Petrocurrency
Encyclopedia
Petrocurrency is a portmanteau neologism used with three distinct meanings, though often confused:
it back to oil consumers.
With a similar rise in prices at the start of the 21st century, more of these oil surpluses have been reinvested through sovereign wealth fund
s. Two early examples were the Kuwait Investment Authority
and the Petroleum Fund of Norway.
has sometimes been regarded as a petrocurrency thanks to North Sea oil
exports.
The Dutch guilder was regarded as a petrocurrency thanks to its large quantities of natural gas and North Sea oil
exports. This caused the Dutch Guilder to strengthen severely in the 1970s when the OPEC
started their price hikes. As a result of this strengthening industrial manufacturing and services were crowded out and became non-competitive on world markets, a phenomenon that is often referred to in economics literature as Dutch disease
.
The Canadian dollar
is increasingly viewed as a petrocurrency. As the price of oil rises, oil-related export revenues rise, and thus constitute a larger component of Canadian exports. Thus, the movements of the Canadian dollar have become increasingly correlated with the price of oil. For example, the exchange rate of Canadian dollars for Japanese yen
(99% of Japan's oil is imported) is 85% correlated with crude prices.
As of 2005, OPEC continues to trade in US Dollars, but some OPEC members (such as Iran
and Venezuela
) have been pushing for a switch to the euro
.
Since the beginning of 2003, Iran has required euro in payment of exports toward Asia and Europe, though prices are still expressed in US dollars. Iran is planning to open an International Oil Bourse
(IOB, exchange), on the free trade zone on the island of Kish
, for the express purpose of trading oil priced in other currencies, including euros.
- Trading surpluses of oil producing nations, originally called petrodollarPetrodollarA petrodollar is a United States dollar earned by a country through the sale of petroleum. The term was coined by Ibrahim Oweiss, a professor of economics at Georgetown University, in 1973...
s - Currencies of oil producing nations which tend to rise in value against other currencies when the price of oil rises (and fall when it falls).
- Currencies used as a unit of accountUnit of accountA unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....
to price oil in the international market.
Oil producers' trading surpluses
With the large rise in oil prices in the 1970s, there was concern that the world economy might contract if the oil producers extracted money and failed to recyclePetrodollar recycling
Petrodollar recycling refers to the phenomenon of major oil-producing states mainly from OPEC earning more money from the export of oil than they could usefully invest in their own economies...
it back to oil consumers.
With a similar rise in prices at the start of the 21st century, more of these oil surpluses have been reinvested through sovereign wealth fund
Sovereign wealth fund
A sovereign wealth fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some of them have grabbed attention making bad investments in several Wall Street financial...
s. Two early examples were the Kuwait Investment Authority
Kuwait Investment Authority
The Kuwait Investment Authority is Kuwait's sovereign wealth fund , managing body, specializing in local and foreign investment...
and the Petroleum Fund of Norway.
Currencies correlated with oil prices
The pound sterlingPound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
has sometimes been regarded as a petrocurrency thanks to North Sea oil
North Sea oil
North Sea oil is a mixture of hydrocarbons, comprising liquid oil and natural gas, produced from oil reservoirs beneath the North Sea.In the oil industry, the term "North Sea" often includes areas such as the Norwegian Sea and the area known as "West of Shetland", "the Atlantic Frontier" or "the...
exports.
The Dutch guilder was regarded as a petrocurrency thanks to its large quantities of natural gas and North Sea oil
North Sea oil
North Sea oil is a mixture of hydrocarbons, comprising liquid oil and natural gas, produced from oil reservoirs beneath the North Sea.In the oil industry, the term "North Sea" often includes areas such as the Norwegian Sea and the area known as "West of Shetland", "the Atlantic Frontier" or "the...
exports. This caused the Dutch Guilder to strengthen severely in the 1970s when the OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
started their price hikes. As a result of this strengthening industrial manufacturing and services were crowded out and became non-competitive on world markets, a phenomenon that is often referred to in economics literature as Dutch disease
Dutch disease
In economics, the Dutch disease is a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector...
.
The Canadian dollar
Canadian dollar
The Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...
is increasingly viewed as a petrocurrency. As the price of oil rises, oil-related export revenues rise, and thus constitute a larger component of Canadian exports. Thus, the movements of the Canadian dollar have become increasingly correlated with the price of oil. For example, the exchange rate of Canadian dollars for Japanese yen
Japanese yen
The is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
(99% of Japan's oil is imported) is 85% correlated with crude prices.
Currencies used to trade oil
Since the agreements of 1971 and 1973, OPEC oil is exclusively quoted in US dollars. This created a permanent demand for dollars on the international exchange markets.As of 2005, OPEC continues to trade in US Dollars, but some OPEC members (such as Iran
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
and Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
) have been pushing for a switch to the euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
.
Since the beginning of 2003, Iran has required euro in payment of exports toward Asia and Europe, though prices are still expressed in US dollars. Iran is planning to open an International Oil Bourse
Iranian oil bourse
The Iranian Oil Bourse International Oil Bourse, Iran Petroleum Exchange Kish Exchange or Oil Bourse in Kish is a commodity exchange which opened on February 17, 2008. It was created by cooperation between Iranian ministries, the Iran Mercantile Exchange and other state and private institutions...
(IOB, exchange), on the free trade zone on the island of Kish
Kish, Iran
Kish is a resort island in the Persian Gulf. It is part of the Hormozgān Province of Iran. Due to its free trade zone status it is touted as a consumer's paradise, with numerous malls, shopping centres, tourist attractions, and resort hotels. It has an estimated population of 20,000 residents and...
, for the express purpose of trading oil priced in other currencies, including euros.
External links
- PetroTalk.com Portal for petro related Articles, Discussion, Links and more
- Washington Report
- A Look At The World's Economy (December 2000) from CBSCBSCBS Broadcasting Inc. is a major US commercial broadcasting television network, which started as a radio network. The name is derived from the initials of the network's former name, Columbia Broadcasting System. The network is sometimes referred to as the "Eye Network" in reference to the shape of...
News - IMF warns trade gap could bring down dollar
- Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse
- History of Oil video done by Robert Newman A vaudeville type story which talks about petrodollar story in the context of the history of oil
- The beginning of the end for petrodollar by Bulent Gokay, 15 March 2006.
- Cost, abuse and danger of the dollar by Rudo de Ruijter, Mathaba News, March 7, 2007.
- In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading