Petrocurrency

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Petrocurrency is a neologism used with three distinct meanings, though 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[edit]

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[edit]

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

The Dutch guilder was regarded as a petrocurrency due 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.[citation needed] As the price of oil rises, oil-related export revenues rise, and thus constitute a larger component of Canadian exports. Thus, 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.

Currencies used to trade oil[edit]

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.[2][3] 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,[4][5] for the express purpose of trading oil priced in other currencies, including euros.

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