DEFINITION of Petrodollars
The term petrodollar refers to the money received from the sale of oil. Coined in the 1970s, the term petrodollar was a result of the oil crisis in the mid-1970s when prices spiked to record levels and to increase stability oil prices were denominated in U.S. dollars.
The term regained notoriety in the early part of the 2000s, when oil prices rose once again.
BREAKING DOWN Petrodollars
Petrodollars are the primary source of government revenue in many Middle Eastern countries that are net exporters of oil. Simply put, petrodollars are oil revenues denominated in U.S. dollars. Because petrodollars are denominated in U.S. dollars, the true purchasing powering of them are reliant on both the core rate of U.S. inflation and the value of the U.S. dollar.
The petrodollar system was one of the earliest happenings that set the U.S. dollar as the worlds reserve currency. Seeking stability, petrodollars set the price of oil in U.S. dollars and led to many Middle Eastern countries pegging their currency to the U.S. dollar. This enabled them to better forecast the money coming in from oil reserves or petrodollars.
The petrodollar system creates surpluses, known as petrodollar surpluses. By definition, this is the money earned from sales after investment in the development of the oil industry. In fact, these funds represent a massive amount of investment capital and are often traded on the eurocurrency market.
Although petrodollars initially referred primarily to money that Middle Eastern countries and members of OPEC received, the definition has broadened in recent years.
In late 2017, China announced it was considering a move to price oil in its own currency, the Chinese yuan. Because China is the worlds biggest importer of oil, they saw it as a logical shift to price the worlds most important commodity. To-date, there has been no official move away from the U.S. dollar.