In the latest edition of the Federal Reserve Bank of New York’s Current Issues in Economics and Finance, ‘Recycling Petrodollars’, Authors Matthew Higgins, Thomas Klitgaard and Robert Lerman, analyze how oil-exporting countries are using the increased revenues coming from the rise in oil prices.

The authors note that about half of these revenues have been returned to oil-importing countries in the form of purchases of locally produced goods, while the rest have been used to invest in foreign assets. Although it is not easy to determine where the funds are initially invested, evidence suggests that a major portion is finally invested in the United States.

The study detects remarkable differences in how petrodollars are recycled, across major oil importers. Europe and China have seen a greater part of their oil payments return to purchase locally produced goods, while US and Japan have noted only a small fraction return for the same. On the financial side, however, only the United States has chosen to increase its net borrowing in recent years. Consequently, the bulk of the oil revenues used to buy foreign assets has ended up, directly or indirectly, in the United States, aiding finance the large U.S. current account deficit.