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What Is a Petrodollar?

Most oil sales are conducted in U.S. dollars, but some countries sell in other currencies.
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  • Last Modified Date: 02 September 2014
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A petrodollar is a dollar earned by selling petroleum. Petrodollars flow into members of the Organization of the Petroleum Exporting Countries (OPEC) at a steady rate, and flow out at an almost equally steady rate as these countries invest petrodollars overseas. In fact, often money makes a round trip, flowing from a country like the United States to an OPEC member which in turn reinvests the funds in the United States.

Prices for oil sales are generally given in United States Dollars (USD). In 1973, economist Ibrahim Oweiss wanted to come up with a term to describe the large volumes of currency changing hands as a result of oil sales. He coined the portmanteau “petrodollar,” referring to “petroleum” and the United States Dollar. People also use the term “oil money” or “petrocurrency” to describe petrodollars, although “petrocurrency” is also sometimes confusingly used to refer to the currency used by an oil producing country.

At various points in history, OPEC members have literally made more petrodollars than they knew what to do with. Rising oil prices resulted in such a flood of currency that these countries were unable to invest it on internal development projects. As a result, many nations started engaging in a practice known as petrodollar recycling, in which they promptly reinvest the currency in banks in regions like Europe and North America.

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Changes in oil prices can lead to ebbs and flows in the movement of the petrodollar and in the investment funds available to OPEC members. Some of these nations rely heavily on income from oil sales and are placed at a disadvantage when prices are depressed. In regions such as Dubai, the profound impact of petroleum sales on regional economies can be seen firsthand in the form of extravagant and rapid development reflecting the increasing wealth of some members of the population.

While the bulk of oil sales are conducted in USD and prices are quoted in USD, some countries have opted to sell in other currencies. The dominance of the USD in global commerce is credited in part to the petrodollar, and some theorists have suggested that changing economic trends may result in petrodollar warfare, in which there will be a push to denominate oil sales in other currencies. If, for example, the world switched to the petroeuro, based on the currency of the European Union, the United States Dollar might weaken as a result.

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ddljohn
Post 3

I just heard about something called the petrodollar scam. Most people have probably heard about it already, but it's real news to me. The scam is the U.S. deal with OPEC to sell oil in dollars.

I guess several decades ago, we printed lots of American dollars and didn't know what to do when countries wanted to exchange dollars for gold, which apparently we didn't have.

What's shocking to me is that we are said to have literally gotten oil for free since it was all in dollars. But now that countries like Iran and Venezuela are selling oil in euros, they say that the scam is out. If we are forced to buy oil in euros in the future, our economy might go into depression.

burcinc
Post 2

There are claims that the worldwide oil crisis, the pricing of oil and the decreasing value of the dollar are the main reasons for the Iraq war.

The world is said to be slowly running out of oil and its price is going up for that reason. Plus, there are growing fears of euros taking over the dollar in oil sales. Some say that the U.S. has been fearing of losing its petrodollars and eventually the global power that comes with it. They say that this is why the Iraq war started in the first place and furthermore, this is why the U.S. is on bad terms with Iran.

I don't know what to think about these claims. Clearly, petrodollars are important and we don't want to be losing that. But I still doubt that it is the sole reason for the U.S. problems with the Middle East. We can probably also say that petrodollars have a role in our strategic interests. But these claims seem a bit far fetched in my opinion.

candyquilt
Post 1

I guess becoming the currency of petroleum is the dream of all currencies. But only the world's leading currency can take that position.

I read that for over sixty or so years, the dollar has been the currency for the majority of world trade. The Central World Bank and pretty much all of the international organizations use the American dollar. But as we all know, the dollar has started to lose its value. The euro is more valuable now and some say that it might replace the dollar in world trade pretty soon. That means that petroleum sales might become petroeuro as the article mentioned.

I sure hope that doesn't happen. Being the currency for petroleum is a huge thing and I don't think that the American economy can afford to lose this privilege.

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