What is Petrodollar?

A Petrodollar is an estimated unit of currency received by a nation from the export of petroleum.

It usually denotes to the fact of key petroleum-exporting countries, essentially the OPEC nations and Russia, generating revenue through export of crude oil than they could practically invest in their internal markets.

The subsequent international mutual reliance and monetary flows from oil producers to oil buyers could reach a magnitude of huge quantities (US dollars) year-on-year covering various currencies. The movement of the petrodollar is greatly determined by decisions of oil-producing governments.

The occurrence is extremely distinct during phases when oil price is traditionally high. Internal political dynamics in Saudi Arabia is going to affect the petrodollar.

Fall in oil prices in recent times has forced the Saudi government to strategize a new path for economic growth – reducing oil reliance and diversifying into other sectors (healthcare, tourism), but experts believe it would be difficult for Saudi Arabia to make the paradigm shift.

The Kingdom has placed a five-year syndicated loan valued at $10bn (short-term fundraising, revenue generated through oil and sales of US Treasuries). This move by Saudi Arabia could result in a breakdown of the US bond market and the dollar.

This could result in another global meltdown and central banks are trying to avoid it. According to market experts, China’s financial strength (huge amount of dollar to dispose of), political clout (increasing political interests in Asia), along with Saudi Arabia’s position as an energy supplier could result in an agreement (between China and Saudi Arabia) which could be mutually beneficial in the long run.

The indebted US is not able to compete with China economically. Hence, it is only a matter of time before the Saudi riyal would ultimately get de-pegged from the US dollar and managed according to a basket of its oil currencies, influenced by the yuan.

Therefore, any currency strategy followed by China and Saudi Arabia could impact the dollar.

The Chinese government would provide dollar loans to Saudi Arabia against the sale of oil in the future that would be repaid in yuan, probably at a prearranged rate of exchange.

Saudi Arabia would receive dollars to spend, and China might balance supply and demand for yuan in the future. Hence, a significant portion of the petrodollar pile would crash in the future.

Over a period, the US has taken advantage of the dollar’s reserve currency status, resulting in a huge amount of dollars in intentional ownership. However, at present, the geopolitical dynamics that supported the dollar previously has changed.

There is a market opinion, which is moving towards gold. Hence, the purchasing power of the dollar would keep decreasing in the long run.

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