U.S. Petrodollar arrangement

Apologies. The above article was written by Sohan Sharma, Sue Tracy, and Surinder Kumar. Sharma is a professor emeritus. Surinder Kumar is professor of economics.

As University of Calgary Haskayne School of Business professor Bob Schulz explained, virtually all of the oil trading around the world is denominated in U.S. dollars, thanks in large part to “petro-dollar” agreements struck in the 1970s between the U.S. and OPEC countries like Saudi Arabia. The U.S. agreed to provide the Saudis and other countries protection in exchange for OPEC members selling their oil in U.S. dollars.

Source for OP: https://thirdworldtraveler.com/Iraq/Iraq_dollar_vs_euro.html?msclkid=66f12a55b13911eca40a61c3844edde5

The U.S. went off the gold standard in the early 70s and tied the dollar to oil by striking a deal with the king of Saudi Arabia whereby the Saudis would sell their oil only in U.S. dollars in return for protecting their oil fields from potential enemies. By 1975, all of the members of OPEC (Organization of the Petroleum Exporting Countries) which included Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, agreed to sell their oil in U.S. dollars only. As a result, every oil-importing nation in the world was forced to accumulate U.S. dollars in order to buy their oil. This created a great demand for dollars, which meant that every oil-importing nation sought to sell their products to the U.S. to acquire the necessary dollars to purchase needed oil. This situation amounted to an oil tax applied to the world by the U.S.

You seem to think that this is a nonissue.

Contrary to what the mainstream media in the U.S. is telling uninformed people concerning the reasons for the invasions of Middle East countries, the real reason has to do with these countries’ decision to either sell their oil in other currencies, or to switch their foreign currency transactions from dollars to euros (Russia and Iran are talking about doing this). It is no coincidence that when Libya decided to dump the dollar, the U.S. responded with an invasion. Syria made a similar decision, and suddenly Assad was a butcher who had to go. Iraq announced their decision to drop the dollar and was invaded shortly thereafter under the pretext that they were concealing weapons of mass destruction. In 2007, Iran announced that they would nationalize their oil, accepting all currencies. As a result, the U.S. accused them of developing nuclear weapons and wanting to wipe Israel off the map, and then began applying sanctions. Iran never made such a threat, and sixteen intelligence agencies within the U.S. concluded that they had not been pursuing nuclear weapons capability. At about the same time, Venezuela decided to dump the dollar, and the U.S. declared Hugo Chevez a bad guy who had to go.

So, let me see if I understand you. Are your insults your way of saying that oil-importing nations did not have to pay with U.S. dollars? Cuz that would just be ignorance on your part.

Continued:

To sum it up, war, in the case of the U.S., is too expensive not to wage. In 2001, Iraq began selling their oil in the Euro. We invaded. In 2010 Gaddafi proposed a new currency called the Gold Dinar to replace the dollar for oil sales. We bombed the **** out of his country, killed him, and caused a regime change. Syria moved away from the Dollar in 06 and Iran in 08. That is what this is all about. There are other geopolitical objectives, sure, such as the pipeline that Syria signed with Iran instead of the U.S.- friendly Qatar, but the Petrodollar is the thing. It is literally the only reason the dollar and US economy is stable. The entirety of the Western financial elite need the Petrodollar system and they are willing to go to war and kill millions to defend it. Right now, the US Dollar makes up 2/3rds of the worlds global reserve currency. This is because nearly every oil-exporting country in the world sells their oil exclusively in dollars, so nations are forced to hoard large amounts of the dollar.

But that is changing . . .

The U.S.'s deal with OPEC nations to accept U.S. dollars only for their oil was had in order to avoid the consequences of having its currency devalued after it defaulted on the Bretton Wood agreement after foolishly running up the debt to the extent that it didn't have the gold to convert the dollars held by those nations ravaged by the war. Therefore, we can conclude that the Administration of that time decided to keep the details of that deal, and the reasons for it, out of the mainstream media and public view.

In fact, in Nixon's televised address to the nation, he didn't mention anything about the devaluation of the dollar. He said he was closing the gold window to protect the dollar from speculators, when in reality, he was protecting the gold from those countries that had a legitimate claim to it.

So, for decades, foreigners always needed more dollars. The US treasury issued extra dollars. And here it becomes very interesting. There is only one way to make these dollars available abroad. Spend them around the world! The US would purchase goods, services, shares, investments etc. But the US never had to deliver anything in return. Foreigners needed these dollars to buy oil. The purchases were just inscribed on the trade balances and the amounts added to the US foreign debt. For the US, the oil trade works like a fairy credit card. Each time more dollars are needed abroad, this means "free" shopping. Nothing can be done about it.

Jerry Robinson put it in easy to understand terms:

"Today, virtually all oil transactions are made in U.S. dollars. This means that if you want to buy a barrel of oil anywhere in the world, you must pay for it with U.S. dollars. If you do not have U.S. dollars, you must obtain them somehow. One way is to simply convert your currency for U.S. dollars on the exchange markets. Or, products can be exported to the United States in exchange for U.S. dollars. If you are a small business owner in Japan, you must first convert your yen into dollars to purchase oil. Mexico must convert its pesos to dollars to buy oil, and so on.

"Additionally, having oil priced in dollars means that the United States can print money to buy oil and then have the oil producers hold the debt that was created by printing the money in the first place. What other nation, besides America, can print money to buy oil and then have the oil producers hold the debt for the printed money?"


I know there's a lot of people who don't believe that what I've just said is true. However, I would like to point out the complete absence of proof to the contrary in this thread, and the reason for its absence.

Enough opinion. Time for some fact:


Petrodollars
By James Chen

Updated March 24, 2022
Reviewed by Gordon Scott

https://www.investopedia.com/terms/p/petrodollars.asp

What Are Petrodollars?

Petrodollars are crude oil export revenues 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.

Then as now, oil sales and the resulting current account surpluses were denominated in dollars because the U.S. dollar was—and remains—by far the most widely used currency. The U.S. dollar's global popularity does not depend on the good will of oil exporters. It is based on U.S. status as the world's largest economy and goods importer, with deep, liquid capital markets backed by the rule of law as well as military power.1

Key Takeaways

Petrodollars are U.S. dollars paid to an oil-exporting country.

Petrodollars are the primary source of revenue for many OPEC members and other oil exporters.

Oil exporters settle sales in U.S. dollars because the dollar is the most widely used currency, making it easier for them to invest export proceeds.

Some crude exporters implicated in human rights violations have suggested they may accept payment in other currencies.

Understanding Petrodollars

Petrodollars are oil export revenues denominated in U.S. dollars. Petrodollars are not a distinct currency; they are simply U.S. dollars accepted as payment by an oil exporter.

Global crude oil exports averaged approximately 70 million barrels per day in the two years before the COVID-19 pandemic.2 That pace would generate annual global petrodollar supply of more than $2.5 trillion assuming an average price of $100 per barrel.

Petrodollars are the primary source of revenue and wealth for many members of the Organization of Petroleum Exporting Countries (OPEC) as well as non-OPEC oil and gas exporters including Russia, Qatar, and Norway.

Just as the petrodollar is not a currency, neither is it a global trading system. The wide use of the U.S. dollar as payment for crude oil reflects the traditional preferences of non-U.S. oil suppliers.
Petrodollar Recycling

Oil exporters prefer the U.S. dollar because it is the pre-eminent global currency for global investments. That makes it the most convenient store of value for accumulated oil revenue, which needs to earn a rate of return to be useful.

An early example of petrodollar recycling is the 1974 deal between the U.S. and Saudi Arabia to funnel Saudi petrodollars into U.S. Treasuries.3

Subsequent deals deployed Saudi oil export proceeds to pay for U.S. aid and development projects in Saudi Arabia and to finance U.S. weapons sales to the kingdom.4

Many oil exporters now invest their petrodollars in stocks, bonds and other financial instruments through sovereign wealth funds. Norway's sovereign wealth fund had assets of about $1.4 trillion at the end of 2021. With a 72% allocation to stocks, the fund holds nearly 1.5% of the world's publicly listed shares.56


The Problem With the Petroyuan

To evaluate the advantages for an oil exporter of getting paid in U.S. dollars, consider periodic claims over the past decade that the petrodollar would soon face a challenge from the petroyuan: oil exports denominated and paid for with Chinese currency.789

All buyers of exported oil hold or can easily access U.S. dollars, while only China and mostly Chinese companies hold the Chinese national currency, called the yuan or renminbi. Unlike the U.S. dollar, the renminbi is not a freely convertible currency; its exchange rate against other currencies including the U.S. dollar continues to be managed by China's central bank.1011

U.S. dollars from crude exports can be easily invested worldwide, including in the $13.4 trillion eurodollar market for short-term dollar denominated deposits in European banks.12 Crude export proceeds in Chinese currency cannot be invested outside China as widely as USD, and can only be invested inside China at the discretion of the Chinese government. Though Chinese capital markets have grown fast, they remain much smaller and less liquid than U.S. capital markets.13

To sum up, claims that the U.S. dollar's primacy rest on its status as the settlement currency for oil exports have it backwards: the dollar's status as the global reserve currency is what keeps it indispensable to oil exporters. The dollar was the established global store of value decades before non-U.S. crude oil exporters rose to prominence.


The Real Problem With Petrodollars

Petrodollars recycled into investments overseas or development programs at home can produce positive financial and social returns. Results are decidedly less positive when petrodollars are spent on fortifying domestic oppression, fueling an arms race or waging war abroad.1415

In recent years, actions including the murder of U.S. resident Jamal Khashoggi by Saudi state agents in Turkey and Russia's invasion of Ukraine have fueled concerns that petrodollars are financing war and human rights violations, while shielding perpetrators from accountability.161718

Is the petrodollar a currency?

No, petrodollars are simply U.S. dollars received in exchange for oil exports. There is no "petrodollar system." The reinvestment of oil export proceeds has sometimes been called petrodollar recycling.

Does the U.S. dollar's global role depend on its use to settle oil sales?

No, the U.S. dollar is used to settle oil sales because of its wide global acceptance. That acceptance makes it easier for oil exporters to invest the export proceeds.

Is the petroyuan in sight?

Oil exporters are free to accept payment in a currency of their choosing. Accepting Chinese currency would be most useful for investment in, and purchases from, China. Chinese capital markets are much smaller and less liquid than those in the U.S., and Chinese currency is not widely accepted outside China.

Are petrodollars fueling war and oppression?

Saudi human rights violations and Russia's invasion of Ukraine have led to suggestions those countries' rulers have been emboldened by their oil wealth. Like any other resource, petrodollars can be deployed for good or ill.

The Bottom Line

Petrodollars are U.S. dollars received in return for oil exports. The growth in global oil flows over time has increased the economic interdependence of crude exporters and importers and the volume of international capital flows. But the oil trade and related investments depend crucially on the U.S. dollar as the most widely accepted global currency. The U.S. dollar is unlikely to be supplanted as the global payments currency of choice in the near term.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Board of Governors of the Federal Reserve System. "FEDS Notes: The International Role of the U.S. Dollar."

BP. "Statistical Review of World Energy 2021: Oil," Page 32.

Bloomberg. "The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret."

The Washington Post. "Oil for Security Fueled Close Ties."

Norges Bank. "Very Good Results in 2021."

Norges Bank. "About the Fund."

FP. "Debunking the Dumping-the-Dollar Conspiracy."

Forbes. "Why the Petro-Dollar Is a Myth, And the Petro-Yuan Mere Fantasy."

Wall Street Journal Opinion. "Is the Dollar in Danger?"

Lehman, Lee & Xu. "The Renminbi Is Not Fully Convertible. How Does This Affect Business Foreign Investment in China?"

International Monetary Fund. "China’s Evolving Exchange Rate Regime."

Bloomberg Opinion. "Saudi Arabia’s Oil-For-Yuan Bid Won’t Threaten the Dollar."

Securities Industry and Financial Markets Association. "2021 SIFMA Capital Markets Fact Book." pp. 7, 43-47

The Washington Post. "How 'Petrodollars' Rearranged the World."

The American Prospect. "How High Energy Prices Emboldened Putin."

The New Statesman. "Our Addiction to Oil Has Paid for Putin’s War."

Office of the Director of National Intelligence. "Assessing the Saudi Government's Role in the Killing of Jamal Khashoggi," Page 3.

ABC News. "Saudi Arabia's Human Rights Record May Be Overlooked Over Need for Cheap Oil, Groups Say."

Sorry, but nowhere in that piece did this guy disprove that nations HAD TO exchange U.S. dollars for oil. That means they had to approach the U.S. to make a deal to get some dollars. If you believe that that guy disproved that fact, point it out.

But before we get into this, you are denying that "non-oil producing countries, such as most underdeveloped countries and Japan, first have to sell their goods to earn dollars with which they can purchase oil. If they cannot earn enough dollars, then they have to borrow dollars from the WB/IMF, which have to be paid back, with interest, in dollars."

That means you believe that such countries could pay in any currency they wanted, right?

Just a yes or no, and we can continue.

Here's a real good dumbed down explanation of how it works:

Imagine this: you are deep in debt but every day you write cheques for millions of dollars you don't have -- another luxury car, a holiday home at the beach, the world trip of a lifetime.

Your cheques should be worthless, but they keep buying stuff because those cheques you write never reach the bank! You have an agreement with the owners of one thing everyone wants, call it petrol/gas, that they will accept only your cheques as payment. This means everyone must hoard your cheques so they can buy petrol/gas. Since they have to keep a stock of your cheques, they use them to buy other stuff too. You write a cheque to buy a TV, the TV shop owner swaps your cheque for petrol/gas, that seller buys some vegetables at the fruit shop, the fruiterer passes it on to buy bread, the baker buys some flour with it, and on it goes, round and round -- but never back to the bank.

You have a debt on your books, but so long as your cheque never reaches the bank, you don't have to pay. In effect, you have received your TV free.

This is the position the USA has enjoyed for 30 years -- it has been getting a free world trade ride for all that time. It has been receiving a huge subsidy from everyone else in the world. As its debt has been growing, it has printed more money (written more cheques) to keep trading. No wonder it is an economic powerhouse!

Then one day, one petrol seller says he is going to accept another person's cheques, a couple of others think that might be a good idea. If this spreads, people are going to stop hoarding your cheques and they will come flying home to the bank. Since you don't have enough in the bank to cover all the cheques, very nasty stuff is going to hit the fan!

It's not a reserve currency because it's valuable; it's valuable because it's a reserve currency.

You didn't read it, did you? Did you read even one footnote.

I'll handle my argument, but I cannot argue against your willful ignorance.

I refuse to pick through your boogers.

CALGARY – When Prime Minister Stephen Harper, standing alongside Chinese Premier Li Keqiang in Beijing’s Great Hall of the People, announced last month that a Renminbi currency trading hub would soon open in Canada, Calgary’s oil and gas sector was paying particular attention.

“I think it probably brings us to a level playing field with the U.S., because right now everything goes through U.S. dollars,” said Greg Stringham, Canadian Association of Petroleum Producers vice-president of oil sands and markets.

The Chinese currency hub, the first of its kind in either North or South America, will allow Canadian companies to deal directly in Renminbi – a move that is expected to save importers and exporters billions of dollars in transaction fees, especially in foreign exchange transactions in and out of the U.S. dollar, while also eliminating an extra layer of uncertainty in the foreign exchange market. For the first time, the Canadian dollar will be valued directly against China’s currency.

The hub would also allow Canadian energy companies to number among the very few producers in the world to sell oil in a currency other than the U.S. dollar. In August, Russia’s Gazprom Neft began accepting Rubles or Chinese currency for oil sales off its eastern coast. Russian president Vladmir Putin has recently described the international oil trade as the “dollar dictatorship.”
_______________________________________________________________________________________________

Was he kidding when he said that? I'd be highly interested in your reason for refusing to believe that. And he's not the only one who wasn't kidding when they said that.

But before we get into this, are you denying that "non-oil producing countries, such as most underdeveloped countries and Japan, first had to sell their goods to earn dollars with which they can purchase oil; that if they cannot earn enough dollars, then they have to borrow dollars from the WB/IMF, which have to be paid back, with interest, in dollars?

Hey, in the interest of clarity, why don't you give your version of why Nixon closed the gold window? You must believe something other than the real reason. What do your "sources" have to say about that?

I really don't give a **** about the gold standard.

My understanding of Nixon's motives is that he understood that a large growing third world, some having large economies, have currencies not backed by gold. That making our currency backed by gold was actually a weakness in that anyone (except Americans) could demand gold on what was actually a bearer bond and that gold would be out of the US where gold was more expensive.

By putting gold on the market, it's a small jump to put the dollar on the market with all other currencies. It opened up markets and labor pools all over the world.

My opinion. But I did get an education to have the skills to form a informed opinion.

"Petrodollars" is the name of a phenomena - the dollar is stable and the US always pays its debts and everybody loves the dollar; not the name of any program by any state or corporate entity. Multinational corporations love a single currency, Your cabbie in Moscow loves a single currency. The Chinese buy more T-notes with dollars than any other nation. They love a single currency.

In the end it doesn't matter, the problem is the US's economy is larger than the next 10 nations put together. Did you know Texas's economy is larger than Russia's???

What currency do you think is big enough???????

As at 2020:
US GDP is 20 trillion
The next 10 nations total about 38 trillion

China's is 14 trillion
Euroblock nations probably top 10 trillion

OPEC nations could arguably also form their own currency block and insist their oil be bought in that currency
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

Not hardly, not with both Saudi and the Chinese economies so in love with dollars.

Do you think the Chinese with Trillions in American debt financing really want to mess with the dollar. Using EU as an international currency is no big deal. They'll still be valuing their petroleum buys in Dollars.

I was responding to the glaring errors in your statement. Now, rather than correcting your error, you are adding other arguments like they somehow change the original error.


That said:
Currently? Things change over time. Change is a constant in the the world.

I've little doubt that is exactly why they are doing it. If I were China, I would to become the reserve currency. I'd say it is more like when, rather than if. If they did trigger a US dollar collapse, that is good for them, because it means the US would not rise again under the burden of debt. Of course such things can't be considered outside the political repercussions. They may just wait for the world to switch reserve currencies on their own, but owning so much debt gives them more options and potential for political leverage (with other countries as well as the US). Again, it's what I'd do if I had a long term goal to become the reserve currency.