Petrocurrency (or petrodollar) is a word used with three distinct meanings, often confused:
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Dollars paid to oil-producing nations (petrodollar recycling)—a term invented in the 1970s meaning trading surpluses of oil-producing nations.
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Currencies of oil-producing nations which tend to rise in value against other currencies when the price of oil rises (and fall when it falls).
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Pricing of oil in US dollars: currencies used as a unit of account to price oil in the international market.
Oil-producers' trading surpluses
"Petrocurrency" or (more commonly) "petrodollars" are popular shorthand for revenues from
petroleum exports, mainly from the OPEC members plus
Russia and
Norway. Especially during periods of historically expensive oil, the associated financial flows can reach a scale of hundreds of billions of
US dollar-equivalents per year – including a wide range of transactions in a variety of currencies, some
Currency peg to the US dollar and some not.
Currencies correlated with oil prices
The
pound sterling has sometimes been regarded as a petrocurrency as a result of North Sea oil exports.
[ Sterling and the EMS In for a penny]
The Dutch guilder was once regarded as a petrocurrency due to its large quantities of natural gas and North Sea oil exports. The guilder strengthened greatly in the 1970s, after OPEC began a series of price hikes throughout the decade that consequently increased the value of all oil-producing nations' currencies. However, as a result of the appreciation of the Guilder, industrial manufacturing and services in the Netherlands during the 1970s and into the 1980s were crowded out of the larger national economy, and the country became increasingly non-competitive on world markets due to the high cost of Dutch industrial and service exports. This phenomenon is often referred to in economics literature as Dutch disease.
The Canadian dollar is sometimes viewed as a petrocurrency, but this status is controversial. In theory, as the price of oil rises, oil-related export revenues rise for an oil exporting nation, and thus constitute a larger monetary component of exports. As their oil sands deposits have been increasingly exploited and sold on the international market, movements of the Canadian dollar have sometimes been correlated with the price of oil. In 2015, University of British Columbia Professor Werner Antweiler predicted that if the share of oil and gas exports increases further, the link between oil prices and the exchange rate may become even stronger.
Currencies used to trade oil
As the world's dominant
reserve currency, the United States dollar has been a major currency for trading oil.
In August 2018,
Venezuela joined the group of countries that allow their oil to be purchased in currencies other than US dollars, thus allowing purchases in
Euros, Yuan (
Petroyuan) and other directly convertible currencies.
Other nations that permit this include
Iran.
World War II to 1970
After WWII, international oil prices were for some time based on discounts or premiums relative to that for oil in the Gulf of Mexico.
[Adelman, M. A. (1972). The World Petroleum Market, Baltimore: Johns Hopkins University Press, Chapter 5.]
After the Bretton Woods conference in the year 1944, the UK and its allies discontinued linking their currencies with gold; however, the US dollar continued to be pegged to gold, at $35 per ounce—from 1941 to 1971.
1970 to 2000
Nixon shock. In the absence of fixed value convertibility to gold, compared to other currencies, the US dollar subsequently deteriorated in value for several years, making fixed USD to local currency exchange rates unsustainable for most countries.
Since the agreements
In October 1973, six OPEC member countries (Saudi Arabia, Kuwait, Abu Dhabi, Qatar, Libya, and Algeria) declared an oil embargo on the United States and the Netherlands. This was in response to the United States' and Western Europe's support of Israel in the Yom Kippur War.
Iran
Since the beginning of 2003, Iran has required payment in euros for exports to Asia and Europe. The government opened an Iranian Oil Bourse on the free trade zone on the island of Kish,
for the express purpose of trading oil priced in other currencies, including euros.
OPEC and shale oil boom
The unconventional
tight oil (shale oil) boom in the USA starting in the early 2000s through 2010s (as well as increased production capacity in many other countries) greatly limited OPEC's ability to control oil prices.
Consequently, due to a drastic fall in
Nymex crude oil price to as low as $35.35 per barrel in 2015, many oil-exporting countries have had severe problems in balancing their budget.
By 2016, many oil exporting countries had been adversely affected by low oil prices including Russia, Saudi Arabia, Azerbaijan, Venezuela and Nigeria.
Venezuela
The
petro, or
petromoneda,
launched in February 2018, is a
cryptocurrency developed by the government of
Venezuela.
[ Cryptocurrencies as Asset-Backed Instruments: The Venezuelan Petro. Banking and Insurance eJournal. Social Science Research Network (SSRN). Accessed 18 February 2018.][(20 February 2018). Venezuela launches the ‘petro,’ its cryptocurrency. Retrieved 3 March 2018.] Announced in December 2017, it is claimed to be backed by the country's oil and mineral reserves, and it is intended to supplement Venezuela's plummeting bolívar fuerte currency, purportedly as a means of circumventing U.S. sanctions and accessing international financing.
China
In March 2018, China opened a
Futures contract market denominated in Yuan which could encourage the use of its currency as a petrocurrency.
See also
Further reading
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Article regarding Dr. Oweiss' claimed coinage of the term "petrodollar".
External links
