THE term “petrodollars” was coined during the upward oil price spiral after the Arab-Israeli War in 1973. Arab Opec members declared an oil embargo against the United States and the Netherlands, and the whole of the oil cartel raised the price of its crude oil. By 1980 the price had reached $98 per barrel in current dollar values.

Oil exporters found that they had more money than they could spend. Their populations were small and their economies undeveloped and unsophisticated. The surplus money, which was dubbed petrodollars, needed to be reinvested if the global economy was to avoid a contraction due to the removal of so much money from circulation.

The solution was to recycle petrodollars through the international banking system. Cash deposited by oil exporters was loaned to oil importers, including many developing countries, to fund their purchases of oil.

However, the debt burden of poor countries mounted as the oil price continued to rise. Panic buying and hoarding of oil by consuming nations worsened the oil price spiral, creating massive monetary and trade imbalances.

In addition to private recycling by commercial lenders, the International Monetary Fund created an Oil Facility. The facility was funded by money loaned to the IMF by oil exporters, which then was borrowed by debtor nations with balance of payments problems.

By 1979, the petrodollar surpluses had created a new phenomenon: stagflation. This was the combined effect of a contracting economy and oil price-induced inflation.

The world may escape similar stagflation this time because the Middle East economies are larger, oil represents a small part of the world economy and Opec’s larger economies are big importers. Opec’s imports from the European Union rose 25 per cent to $73 billion (£41 billion) in the first nine months of last year.