Question

What is meant by the term “petrodollar?” How does the petrodollar get circulated in the international financial markets? How does the circulation of the petrodollar contribute to Third World debt accumulation and economic performance?

Answer 1

The petrodollar is any U.S. dollar charged in return for oil to oil-exporting countries. Since the dollar is a global currency, dollars are priced for all international transactions. As a result, dollars must be earned by oil-exporting nations. Most own their oil industries. That makes them dependent on the value of the dollar for their national income. If it falls, their revenue always falls.

Following the collapse of the gold standard of Bretton Woods in the early 1970s, the United States entered into an agreement with Saudi Arabia to standardize dollar oil prices. The petrodollar system was born through this deal, along with a shift away from fixed exchange rates and gold-backed currencies to unbacked, floating rate regimes.Faced with rising inflation, Vietnam War debt, extravagant domestic spending habits, and a persistent balance of payments deficit, the Nixon administration decided in August 1971 to end the convertibility of U.S. dollars into gold suddenly (and shockingly). The world saw the demise of the gold age in the aftermath of this "Nixon Shock" and a free fall of the U.S. dollar in the midst of rising inflation.

Through bilateral agreements with Saudi Arabia beginning in 1974, the U.S. managed to pressure members of the Petroleum Exporting Countries Organization (OPEC) to standardize the dollar selling of oil. In return for invoicing oil in dollar denominations, Saudi Arabia and other Arab states secured U.S. influence in the Israeli-Palestinian conflict along with U.S. military assistance in an increasingly worrisome political climate that saw the Soviet invasion of Afghanistan, the fall of the Iranian Shah, and the Iran-Iraq War. The petrodollar model was born from this mutually beneficial agreement.

Third World debt, also known as developing countries ' debt or debt, accumulated by third world (developing) countries. Typically, the term is used to refer specifically to the foreign debt owed to developed countries and multilateral lending institutions by those countries. Rapid growth in developing countries ' external debt first became a key issue in the early 1980s and continued into the 21st century. Debt itself is not unique to the developing world. Debt only becomes a potential problem if the borrower is unable to generate enough funds to meet the repayments.

Several emerging (and some developed) countries have faced these difficulties and the term debt crisis is often used by analysts to describe the situation. In August 1982, when Mexico declared that it could no longer meet the repayments on its external debt, the issue among developing countries became prominent. In the following decades, many of the world's poorest countries had to make sacrifices for servicing their debt in key areas of public spending (sometimes referred to as austerity measures).