Petrodollar recycling is the phenomenon where oil exporting nations earns more money than they could possibly invest in their own economy and the term “petrodollar recycling” is coined by Henry Kissinger. Oil is often described as liquid gold is traded and quoted in US Dollars. Around 60% of the currency reserves across the globe are US Dollars.
In order to understand the current scenario of petrodollar recycling, understanding the history and the development of petro-currency is essential. After World war-II majority of nations were war torn and in debt and in order to revive the economy 44 allied nations gathered for the bretton wood conference on July, 1944. The main purpose of the bretton wood system to international monetary and the financial order in the world. This rise to the formation of the International bank, International Monetary fund ,foreign exchange rate system and GATT. Also the US Dollar is fixed to Gold and all the global currencies are pegged to gold standards. The US dollar is fixed at the rate of 35$ per ounce and this created a incentive for other nation to peg against US dollar since they can exchange their dollar for Gold. But the bretton wood system created the strong incentive for United states for their demand for US dollars in Global Arena.
Thus United states starts printing the money proportion to the global demand and economic growth. Nearly 80% of the gold reserves were sitting in the US after word war. By 1971 America’s trade deficit increased due to the consumption of the good from western Europe , Japan and the war spending on Vietnam increased dramatically. This caused the gold reserve in US to shrink. There is a growing imbalance of US gold reserves and debt.
This caused the distrust in US financial system and foreign central bank demand Gold for their excess US dollar reserve. This caused the end to yellow brick road and US dollar fixed to gold. In 1971 US dollar officially abandoned the gold standard and declared to be a floating currency and this caused the other currency to float and other nation to frame its policy concerning the exchange rate regime. Due to this the demand for US dollar in global arena is under question after US dollar becomes the floating exchange rate regime. The result is petro dollar system which is originated in 1970. (pre-planned before Nixon Schock)
United states and Saudi Arabia agreed the Saudi will sell all its oil in US dollar currency in return the US will protect the Saudi Arabia with its weapon sales. And Saudi also should preferably invest in US debt securities and bond market. By 1975 all OPEC countries were trade trading oil in US Dollars and later become the standards for the oil producing nations. Now trading oil for US dollar restored the demand for dollar in foreign exchange market.
Now this makes the global demand for US dollar in exchange market is proportional to crude oil demand which is exponential. But getting the US dollar in foreign exchange market comes at price for other major nations. This have lead to other major nations wants to sell their goods to US. And US have become an consumer of cheap goods in global arena. Now the US can enjoy the consumerism and US debt securities , bond have created demand in the world. This global demand for US dollar have given leverage to monetary policies in United states. US are willing to anything to protect their dominance in crude oil.
The main competitor for Dollar currency is Euros which went into into circulation on 1st January, 2002 and Iraq war begin in March 2003 which lasted until 2011. Later in 2015 it also caused the refugee crisis. The speculation are there that the main purpose of Iraq war is that it wants to trade oil in Euros. Nixon shock and petro dollar recycling is also one of the major causes for the 2008 financial crisis. After 1990 many Asian countries have become export oriented nation -China, Taiwan, South Korea etc. By devaluing their currency rate to promote the goods in developed countries and the domestic demand is supressed. The money earned by these developing nations have to find the investment in the developed nation. Mainly for financing consumption in other countries especially USA.
When Asia especially China has joined the export oriented economy (Manufacturing sector ) during 90’s, this have given rise to global trade imbalance. The Bill Clinton’s ambitious project for house hold for all citizen is finance by the other export oriented nation investing US Security bonds. In turn US Security bond financing the housing loan. The trade imbalance was due to strategies and policy countries implementing for their own country than thinking the whole world.
In 2014, Russia and China signed 400 Billion dollar deal signing for supplying gas in exchange for Russian weapons. Russian oil firm Gazprom negotiating 30 Billion Cu.Meter of gas to China over 30 years. Prior Iran Sanction, India is buying oil in Indian Rupees and Euro. China,Russia, Iran and Japan raising its concern regularly about the role of Dollar in financial market. But there is no alternative credible solution or the currency in the future. China has publicly raised the voice for reliable solution for petrodollar after signing the gas deal with Russia.
It is worthwhile to mention about the “International Clearing Union” proposed by John Maynard Keynes alternate to International Monetary fund. In International Clearing Union would measure the international trade with “Bancor”. Bancor will be currency issued by the global central bank. If the country has trade surplus, it would pay interest rate on the surplus. In this way, world will attain trade balance. IMF won over International clearing union due to US dominance in negotiation post world war.
If the International clearing union won the negotiation , the world will be in different path. We have to wait and watch whether there is structure like International clearing union going to come in future or oligopoly style of petro-currency is going to come. Only time have to tell.