However, more diverse sources of global liquidity, along with the improved external positions of emerging markets outside the Middle East, have reduced the potential for petrodollars to create serious global disequilibrium.

Historical context. Following the oil shocks of the 1970s, Middle Eastern states invested their windfall oil revenues in international banks. Weak credit demand due to slowing growth in industrialized economies prompted the banks to seek out new borrowers. At the same time, the oil price spike resulted in a widening of developing countries' current account deficits, leaving them in need of external financing. This situation resulted in petrodollar recycling.

With borrower countries failing to achieve higher rates of growth -- and with oil prices remaining high -- this situation eventually led to the debt crisis of the 1980s. However, while the scale of rise in oil prices in recent years is comparable to the 1970s, there are also important differences.

New petrodollars. Between 1978-82 Middle Eastern states accounted for nearly the entire cumulative current account surplus of oil producers. From 2001-06, the share of Middle Eastern producers had fallen to less than half, as production in other regions increased.

New liquidity. The relative importance of petrodollars to the global economy is significantly smaller than was the case in the 1970s:

· In the five years through the end of 1982, only the major oil producing countries and Japan ran current account surpluses, with Japan's less than one-sixth that of the oil producers, making petrodollars virtually the sole source of international liquidity.

· In contrast, in the five-year period from 2002-06, major oil exporters' current account surplus of roughly 760 billion dollars was slightly smaller than Japan's, and only slightly larger than the 675 billion dollar surplus accumulated by Asia's emerging economies.

Petrodollar investment. Furthermore, the manner in which oil exporting countries manage revenues has changed substantially:

1. Low risk assets. Whereas in the 1970s government securities made up a small fraction of oil producers' investment portfolios, a substantial share of the petrodollars generated during the last decade have been used to purchase US government debt.

2. Domestic investment. A much greater share of Middle Eastern oil revenues have financed investment within the region. In part, this reflects greater government investment in infrastructure and projects to develop the non-oil sector than occurred in the late 1970s.

3. Shifting destinations. Whereas in the 1970s virtually all emerging markets relied on petrodollars to finance current account deficits, today this is varied. European emerging markets and non-oil producing states in the Middle East are running sizable current account deficits. The latter group, which includes countries such as Turkey and Egypt, have been recipients of large capital flows from the region's oil producers, and consequently are particularly vulnerable to an unexpected drop in petrodollar financing. However, most of Latin America and Asia now run current account surpluses, and thus are not dependent on petrodollar financing.