The Power and Influence of the Petrodollar

By Karl Weinmann

Opec International oil provider, trading in Dollars, will have a new global competitor. China is about to start trading oil futures in Yuan and is preparing to launch Yuan-Priced Crude oil futures changing the powers and players in the global petroleum markets. China will be the world’s largest oil producer, expected to provide mainly to Asian countries as expected by market analysts.

Will Petro-Dollar global power and Chinas Yuan-Priced Crude oil futures make ripples?  We will know very soon!

The Petrodollar is considered by the IMF and oil dependent countries like a currency because the dollars paid through petroleum sales bilaterally from oil exporting countries adds value to the U.S. revenue. This international valuation in dollars is indexed as USD per barrel. Petrodollars have been traded from around the same time the international organisation Opec was formed. Opec‘s first five members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela founded the intergovernmental organisation in Baghdad in 1960. Now in 2017, Opec‘s international organization includes fourteen countries and their headquarters are based in Vienna.

For over 60 years, petrodollars have been the bench mark for trading petroleum around the globe. Trading of petroleum has evolved because of geopolitical reform and globalisation.  In 2013, Russia joined the World Trade Organization (WTO), exporting gold and growing their gold reserves. China relaxed their banking regulations changing their rules allowing Chinese banks to enter into to the international credit market and invest outside China. Gold reserves strengthen a country’s currency. The economic relationship between Russia and China in oil has been bullish. Non-dollar petroleum trading allows countries like Russia to bypass U.S. sanctions.

A strong U.S. Dollar has influenced the popularity of petrodollars for more than sixty years but has weakened as interest rates on the dollar fell over ten years.  The U.S. interest rates fell during the financial crash between 2007 and 2009 from just above 5 to 0.2 percent and remained at this low level until the end of 2016. The interest rate has risen back to 1.25 percent in ten months.

U.S. – Saudi relations have been a strong partnership. Since 1938, Saudi Arabia and the U.S. have been partners who produced oil for America throughout World War II. For over ninety years, the two nations have been making deals based on ‘U.S. private sector’ and ‘Saudi political stability’ needs. The U.S. Government’s relationship with Saudi Arabia was progressive until the energy crisis of 1973 and 1974, and then the U.S. Government drafted a national energy policy to clarify ground rules for dealing with Saudi Arabia around energy issues.

In 2016, Opec announced its first cuts in oil production, the price of oil rose by eight percent. In Iran, Saudi Arabia, and the Persian Gulf regions war is threatening relations between Iran and Saudi Arabia. Iran has been accused of harbouring an extremist ideology and Saudi Arabia on the border with Iraq has shown an increase of militarization.

 

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