortsighted abandon.

But today, the Middle East’s resource curse is spilling over into the international financial system. Unanticipated petrodollar flows are fueling financial bubbles, financing a Middle Eastern arms race, and damaging the global economy through speculative oil-price feedback loops. All the elements of previous boom-and-bust cycles in the 1970s and 1980s and again in the past decade remain in place.

What’s happening is both comfortingly familiar and terrifyingly new. Sudden surges in oil-revenue flows to and from the Middle East — known as “petrodollar recycling” — have certainly been a problem before. But in the last few years, they have become critically destabilizing. Today’s Great Recession has generally been understood as a story about real estate excesses and regulatory shortcomings. But it’s also a cautionary tale about the increasingly pernicious role that oil is playing in the global economy.

Foreign Policy

This article is part of a special report called Oil: The Long Goodbye. A lot of articles, by big names such as Daniel Yergin, Peter Maas, Prince Turki al-Faisal, Fatih Birol, and others.