Petrodollars are the primary source of oil revenue for OPEC members and other oil exporters in the Middle East, Russia and Norway. The petrodollar is an exchange of oil for the United States dollar between oil-exporting and oil-importing countries; oil revenue is dominated in the U.S. dollar.
All oil purchases from the Organization of the Petroleum Exporting Countries (OPEC) must be paid in U.S. dollar. For example, if India wants to buy oil, then it has to sell local currency and buy the United States dollar and use these dollars to import oil from OPEC.
The term petrodollar was introduced during the oil crisis in mid of 1970 when oil prices spiked to record level. At that time, the United States dollar was pegged to Gold and other currencies to the U.S. dollar. But because of hyperinflation in mid of the 1970s, President Nixon publicized in 1971 that U.S. dollar would no longer be replaced for Gold to increase the economic growth for the United States of America.
The announcement led to the formation of the petrodollar system, where, Saudi Arabia and the United States agreed to set oil prices in United States dollars. This meant that any country who want to import oil from Saudi Arabia must have to pay in U.S. dollars. That led the remaining OPEC member countries to follow the same procedure. The term regained unsavoury reputation in the early 2000s when oil prices spiked once again.
Even though petrodollars at first stated primarily to revenue that members of OPEC and Middle Eastern countries received from oil exports, in recent times the term has widened to take in other countries in past years.
The petrodollars are U.S. dollars, the primary source of revenue for OPEC members and other oil exporters in the Middle East, Russia and Norway. Because oil revenue is dominated in United State dollars, so the real purchasing power depends on the worth of U.S. dollar and U.S. inflation, this means that the petrodollar will be affected the same way the U.S. dollar is changed. If the value of U.S. dollar falls, so does the worth of petrodollar and government returns.
The exchange of oil in U.S. dollars creates surplus for oil-exporting countries known as petrodollar surplus. The excess lead to a large reserve of United State dollars for significant oil exporters. These surplus needs to be recycled in the shape of investments, domestic consumption, loan to other nations or be capitalized back in the United States through T-bills and purchase of bonds. This procedure aid to create liquidity in the United States financial markets.
With the deterioration in purchasing power, some countries like India, Russia and Iran have reflected shifting the base value of their exports in their currency rather than the United States dollar. In 2018, the People’s Republic of China announced to move oil price in its currency yuan instead of the U.S. dollar, because China is major world importer of oil and saw it as a logical shift. Venezuela has already dropped the petrodollar system in 2017 and began oil pricing in yuan and euros.