Petrodollar

Petrodollar refers to United States dollars earned through the sale of a country's petroleum (oil) to another country.

Origin

In 1971 Richard Nixon was forced to close the gold window taking the U.S. off the gold standard and setting into motion a massive devaluation of the U.S. dollar. In an effort to prop up the value of the dollar Nixon negotiated a deal with Saudi Arabia that in exchange for arms and protection they would denominate all future oil sales in U.S. dollars. Subsequently, the other OPEC countries agreed to similar deals thus ensuring a global demand for U.S. dollars and allowing the U.S. to export some of its inflation. Since these dollars did not circulate within the country they were not part of the normal money supply, economists felt another term was necessary to describe the dollars received by petroleum exporting countries (OPEC) in exchange for oil, so the term petrodollar was coined by Georgetown University economics professor, Ibrahim Oweiss.

Because the United States was the largest producer and consumer of oil in the world, the world oil market had been priced in United States dollars since the end of World War II. International oil prices were based on discounts or premiums relative to that for oil in the Gulf of Mexico. But, although oil sales prior to 1973 were denominated in U.S. dollars nothing precluded settlement in local currency.

In October 1973, OPEC declared an oil embargo in response to the United States' and Western Europe's support of Israel in the Yom Kippur War and this tension (and new power of OPEC) led to fear that the dollar would become insignificant in the oil trade.

Financial impact

Petrodollars and petrodollar surpluses are by definition denominated in U.S. dollars, so purchasing power is dependent on the U.S. rate of inflation and the rate at which the U.S. dollar is exchanged (whenever there is need for convertibility) by other currencies in international money markets. It follows that whenever economic or other factors affect the U.S. dollar, petrodollars will be affected to the same magnitude. The link, therefore, between the U.S. dollar and petrodollar surpluses, in particular, has significant economic, political, and other implications.

The placement of petrodollar surpluses of oil exporting nations in the United States may be regarded politically as ""hostage capital". In the event of a major political conflict between the United States and an oil-exporting nation, the former with all its military power can confiscate or freeze these assets or otherwise limit their use. It can impose special regulations or at least use regulations for a time, in order to attain certain political, economic, or other goals. It may be argued that such actions are un-American, since they are a direct violation of the sacred principles of capitalism and economic freedom. Nevertheless, the U.S. government resorted to such weapons twice in the l980s against Iranian and Libyan assets. It follows, therefore, that governments placing their petrodollar surpluses in the United States may lose part of their economic and political independence. Consequently, the more petrodollar surpluses are placed in the United States by a certain oil-exporting nation, the less independent such a nation becomes.

Large inflows of petrodollars into a country often has an impact on the value of its currency. For Canada it was shown that an increase of 10% in the price of oil increases the Canadian dollar value versus the US dollar by 3% and vice versa.

Opposition

News outlets in mid-2000-2002 carried articles about Saddam's efforts to sell oil on markets exclusively in Euros. This may have been viewed as a push to influence other OPEC states to challenge the reserve currency status in oil trading of the USD. This may have been an unacceptable outcome in the global economy with respect to the flow of petrodollars. through the region.

Since the beginning of 2003, Iran has required euro in payment of exports toward Asia and Europe. The government opened an Iranian Oil Bourse on the free trade zone on the island of Kish, for the express purpose of trading oil priced in other currencies, including euros.

Alternative meanings

In addition to the United States petrodollar, a petrodollar can also refer to the Canadian dollar in transactions that involve the sale of Canadian oil to other nations. In this sense, the term petrodollar is related to but should not be confused with petrocurrency which refers to the actual national currency of each petroleum exporting country.

References

Further reading

• Spiro, David E. (1999). The hidden hand of American hegemony : petrodollar recycling and international markets. Ithaca, NY : Cornell University Press.
• "Petrodollar profusion", "The Economist", Apr 26th 2012