What Petrodollar recycling is

Oil-producing countries found themselves having very large financial resources, namely petrodollars, precisely because crude oil was paid for using the US dollar

by Lorenzo Ciotti
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What Petrodollar recycling is
© Matt Cardy / Stringer Getty Images News

Oil-producing countries found themselves having very large financial resources, namely petrodollars, precisely because crude oil was paid for using the US dollar. Only a small part of these resources were reinvested in the producing states themselves.

The rest was poured into the world economic and financial system, with the purchase of foreign currency and securities, with destabilizing effects on the entire system. The payment of oil and other raw materials in dollars guarantees a stable demand for this currency, coming from abroad, which serves to support the exchange rate, in the presence of a negative trade balance, to finance the foreign deficit of the United States.

Raw materials are a primary good, however necessary for the economy, with little elasticity of demand with respect to price, and therefore suitable for guaranteeing an exchange rate on other currencies independent of the state of health of an economy.

the use of dollars in international oil transactions increases overall U.S. dollar demand by only a tiny fraction, and the dollar's overall status as the major international reserve currency has relatively limited tangible benefit to the United States economy as well as some drawbacks.

What Petrodollar recycling really is

After World War II, under the Bretton Woods agreements, the dollar was the sovereign currency of oil transactions. Oil could only be bought or sold in dollars, typically referring to one of three oil markers: West Texas Intermediate Crude, United Arab Emirates Dubai Crude and Norway Brent Crude.

This practice was first discontinued in July 2011 with the opening of the Kish Stock Exchange in Iran. In June, China signed a trade agreement with Japan and Iran for the supply of oil and finished products, requiring payment in its local currency.

Differently, the petroeuro is an oil exchange valued in euros and not in US dollars. Trade in any natural resource, including oil, is controlled through trade agreements involving exporters and importers of the resource in a given market, through a trade agreement.

The main countries that have oil reserves from the decline of US production are grouped in OPEC, which can choose between dollars, euros, yen or any other currency that can give political or economic advantages.

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