I’ve been researching petrocurrency and have read many definitions but am having a hard time wrapping my head around exactly how it works. Is it a similar concept to the Gold Standard or something else entirely?
In: Economics
The mistake most people make is they think petrodollar is a currency like dollar,euro,yen or yuan. But it’s a system where transactions of petroleum products occurs and how the trades are settled between the parties.
Imagine you found oil reserve in your backyard & you setup a refinary. Now you have petroleum products you can export to foreign countries. Now you have a problem, what currency you are accepting as payment?
You can accept dollar, euro, yuan ,yen etc. But once you accept the currency you have to spend the currency but most currencies are not accepted around the world of finance for investment purpose like buying bonds/equity etc.
Before 1945 gold is the accepted as payments but after world war 2, US had 65% of the global gold reserve and choose to back dollar with gold (Bretton woods system). So an agreement was struck between US and saudi to ONLY ACCEPT DOLLAR AS PAYMENTS FOR PETROLEUM PRODUCTS. So after that OPEC was formed and they also choose Dollar to settle trades of petroleum products.
Thus the revenue generated by selling petroleum products by the foreign countries in dollar are know as “petrodollar”.
Petrodollar is the poll of dollar that is outside of US and are used for trades buy the oil producing countries.
Every year around $3.1 trillion dollars are reported as revenue by selling petroleum products.
Once is petrodollar are reinvested in to economy or used for investment purposes like buying bond in other countries, this process of reinvestment is called “Petrodollar Recycling”.
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