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What are Petrodollars? Why do Petrodollars Matter? - YouTube
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the wall street journal last week ran a
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story outlining active talks between the
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governments of saudi arabia and china to
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price saudi oil sales to china in
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renminbi rather than us dollars
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according to that report the talks which
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had been ongoing for more than six years
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accelerated in recent weeks due to saudi
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dissatisfaction with the biden
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administration's position on a number of
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issue areas including the yemen civil
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war the iranian nuclear negotiations and
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the chaotic u.s withdrawal from
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afghanistan
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but if such an agreement were to be
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concluded that is if saudi arabia starts
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selling oils nominated in yuan rather
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than u.s dollars what impact would that
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have on the us dollar and on the
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petrodollar system more generally hey
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everyone i'm noah zerby i'm a professor
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of political economy at california state
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polytechnic university humboldt in this
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video series i try to explain the
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concepts and theories behind current
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events generally in two minutes or less
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most international oil sales are priced
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in u.s dollars regardless of the
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countries that are participating in the
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transaction
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in 2020 for example saudi arabia sold
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about 8.2 billion dollars in oil to
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china and about 3.1 billion dollars
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worth of oil to india but rather than
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selling its oil in the real the national
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currency of saudi arabia or in chinese
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renminbi or indian rupees all of the
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transactions took place in u.s dollars
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and this is true not just for saudi
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arabia but for nearly every oil
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exporting country in the world and it's
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generally been the case for about 50
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years oil is the most widely traded
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commodity in the world with nearly 100
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million barrels sold per day
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projections are that more than 2.2
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trillion dollars worth of oil and
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natural gas will be sold in 2022 with
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oil prices currently hovering around 100
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a barrel this figure could move even
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higher and almost all of those
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transactions take place in u.s dollars
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because countries who want to purchase
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oil must first purchase u.s dollars oil
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sales generate additional demand for u.s
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currency beyond what might otherwise be
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the case
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such demand creates greater currency
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stability for the united states currency
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and it also insulates the u.s economy
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from some forms of price inflation
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it also generates significant additional
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demand for u.s treasury bills providing
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a steady stream of credit for the u.s
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government
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there has been some pressure to move
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away from the petrodollar system the
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canadian dollar the euro the renminbi
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and others have all been used to price
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oil in different countries but the size
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of the global oil market creates
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challenges for smaller economies in the
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1970s for example the netherlands
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suffered from dramatic currency
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appreciation a sharp increase in the
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value of the currency due to pricing oil
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and natural gas in the north sea in
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dutch gilders
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this made dutch exports much less
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competitive on global markets leading to
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a decline in the industrial base and
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service sector of the country a
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phenomenon we now refer to as dutch
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disease
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as a result of this phenomenon we'd
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expect that currencies like the euro or
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the renminbi would make more likely
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alternatives for the current petrodollar
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system rather than smaller currencies
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like the canadian dollar or the russian
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ruble
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so would a deal between saudi arabia and
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china be different
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on its own probably not saudi arabia's
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annual oil sales to china amount to
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about 8.2 billion dollars a year
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but the u.s dollar accounts for about 80
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percent of all foreign currency
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transactions worldwide a total of about
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6.6 trillion dollars per day
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thus i wouldn't expect the saudi chinese
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oil deal to have a dramatic impact in
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its own right on the petrodollar system
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that said if other countries begin
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following suit and making similar deals
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effectively bypassing the dollar that
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could have a larger impact
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over time i wouldn't be surprised at all
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if global currency reserve systems began
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to diversify away from such extensive
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reliance on the us dollar this trend has
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already begun and a number of other
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currencies including the euro the swiss
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franc the british pound sterling the
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canadian dollar and the chinese renminbi
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are already in use
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i'd expect that trend to continue and
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perhaps even to intensify if the dollar
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becomes less stable as a store of value
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that is if it suffers from higher rates
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of inflation
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that's it for now if you found this
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helpful click the thumbs up button and
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subscribe to catch future explainers as
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i release them please leave any
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questions you have about this video or
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if you have any suggestions for future
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explainer topics i'd welcome those as
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well thanks for watching everyone bye
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