Petrocurrency

Petrocurrency is a neologism used with three distinct meanings, often confused:

  1. Trading surpluses of oil producing nations, originally called petrodollars.
  2. 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).
  3. Currencies used as a unit of account 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 recycle 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 funds. Two early examples were the Kuwait Investment Authority and the Petroleum Fund of Norway.

Currencies correlated with oil prices

The pound sterling has sometimes been regarded as a petrocurrency as a result of North Sea oil exports.[1]

The Dutch guilder was once regarded as a petrocurrency due to its large quantities of natural gas and North Sea oil exports. The Dutch Guilder strengthened greatly in the 1970s, after OPEC began a series of price hikes throughout the decade that consequently increased the value of all oil producing nations' currencies. However, as a result of the appreciation of the Guilder, industrial manufacturing and services in Holland during the 1970s and into the 1980s were crowded out of the larger national economy, and the country became increasingly non-competitive on world markets due to the high cost of Dutch industrial and service exports . This phenomenon is often referred to in economics literature as Dutch disease.

The Canadian dollar is increasingly viewed as a petrocurrency in the 21st Century. Generally speaking, as the price of oil rises, oil-related export revenues rise for an oil exporting nation, and thus constitute a larger monetary component of exports. Thus it has been for Canada. As their tar sands oil deposits have been increasingly exploited and sold on the international market, 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 long as oil exports remain a strong component of Canada’s exports, oil prices will influence the value of the Canadian dollar. If the share of oil and gas exports increases further, the link between oil prices and the exchange rate may become even stronger.[2]

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.[3][4] 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. The government opened an Iranian Oil Bourse on the free trade zone on the island of Kish,[5][6] for the express purpose of trading oil priced in other currencies, including euros.

See also

References

  1. ↑ Sterling and the EMS In for a penny
  2. ↑ "Is the Canadian dollar a petrocurrency?". UBC News.
  3. ↑ "$ Collapse in Iran".
  4. ↑ The Iranian line in the sand, Dan Crawford, The Republic (Vancouver), August 18 to 31, 2005
  5. ↑ "Kish Oil Exchange Planned". Iran-Daily.com. Iran Daily. January 24, 2006.
  6. ↑ "A frenzied Persian new year". Asia Times. March 22, 2006.
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