The Story Behind The Petro-Dollar

The Story Behind The Petro-Dollar

Dec. 6, 2022

Uinvests

To predict the value of a currency, it's important to understand its history.

What is the petrodollar?

Petrodollars are the form of currency that is paid globally for oil. The petrodollar system is essentially the global practice of exchanging oil for the United States dollars, rather than any other currency. This means that no matter what country is buying the oil, they pay the oil-producing country in petrodollars, which are denominated in U.S. dollars.

The answer to “What is the petrodollar?” has changed over the years, as the petrodollar system originally only applied to Western Asia countries and members of Organization of the Petroleum Exporting Countries (OPEC), but has been broadened over the years. Petro currency is the main source of revenue for these countries.

What is petrodollar recycling?

Because the petrodollar is denominated in U.S. dollars, the system means that oil-producing countries end up with surpluses of U.S. currency that need to be “recycled” back into the economy. Petrodollar recycling can involve channeling these dollars back into their own domestic economies, lending them to other countries or investing them in the U.S. economy. Countries can use them to buy assets and securities like treasury bills, helping to keep interest rates and inflation low and allowing the countries to avoid currency conversion losses and risks.

History of the petrodollar system

The term “gold standard” didn’t come out of thin air. The global economy used to run on a system in which each country’s currency was linked to the value of gold. There was a fixed price for gold at which each country bought and sold that commodity. The gold standard was abandoned in 1971 when the Nixon administration ended the practice – and the value of the U.S. dollar went into free fall as inflation soared.

In 1973, the petrodollar system was created through a deal between the United States and Saudi Arabia. The countries agreed to price and trade oil in U.S. dollars. With oil standardized in terms of dollars, any country that purchased oil from Saudi Arabia would have to use dollars. This led many other oil-producing countries to also standardize oil prices in U.S. dollars... and the petrodollar system was born.

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Sources From:

https://www.tonyrobbins.com/blog/what-is-the-petrodollar

https://www.thebalancemoney.com/what-is-a-petrodollar-3306358

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