Petrodollars and Their Positive Impact on US Currency
The petrodollar arrangement created in the mid-1970s has brought about many advantages for the US dollar and the economy.
Stock trading and investing moves are often like chess moves, but are determined by factors such as international trade, gold and oil. Oil is such a valued commodity globally, and stock markets are impacted by it.
What Are Petrodollars?
When it comes to dealing with financial markets, particularly of the United States, international oil transactions are a major factor. And that’s when you come across the concept of petrodollars, as this Investopedia definition reveals. Petrodollars are oil prices that are denominated in the US currency. From the perspective of the United States, it also describes the money the country has received by selling oil internationally.
This arrangement of denominating oil prices in US dollars began in the mid part of the 1970s. Investopedia’s Zaw Thiha Tun explains that during the early 1970s, the Bretton Woods Agreement – established in 1944, by which currencies were pegged to gold’s prices and the US dollar considered a reserve linked to gold prices – collapsed. The United States then made an arrangement with Saudi Arabia under which oil prices would be standardized in terms of the dollar. That gave birth to the system of petrodollars.
Oil Crisis of the 1970s Leads to Creation of Petrodollars
The oil crisis of the mid-1970s caused prices to soar to levels unheard of then. The prices needed to be stabilized, and the solution seemed to be denominating oil prices in US dollars. With the birth of the petrodollar system, there was a shift from currencies backed by gold and pegged exchange rates to floating rate and non-backed regimes.
With the petrodollar system, the US dollar received the status of being the reserve currency of the world. This gives the United States many advantages including relentless trade deficits. It has become an economic domination. The system also gives the financial markets of the US some liquidity and inflows of foreign capital through the system of recycling of petrodollars. Petrodollars therefore have a major impact on the US dollar.
Benefits of Petrodollars for the US Dollar
Oil sale is now standardized in US dollars. So looking at petrodollars in detail, we come across many advantages for the United States. With oil being the commodity most sought after in the world, the petrodollar raised the US dollar to become the dominant currency in the world. As a result, the US dollar is able to finance its current account deficit through the issue of dollar denominated assets at pretty low interest rates. In the process, it has become an economic hegemony.
There is also the advantage of petrodollar recycling. The petrodollar arrangement manages to create US dollar reserve surpluses for the countries that produce oil. These dollar reserves must be recycled, and are used for domestic consumption as well as for lending overseas for meeting the developing nations’ balance of payments. They can also be invested in assets denominated in US dollars. This particularly helps petrodollars get back to the country and be used for purchasing Treasury bills and other such US securities that create liquidity and keep the interest rates at a manageable level. This contributes to non-inflationary growth. The OPEC states can also be led to make US investments to avoid currency conversion risks.
In short, the impact of petrodollars is significant. They have been of great advantage to the US markets and economy. Take advantage in the moves in the oil markets by trading oil stocks, suppliers and ETFs. Trade those all with TradeZero, commission free using up to 6 to 1 intraday leverage.