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How the Petrodollar System Works

The petrodollar system refers to a trade system used in the international trading of petroleum.

The term "petrodollar" was first used in the year 1973 by Ibrahim Oweiss, economics professor at the Georgetown University and referred to the practice of selling oil in exchange for US dollars.

How Does the Petrodollar System Work?

How the petrodollar system works (simply): if a country wants to buy oil/petrol from a major petrol-producing nation (e.g.: OPEC countries), then the buyer nation has to purchase US dollars which with it will be able to obtain the oil.

The petrodollar system was literally forcing buyers to acquire US dollars in order to buy oil. In order for (let's say) Poland to buy oil from Saudi Arabia, Poland would have to buy US dollars first in order to pay for the oil.

The petrodollar usually refers to the US dollar, but in some cases it may also refer to the Canadian dollar (in this case the sale of Canadian petrol to other countries in exchange of Canadian dollars).

How It Empowered the Dollar

The United States has been maintaining close ties with oil-rich countries for decades and in exchange for certain privileges (political, technical, economical etc.), many of these oil sellers have agreed to sell their oil only in US dollars.

This gave the US dollar tremendous strength and consolidated its position on global markets as a reserve currency of the World.

The Winds are Changing - New Trends Will Put an End to the Petrodollar System

Today - things are dramatically changing. Venezuela, Iran, Brazil are some of the numerous countries avoiding the dollar in bilateral trade. They're usually selling their oil for other currencies (often their own) or, they're selling it for gold (Iran has been selling oil to India in exchange for gold).

An increasing number of countries are trading oil for anything else than US dollars (the reasons are economical and political alike).

Economical reasons would be the worries regarding the weakening US economy (which will eventually reflect in the dollar's stability), therefore it's believed that it's better to avoid an unstable currency in trade.

Political reasons are various. Sometimes it's the political motivations that lead to trade wars and currency wars.

The petrodollar system will end eventually - either because a large number of oil-selling countries are avoiding the dollar or, because oil will be used up one day! Either way, the petrodollar system will end. This could drastically affect the US currency - unless something else will be found to empower it.

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