Petro-dollars are the oil surplus funds accumulated by major oil exporting countries in their balance of payments surplus over the years since the substantial increase in oil prices in 1973. Because the U.S. dollar accounts for the largest proportion, it is called petro-dollars. This article introduces how the petro-dollar system was established and the impact of the petro-dollar system on foreign exchange.

How was the petrodollar system established

The petro-dollar system refers to the increased oil revenue of oil exporting countries due to the substantial increase in oil prices in the 1970s, after excluding the surplus funds settled in US dollars that were used to develop their own economy and other expenditures. Since oil is priced and settled in U.S. dollars in the international market, huge petrodollars have a great impact on oil importing and exporting countries, and even the global economy. The first is to bring abundant capital flows to crude oil exporting countries and to promote the economic development of these countries and regions; the second is to bring about a new imbalance in the international balance of payments of different countries and regions, and the balance of power between international savings and capital has occurred. Structural changes. At the same time, the circulation of petrodollars is an important factor affecting international politics and economy. It has also greatly promoted the economic development of the United States and consolidated its economic and financial status.

One of the main reasons why the US dollar is the world’s reserve currency is that it occupies a dominant position in the global oil trade. Since the end of the gold standard in the 1970s, the petrodollar system has been the backbone of the dollar’s status. The formation of the petro-dollar system dates back to 1971 after the U.S. government stopped exchanging U.S. dollars for gold. Then U.S. President Nixon agreed to provide arms and protection to Saudi Arabia on the condition that all Saudi oil transactions must be settled in U.S. dollars. As Saudi Arabia is the largest oil producer in OPEC and the world’s largest oil exporter, other countries will soon adopt the U.S. dollar for oil transactions, and the petrodollar system has since been established.

The petro-dollar system allows the United States to borrow more money, while also making the value of the U.S. dollar relatively higher than most currencies. In the past, it was the United States that exported U.S. dollars to the world through the purchase of oil and commodities, and countries returned to the United States through the purchase of U.S. weapons, high-tech and U.S. debt, forming a large-scale U.S. dollar cycle system with petrodollars as the core.

Because of countries with different levels of development, economic development is highly dependent on oil, which is an efficient energy source, and the US dollar, which is the currency of oil settlement, is like circulating blood, constantly circulating in countries with economic development. And these surplus petrodollars will return to the United States in different dollar-denominated securities assets such as U.S. stocks, treasury bonds, etc., thus forming a closed loop of stable capital flow such as “dollars per petrodollars and commodity dollars”. , Which in turn affects the economic development and wealth distribution of countries in different regions of the world.

The impact of the petrodollar system on foreign exchange

After the appearance of the petro-dollar system, it has had a huge impact on the world economy and international finance:

First, it has brought a lot of funds to oil-producing countries, promoted the development of these countries, changed the single economic structure, and was conducive to the establishment of an independent and complete economic system.

Second, the international trade balance of different types of enterprises and countries is unbalanced, and the balance of international knowledge reserves has undergone structural changes. For example, due to rising oil prices, Russia has gained more oil revenue.

Third, it has exacerbated the turbulence in the international economic and financial product markets. After petrodollars entered the international market, on the one hand, they enriched the international credit power and met the needs of many countries for funds; long-term and short-term credit needs; on the other hand, a large amount of hot money flows between countries, sometimes investing in stocks, sometimes investing in gold and others. The country’s currency has caused more volatility in the stock, gold, and foreign exchange markets.

Regarding the petro-dollar system, this article introduces how the petro-dollar system was established and the impact of the petro-dollar system on foreign exchange. It can be seen that the petro-dollar system has an impact on the world economy. For investors, it is necessary to pay more attention to the price of oil and the price trend of the dollar.