Petrodollar System: Crucial to US Economy's Growth

The petrodollar refers to any American dollar paid for oil to the oil-exporting nations (Amadeo, 2020). The petrodollar system is the trading system that requires all oil (as well as other) transactions be done using the US dollar (Fareed, Yaseen, & Ashraf, 2019) since it is the most prominent currency globally. The petrodollar system is a very crucial variable in the future growth of the US economy whose fall spells doom for the American economy (and other economies). This paper will argue that the negative hit on the petrodollar system will have serious economic ramifications on the US economy, as well as other economies (especially the oil-exporting countries). The world economy is likely to take a significant hit as a result of the collapsing of the petrodollar.

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The Creation of the Petrodollar

The petrodollar system was born in the mid-1940s, after World War II. The American and Saudi governments entered into a pact which cemented the dollar-oil relationship. Before this pact, the dollar had already been established as the world's reserve current]cy, following the 1944 Bretton Woods conference (Amadeo 2020). However, the system was only officially established in the early 1970s, after the collapse of the gold standard. The bilateral agreement between the US and Saudi Arabia led to the standardization of the US dollar as the only currency to be used henceforth for all oil transactions. This agreement extended to all other oil-exporting nations (members of the OPEC). Somehow, the US managed to influence all of them to get on board with the idea (Fareed, Yaseen, & Ashraf, 2019). And thus, the petrodollar was created.

Functions, Relevance and impact of the Petrodollar (System) on World Trade

The system is responsible for the pricing of oil. All oil transactions must be priced in dollars, according to the agreements (Fareed, Yaseen, & Ashraf, 2019), which makes the US dollar a very powerful currency. This phenomenon creates a world system which places the US as the control point for all (0r major) world economies. Or, at least, the system gives the US an enormous amount of power and influence over other economies globally. In the production chain, oil is an essential commodity since it is the most commonly used source of energy for production and manufacturing. The change in the prices of oil (and related commodities) reflects in almost every other sector of the economy. Therefore, a system which establishes the US at the apex of the power pyramid in terms of controlling prices of oil also gives the US the power of control over other nations and economies.

Future of Oil and US trade vis-a-vis the Decline of the Petrodollar

The fall in value or popularity of the petrodollar can and will have dire economic consequences on many nations, which will be positive and others negative. Due to the reliance on many countries on the dollar as the contemporary "gold standard," depreciation of the petrodollar value may cause an economic decline in the said countries (Amadeo 2020). However, nations deciding to create or strengthen their local currencies may hit the US economy badly. Recent developments show that the US could even end up losing its grip as the world's economic superpower (Salameh, 2018) due to countries establishing local standard currencies. The move by some Asian countries to exit from the petrodollar system has resulted in some dire economic consequences across the globe(Salameh, 2018). Research shows that the US dollar is losing its grip and predominance as the exclusive currency, especially in some Asian countries (Cho & Kumon, 2019). The same study by Cho and Kumon (2019) reveals that the Chinese Yuan was and still is gaining popularity in the trade arena. This trend has resulted in some trade-related strains between the US and China, which threatens the global economic systems.

Retaliations by the US and continued trade-wars could plunge the world into a major economic crisis. However, if the Petro-yuan (or any other) currency system becomes recognized and established, that could mark the end of the American grip as the world's economic giant. Creating localized standard currencies and ditching the petrodollar (and the dollar in general) could result is strained trade relationships with the US. Given the current situation, the future looks a bit grim for the US trade and her position as the word's economic superpower.

References

Ahmed, O. (April 21, 2020) Covid-19 and the oil Market Crash Spell the end for US Hegemony and the Petrodollar retrieved from https://www.middleeastmonitor.com/20200421-covid-19-and-the-oil-market-crash-spell-the-end-for-us-hegemony-and-the-petrodollar/ on April 25 2020

Amadeo, K. (2020) Petrodollars and the System that Created It: Will the Petrodollar Collapse? Retrieved from https://www.thebalance.com/what-is-a-petrodollar-3306358 on April 25 2020.

Cho, Y And Kumon , T. (2019) China, Russia and EU edge away from petrodollar: Rise of US unilateralism raises concern about relying on greenback for oil trade retrieved from https://asia.nikkei.com/Economy/China-Russia-and-EU-edge-away-from-petrodollar on April 25, 2020

Fareed, G., Yaseen, Z., & Ashraf, M. I. (2019). Oil Politics in the Middle East: Understanding the Genesis of Petrodollar Strategy.

Salameh, M. G. (2018). Will the Petro-Yuan Be the Death Knell for the Petrodollar?