What are Petrodollars?

Petrodollars are U.S. dollars paid to an oil exporting country for

the sale of the commodity. Put simply, the petrodollar system is
an exchange of oil for U.S. dollars between countries that buy
oil and those that produce it.
Although petrodollars initially referred primarily to money that
Middle Eastern countries and members of Organization of the
Petroleum Exporting Countries (OPEC) received, the
definition has broadened to include other countries in recent
years.
Understanding Petrodollars
Petrodollars are oil revenues denominated in U.S. dollars. They
are the primary source of revenue for many oil-exporting
members of OPEC, as well as other oil exporters in the Middle
East, Norway, and Russia.
Because petrodollars are denominated in U.S. dollars—
or greenbacks—their true purchasing power relies on both the
core rate of U.S. inflation and the value of the U.S. dollar. This
means petrodollars will be affected by economic factors the
same way the U.S. dollar is affected. So if the value of the dollar
falls, so does the value of petrodollars, and therefore, the
government's revenue.
History of the Petrodollar System
The origins of the petrodollar system goes back to the Bretton
Woods Agreement negotiated in July 1944, which replaced the
gold standard with the U.S. dollar as the reserve currency. Under
the agreement, the U.S. dollar was pegged to gold, while other
global currencies were pegged to the U.S. dollar.
That led to the creation of the petrodollar system, where the U.S.
and Saudi Arabia agreed to set oil prices in U.S. dollars. That
meant any other country that purchased oil from the Saudi
government would have to exchange its currency into U.S.
dollars before completing the sale. That led remaining OPEC
countries to follow suit and price their oil in U.S. currency.
Key Takeaways
● Petrodollars are U.S. dollars paid to oil exporting
country for the sale of oil, or simply, an exchange of oil
for U.S. dollars.
● Petrodollars are the primary source of revenue for
many OPEC members and other oil exporters.
● Because they are denominated in U.S. dollars, the
purchasing power of petrodollars relies on the value of
the U.S. dollar. When the Dollar falls, petrodollars do,
too.
Petrodollar Recycling
The petrodollar system creates surpluses, known as petrodollar
surpluses. Since petrodollars are basically U.S. dollars, these
surpluses lead to larger U.S. dollar reserves for oil exporters.
These surpluses need to be recycled, which means they can be
channeled into domestic consumption and investment, used to
lend to other countries, or be invested back in the United States
through the purchase of bonds and T-bills. This process helps
create liquidity in financial markets in the U.S.
By investing their surpluses, these exporters reduce their
dependence on oil revenue.
Asian currency Market:
The creation of the Asian currency market in Singapore, set up
as intermediaries between several national capital markets and
the rapidly growing Eurocurrency market.
Thus, when a tightening of credit conditions in the United
States in 1967-68 contributed to a rising trend in interest
rates in the Eurodollar market, tapping the existing dollar
balances in the Asia-Pacific region became attractive for
major international banks, particularly for those from the
United States. Furthermore, many banks were looking for a
site for regional offices from which they would service the
increasing number of their branches in the region.

Deposit and loan facilities offered in the Asian currency market

are similar to those offered in the Eurocurrency market.Deposits
accepted are (a) sight; (b) two-day to seven-day notice, generally
limited to US$100,000 or higher; and (c) deposits with fixed-
term maturities of up to five years. Contrary to the practice of
the Eurocurrency banks, the banks in Singapore accept small
fixed-term and time deposits, the amounts sometimes being as
low as US$5,000.
Loan facilities offered are (a) short-term, including overnight;
(b) fixed-interest rate loans for various maturities that in recent
years have often exceeded one year; (c) lines of credit for
commercial transactions, for a fixed term but subject to a
rollover; and (d) floating interest rate credits for some loans
exceeding three years on which the interest rate, based on the
interbank offer rate plus a margin, is adjusted every 3 to 6
months.

Since 1974, banks of the Asian currency market have

participated in the activity of major financial centers to recycle
surplus funds of the oil producing countries. 
CONTRIBUTION TO Asian countries:
The Asian currency market has provided substantial benefits to the Asian region by facilitating
large inflows of funds that otherwise might not have become available