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What is the petrodollar system and how does it impact the world economy

What is the petrodollar system and how does it impact the world economy image

Petrodollar is simply the U.S. dollars paid to any oil-exporting country in exchange for crude oil. To ensure availability of crude oil, the United States patronizes many oil-exporting countries. Over the years, the United States has purchased oil from so many oil-producing countries.

What makes this possible is that dollars has become an international currency so all oil suppliers must receive dollars as a form of payment for their oil. This is why the economies of many of these countries depend on the value of the U.S. dollars. When it drops, prices of domestic products will also drop in many countries and if the value goes up, the prices will also go up.

Petrodollar recycling

The United States government made a smart move by initiating a deal with selected oil producing countries. The United States will continue to purchase their oil as long as they continue to give juicy contracts to American companies. You know what that means? It is a strategy to get the dollars paid to the countries back to America. The deal started with Saudi Arabia. Thereafter, several other countries joined the bandwagon.

To make their economies less dependent on petrodollar, many of the oil-producing countries also began to invest their petrodollar in other non-oil related businesses and the proceeds from these other businesses makes them less dependent on the fluctuation of oil prices.

Impact of Petrodollar on world economy

Despite the fact that many oil producing countries have other sources of revenue, the dependence of their economies on petrodollar is still substantial. So, when oil prices drop, their economies decline. Unfortunately, the oil producing states are the richest countries all over the world. They collectively control a good part of the world economy. When their economies decline, the ripples spread to every part of the world.

Why do these countries depend so much on petrodollar? It is because they use the funds for the following transactions:

  • For import
  • To pay wages of government employees
  • To increase their domestic and foreign reserves
  • To retire their debt (if any).

Threats to the petrodollar system

Several countries have realized that the petrodollar system gives the United States undue advantages over others and are working on pulling out. Iran changed their payment currency from dollars to Euros. China has launched an oil futures contract denominated in Yuan as against dollars, thereby working towards “Petroyuan”. The current president of Russia, Vladimir Putin is also working to sell more of Russia’s oil in Chinese Yuan and Russian Rubles. It is believed that more countries will join soon.

Pros of the petrodollar system

  • It gives oil producing nations ready market.
  • It increases importation in oil rich nations.
  • It helps them pay wages of government employees.
  • They use it for infrastructural development.
  • It increases their foreign and domestic reserves.
  • Oil-exporting countries use petrodollar to offset or service their debt.

Cons

  • It favors the United States more than other countries.
  • It reinforces the U.S. dollar as the international currency.
  • It gives the United States certain control over other countries.
  • The United States take back the funds through petrodollar recycling.
  • The economies of numerous countries depend on the value of the U.S. dollars

Conclusion

Bitcoin has better features to be the international currency. Due to the features of the blockchain technology, oil-exporting countries should work towards taking their payment in bitcoin and not in any fiat currency since it is not owned or solely controlled by any country.

Sources

  • https://www.fxcm.com/za/insights/what-is-the-petrodollar/
  • https://www.investopedia.com/articles/forex/072915/how-petrodollars-affect-us-dollar.asp
  • https://www.thebalance.com/what-is-a-petrodollar-3306358
  • https://www.jstor.org/stable/24807042?seq=1#page_scan_tab_contents
  • http://faculty.georgetown.edu/imo3/petrod/impact.htm
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