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The simple definition of a petrodollar is the revenue from oil in mainly Middle Eastern countries, a revenue that is denominated in US dollars, not the currency of the countries where the oil comes from. All those nations that export their oil must sell it in dollars, so if the dollar loses value so does their oil. But countries also peg their real currency to the dollar. That means fixing their currency with the dollar, so if the dollar fluctuates so does their currency. If the dollar value lowers, so do the goods and services of that country. This ensures those countries don't experience wild swings in inflation or deflation. So what exactly is the relation between petrodollars and real dollars? Welcome to this episode of The Infographics Show, How Petrodollars Affect the US Dollar. We are told that the beginnings of this petrodollar system was in 1944 at the Bretton Woods Conference. This conference was one of the big events of the 20th century because it's when it was agreed that the new global currency would be the US dollar. America would be the only country that could print this currency. This is when we saw the formation of both the World Bank and the International Monetary Fund. As always, the website The Balance gives a very detailed account of what this would mean. The Balance explains if a country's currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets. That would lower the currency's supply and raise its price, if the currency became too high the bank would print more. That would increase the supply and lower its price. 43 countries signed up in an effort to rebuild the world after a devastating world war, and to cooperate better with each other in terms of trade. The Bretton Woods website tells us, It was felt by the leaders of the allied countries, particularly the US and Britain, that a multilateral framework was needed to overcome the destabilizing effects of the previous global economic depression and trade battles. It ended anyway in 1971 when the US suffered what is called stagflation, and that means a combination of inflation and recession. This had a negative effect on nations that belonged to what is called the Organization of the Petroleum Exporting Countries. Most of the member countries are in the Middle East, with others being in Central America and Africa. Then in 1979 we got something called the US-Saudi Arabian Joint Commission on Economic Cooperation. In that agreement Saudi Arabia agreed to use American dollars for their oil transactions. These dollars would get back into America through contractors, and so they were what are called recycled petrodollars. This deal with Saudi Arabia was the start of this petrodollar. Was this good for the US? Investopedia tells us, The petrodollar system elevated the US dollar to the world's reserve currency, and through this status, the United States enjoys persistent trade deficits and is a global economic hedge money. In the world, the most in-demand resource is oil. It makes oil-rich countries very wealthy, and it's priced in dollars that makes the USA's currency the most dominant currency in the world. Some say this gives the USA something called exorbitant privilege, which means, according to Investopedia, the USA can perpetually finance its current account deficit by issuing dollar-denominated assets at very low rates of interest as well as becoming a global economic hegemony. The USA can just print its own money, which is nice for the USA as it can pay off its massive debt with that money. Imagine you were broke but could just borrow and then just go to the money tree in the garden to pay off the debt. There are many critics of this system with one economist writing, "...the amount of debt, leverage, deceit, corruption and fraud in the economic markets, financial system and in the energy industry are off the charts." Another bonus for the USA is that it can just buy its oil with its own products, which might mean massive construction contracts, expensive military planes, or
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nologically advanced tanks. Saying that, as we write this Bloomberg is saying the dollar as reserve currency might be coming to an end and the days of exorbitant privilege are fast running out. Why is that? We'll let Bloomberg explain. With the current US administration policies of unilateralism, trade wars, and sanctions increasingly affecting both friends and foes, the question arises whether the rest of the world should diversify away from the risks of the US dollar and dollar-centric finance. In 2017, Reuters told us that the power of the petrodollar was already waning. Back in the day, when the USA was busy spending big on oil and petrodollars were going into oil-rich nations and being recycled back out, all was good. But these days, according to that report, not as much of the money is coming back out. These countries are shoring up finances and safeguarding stability at home, said Reuters. Where all the oil money goes, said that report, is hard to say, but a good chunk of it ends up in offshore financial centers such as the UK, the Cayman Islands, Ireland, Switzerland, Belgium, and Luxembourg. Reuters isn't alone. Another journalist wrote this, The United States' ability to maintain its influence over the rest of the world has been slowly diminishing. The USA's dollar monopoly, we are told, might be coming to an end. One of the reasons is that mass consumers of oil, China as well as Russia, Russia, have been setting up deals with oil-rich countries, and nope, they are not doing these deals in the US dollar. The article says, as the tide continues to turn against the petrodollar, eventually even our allies will start to question what best serves their own interests. Forbes writes that there will likely be something called the petroyuan, but that doesn't mean that the yuan will become the reserve global currency. Forbes tells us that everyone has it wrong, and that the USA doesn't enjoy a huge advantage because oil is sold in dollars. The US economy is the central economy in the global system because it is the most open, innovative and productive economy in the world, and because of this the US dollar is the most convenient, liquid and reliable medium of exchange, said the article. Can that be challenged? Not yet, according to the story, solely because no other currency can match that. China also has massive reserves of US dollars, which might seem like the country has its hopes on the dollar remaining strong, although some critics say China is writing off the dollar and along with Russia is buying lots of gold. These critics tell us that those countries believe the dollar is about to inflate. There are likely more doomsday believers than there are positive views as we saw in the Forbes piece. Headlines like this are all over the media, end of petrodollar hedge money may happen soon, and badly impact indebted America. That particular article tells us America has been playing hardball with too many countries, and a growing number of countries seek to end the dollar. dollar hedge money. As we said, there are many views out there concerning the matters of the petrodollar. What we'd like to know is what you think, especially if you have some expertise in the matter. Tell us in the comments! Also, be sure to check out our other show What If The USA Paid Off Its Debt? Thanks for watching, and as always, don't forget to like, share and subscribe. See you next time! tech