There are lots of countries moving away from the Petrodollar i.e. USD. Will there be hyperinflation in history?
What is a Petrodollar?
Chiefly, Petrodollar is an oil export revenue denominated in US dollars. Essentially, Petrodollor is not a distinct currency; it is simply a US dollar accepted as payment by an oil exporter.
Petrodollar is a crude oil export revenue denominated in U.S. dollars. The term gained currency in the mid-1970s when soaring oil prices generated large trade and current account surpluses for oil-exporting countries.
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Why it is called Petrodollar?
Mainly, while importers accumulated huge bills they could not pay, oil exporters accumulated large amounts of US dollars. More than they knew how to use to put simply. These dollars were known as “Petrodollars”.
What is the system of the Petrodollar?
Firstly, the petrodollar system was established in the 1970s after the US abandoned the gold standard and needed a way to prop up the value of the dollar.
Secondly, the system is an arrangement whereby oil is traded globally exclusively in US dollars.
Further, if you have been paying attention to the news for the past week or so there are a lot of headlines about countries moving away from the USD.
Chiefly, this potentially is a huge shift and could cause enormous changes in economies and financial markets.
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Why did the system become dominant?
Chiefly, the petrodollar system became dominant due to the power of the US military and its ability to secure oil from the Middle East.
Secondly, countries that wanted to buy oil had to hold dollars, effectively giving the US a huge market for its currency & supporting its global economic dominance.
Petrodollar – Present Scenario
Recently, there have been persistent rumors that the BRICS nations (Brazil, Russia, China & South Africa) may be seeking a way to abandon the petrodollar system. And establish a new reserve currency to put it simply.
Russia has also been actively seeking to reduce its reliance on the US dollar. Additionally, it has been diversifying its reserves away from the dollar.
Furthermore, China has been actively pushing for the yuan to be used for oil trade.
Primarily, the petroyuan,i.e. the idea that China could use its currency to price oil & replace the petrodollar, is often touted as a potential threat to US hegemony in the Middle East.
What do you think? Could Petroyuan work?
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Why Middle Eastern Countries are not interested in Petroyuan?
Firstly, most Middle Eastern currencies are pegged to the US dollar, requiring a constant inflow of US dollars to support the system.
Further, it means Middle East countries have a vested interest in keeping the dollar at the top of the currency hierarchy.
Above all, this trend will not be broken easily. Structurally, there are even more reasons to stay with the dollar.
Secondly, US dollars are easily convertible, the yuan not so much. In addition to, the dollar being the most liquid, the yuan is not.
Thirdly, the yuan is also pegged to the dollar and although this could be changed, China has incentives to keep the “$”.
Benefits of Petrodollar to US
Firstly, the US is still the most powerful country in the world from a military & economic standpoint.
Secondly, the US is also the largest oil-producing country.
Mainly, these things matter when it comes to establishing a reserve currency. Additionally, this is not to say that the US dollar does not have issues, it does.
Chiefly, the petrodollar system has allowed the US to print money at will and run up huge debts without suffering the consequences of inflation or currency devaluation.
Furthermore, it has also given the US enormous political power over countries that rely on its currency for trade.
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Conclusion
Mostly, Middle Eastern countries have shown little interest in abandoning the petrodollar.
Even with Chinese President Xi Jinping’s efforts, there is little appetite among OPEC producers to price oil in yuan using a Chinese exchange.
“Better off with the devil you know, than the devil you don’t”.
Lastly, the petrodollar system remains the dominant global currency for oil trade, with the US dollar accounting for 90% of all oil trade transactions.
Its fate will have significant implications for the global economy.
Further, barring a transformative generational shift in geopolitical and economic power, the petrodollar will likely continue to be the keystone of the global economy for the foreseeable future.
For now, there is the dollar and everything else!
What do you think?
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FAQs
Is the US dollar a Petrodollar?
How does the US benefit from Petrodollar?
What will happen if the petrodollar falls?
Why did Saudi Arabia agree to Petrodollar?
Can You buy Petrodollor?
What is a threat to the Petrodollor system?
Is the US dollar a petrodollar?
Mainly, Petrodollors are simply US dollars that have been used to purchase crude oil.
How does the US benefit from Petrodollar?
Chiefly, Petrodollors or Petro currency refers to the US dollar traded for worldwide crude-oil exports. Additionally, it facilitates the investment of export gains as the dollar is the world’s reserve currency.
What will happen if the US dollar falls?
But if the petrodollar ever crumbled, America would be stuck with lots of extra dollars that would no longer be in demand. Additionally, these dollars would quickly return to the US, which would lead to massive inflation.
Why did Saudi Arabia agree to Petrodollor?
Saudi Arabia agreed to price oil in dollars and hold reserves partly in Treasury bonds, in return for the US military and political protection and purchases of its oil, simply put.
Consequently, other oil exporters followed suit. Saudi Arabia also kept their currency exchange rate linked to the dollar.
Can you buy Petrodollor?
Firstly, yes you can buy it. You can go to an exchange like CoinmarketCap and search for Petrodollar. Tap on the button labeled “Market” near the price chart.
In this view, you will see a complete list of places you can purchase Petrodollars as well as the currencies you can use to obtain them.
What is the threat to the Petrodollar system?
Ultimately, this agreement ensured that the US Dollar would remain the world’s reserve currency. And additionally, serve as a steady source of income for the United States.
Further, one of the biggest threats to the Petrodollar system is the increased use of alternative currencies in international oil trades.
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