How was the petrodollar system established, and what are the profound impacts on the foreign exchange market?

  The petrodollar is the oil surplus fund accumulated by the major oil exporting countries since the major oil price increase in 1973, and the balance of payments surplus has accumulated over the years. Because the US dollar accounts for the largest proportion, it is called the petrodollar. This article describes how the petrodollar system was established and the impact of the petrodollar system on foreign exchange.

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  How the petrodollar system was established

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  The petrodollar system refers to the surplus funds settled in U.S. dollars after the oil-exporting countries increased their oil revenues due to the sharp increase in oil prices in the 1970s, after excluding those used for their own economic development and other expenditures. Since oil is priced and settled in US dollars in the international market, huge petrodollars have a great impact on oil importing and exporting countries, and even the global economy. One is to bring rich capital flows to crude oil exporting countries and promote the economic development of these countries and regions; the other is to make the international balance of payments of different countries and regions appear new imbalances, and the power balance of international savings capital occurs. structural changes. At the same time, the circulation of petrodollars is an important factor affecting the international political economy, and it also greatly promotes the economic development of the United States and consolidates the economic and financial status of the United States.

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  One of the main reasons the dollar is the world's reserve currency is its dominance in global oil trade. The petrodollar system has been the backbone of the dollar's status since the end of the gold standard in the 1970s. The formation of the petrodollar system dates back to 1971, after the U.S. government stopped the exchange of dollars for gold, when then U.S. President Richard Nixon agreed to provide Saudi Arabia with arms and protection on the condition that all Saudi oil transactions be settled in dollars. Since Saudi Arabia is the largest oil producer in OPEC and the world's largest oil exporter, other countries quickly adopted the dollar for oil transactions, and the petrodollar system was established.

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  The petrodollar system allows the United States to borrow more money, while also giving the dollar a relatively higher value than most currencies. In the past, the United States exported dollars to the world by purchasing oil and commodities, and other countries returned to the United States by purchasing American weapons, high-tech and American debt, forming a large dollar circulation system with petrodollars as the core.

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  Because countries with different levels of development, the economic development is highly dependent on oil, a highly efficient energy source, and the US dollar, which is the currency for oil settlement, is like circulating blood, which is constantly circulating in economically developed countries. These surplus petrodollars will flow back to the United States in different dollar-denominated securities assets, such as U.S. stocks and treasury bonds, thus forming a closed loop of stable capital flows such as "dollar-petrodollar-commodity dollar" , which in turn affects the economic development and wealth distribution of countries in different regions of the world.

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  The impact of the petrodollar system on foreign exchange

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  After the emergence of the petrodollar system, it had a huge impact on the world economy and international finance:

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  First, it brings a lot of capital to oil-producing countries, promotes the development of these countries, changes the single economic structure, and is conducive to the establishment of an independent and complete economic system.

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  Second, the international trade balance of different types of enterprises and countries is not balanced, and the balance of international knowledge reserves has undergone structural changes. Russia, for example, gets more oil revenue thanks to higher oil prices.

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  Third, it exacerbated the turmoil in the international economic and financial product market. After the petrodollar entered the international market, on the one hand, it enriched the international credit power and met the needs of many countries for capital; long-term and short-term credit, on the other hand, a large amount of hot money flowed between countries, sometimes investing in stocks, sometimes investing in gold and other The country's currency, leading to more volatility in the stock, gold and foreign exCM Trade.

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  Regarding the petrodollar system, this article introduces how the petrodollar system was established and the impact of the petrodollar system on foreign exchange. It can be seen that the petrodollar system has an impact on the world economy. For investors, it is necessary to pay more attention to the price of oil and the price trend of the dollar.