What are petrodollars?

Petrodollar is a United States dollar earned by a country through the sale of petroleum

Coined by Ibrahim Oweiss , a professor of economics at Georgetown University, in 1973.

Petrodollar "recycling" refers to the $ reflows to the rest of the world that result from the use oil-exporting countries (mainly OPEC countries) make of their oil receipts

What is Petro Dollar Recycling?

OPEC

• Formed at a meeting held on September 14, 1960 in Baghdad, Iraq, by five Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

• Algeria,Angola,Ecuador ,Iran ,Iraq ,Kuwait ,Libya ,Nigeria,Qatar, Saudi Arabia ,United Arab Emirates,Venezuela

• OPEC is the biggest and the most successful cartel in the world.

Reserves

Saudi oil reserves are the largest in the world, estimated to be around 264 billion barrels, 25% of world oil reserves.

Venezuela is second with total oil reserves at 172 billion barrels at the end of 2009

Iran’s total oil reserves are estimated of 138 billion barrels and production amounts to 2.4 million barrels per day.

Current account surplus (billions USD)

Sheikh Khalifa Bin Zayed Al Nahyan, Abu Dhabi,($23 bn)

King of Saudi Arabia: Abdullah Bin Abdulaziz, ($21 bn)

OILY DOLLARS

Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world.— Henry

A. Kissinger

IMPORTANCE OF PETRODOLLARS FOR USA

Nixon Shock made USD a fiat currency posed a great threat to the US as its supremacy as a reserve currency

In 1974,US made a secret deal with the Saud’s to keep selling the oil in US dollars and invest a certain percent in T- bills. In return, the Americans provided the Saudis with military support and special voting rights in the IMF

1973 Oil Embargo and 1980 Oil Crisis

• In 1973 OPEC imposed an embargo i.e the decision to boycott America and West in response to support for Israel.

• The world again saw a oil crisis in 1979-80

ImpactThe 1970s oil price shocks

dealt a severe blow to the world economy. Prices more than doubled in late 1973 and again in 1979. In both instances the global economy entered recession within a year.

Inflation Was Accelerating

Unit Labor Costs Were Squeezing Margins

Central banks were tightening

Effect on the EU Economy

Petro dollar Tsunami

  2002 2006 Change

Surpluses

   Oil exportersa 88 571 483

   Emerging Asia 122 263 141

   Japan 113 167 55

   Western Europeb 57 13 -44

Deficits

   United States -472 -869 -397

   Miscellaneous countries -59 -130 -72

Global Current Account BalancesBillions of U.S. Dollars

Effects of Oil receipts on OPEC countries

• From 2002-08, OPEC countries experienced record amount of surpluses due to the high oil prices. They used a major part of it to build their infrastructure and develop their countries as tourist destinations. These include the Palm Jumeirah, Burj Khalifa and Burj-al-Arab in Dubai, World Trade Centre in Bahrain etc.

However the recent oil price crash of 2008 due to the global economic slowdown affected the OPEC countries adversely. Property prices in these cities fell by more than 60% and new projects like the Trump towers in Dubai were canceled due to financing problems.

According to Citigroup, UAE alone has cancelled 160 billion $ projects in 3 years!

Conspiracy TheoryWar with Iraq

The invasion of Iraq had less to do with any threat from Saddam’s long-gone WMD program and certainly less to do to do with fighting International terrorism

There were only two credible reasons for invading Iraq: controlover oil and Preservation of the dollar as the world's reserve

currency.— John Chapman, “The Real Reasons Bush Went to War,” Guardian, 2004

Iranian Oil Bourse

“This notion that the United States is getting ready to attack Iran is simply ridiculous ...Having said that, all options are on the table.”

– President George W. Bush, February 2005

Military operations against Iran relate to the macroeconomics of ‘petrodollar recycling’ and the unpublicized but real challenge to U.S. dollar supremacy from the euro as an alternative oil transaction currency.

Unrest in Libya

Under the guise of “protecting civilians,” the United States led NATO into Libya and is attempting to assassinate the Libyan leader. Libya happens to be the largest oil producer in Africa.

Colonel Gaddafi was planning to introduce the gold dinar, a single African currency that would serve as an alternative to the U.S. dollar to buy oil

Downgrading the PIIGS economies

The US rating agencies downgraded the PIIGS (Portugal, Ireland, Italy, Greece and Spain) economies. This in turn made EU and the

Euro unstable and hence the supremacy of the dollar was safe yet again.

Reinvestment in Oil through Hedge Funds

• Daily consumption of oil = 85 million barrels• Daily trade on NYMEX = 1 billion Therefore prices depend on speculation not

demand and supply. OPEC countries invest huge amount of money

in oil, thus creating positive sentiments towards oil and accelerating its price.

WHAT THE FUTURE LOOKS LIKE!

With the Chinese and Russians striking bilateral trade agreement to trade directly in Yuan and Ruble without Using dollar (including oil) is possibly the beginning of the petrodollar collapse!

THE QUESTION IS NO MORE “WILL IT”….. IT IS JUST A QUESTION OF “WHEN WILL IT”!!!

References• Reinventing the system(1972-81) - International Monetary Fund•Petrodollar Recycling And Global Imbalances - Saleh M. Nsouli , Director , IMF•A Petrodollar Tsunami Is Coming - Morgan Stanley•Oil shocks and the global business cycle – J.P. Morgan•Petrodollar recycling : Issues and challenges - Crédit Agricole Investment bank•Invasion of Libya was About Gaddafi’s Plan to Introduce Gold Dinar - Jason Hamlin•Petrodollar Theories of the War - Peter Dale Scott ,University of California, Berkeley•Insight: Petrodollar tsunami to hit euro and dollar-Financial Times•The hidden hand of American hegemony -David E. Spiro•Recycling Petrodollars by federal reserve bank of New York•Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse - William Clark•Hysteria Over Iran and a New Cold War with Russia - William Clark•Arabianbusiness.com•Crude oil price graph : Inbuss GCMI slides•Peaking of world oil production - Robert L. Hirsch, SAIC