Petrodollar Recycling explained - How OPEC Strenghtens the American Economy

 

Short for Organization of the Petroleum Exporting Countries, OPEC is an intergovernmental organization that accounts for approximately 50% of all crude oil production and over two-thirds of oil reserves. OPEC's goal is to unite the biggest oil-producing countries in the world with the intent of regulating oil supply and prices under an oligopolistic trade system, hence strenghthening OPEC members as key players in the oil trade. 

Member countries of OPEC include African, Arabic, Asian, and Latin-American countries, but why then does the organization receive payments exclusively in US dollars? 

THERE IS MORE THAN MEETS THE EYE

The advantages of the USD for OPEC include the high liquidity that comes from USD payments. 

BUT WHAT IS IN IT FOR THE UNITED STATES? 

THE US FINANCES PART OF ITS ECONOMY FROM OPEC USING THE USD

Some time ago I overheard a conversation between a realist and a Capitalist-US-Hating socialist, it went like this:

Realist: The US is at the top of the world economy because they know how to do business.

Socialist: You really think so? Do you know who is really behind the US government? 

Realist: No, tell me. 

Socialist: Saudi Arabia is. They own nearly 7% of the United States. 

Now, I personally knew both people contributing in the conversation and I can tell you that despite none of them had had any business education, the socialist had been extremely wrong in his statements. 

First of all, stating that Saudi Arabia owns 7% of the US is a very gullible statement by someone who clearly does not understand how the economic machine works. The best personal interpretation I could infer from that statement is that Saudi Arabia maybe owns a complexive 7% of American publicly-traded companies, which might actually be true, but there is more than meets the eye.

If you owned an investment firm and one of your clients that trusted you with his money skills in trading the markets and he, let's say, accounted for 7% of the total funds invested for management through an agent-principal relation, would you say the investor owned 7% of the total company? OF COURSE NOT, the company would still be owned by the fund manager and the investor would just make up 7% of the funds under management. 

The same is true in Saudi Arabia's case. 

In fact, most of the US dollars earned through OPEC revenues are invested by OPEC countries into US equities, treasuries, and other financial products in an agent to principal relationship, meaning that OPEC countries remain a client to the US that manages the organization's money by investing the funds into its domestic companies and government. Meaning that in essence, Saudi Arabia does not own 7% of the US economy, but is simply one client of the US investment machine. 

BUT WHY SHOULD SAUDI ARABIA WANT TO INVEST THEIR MONEY IN THE US? 

Because the US dollar is one of the most liquid currency and the US the leading economy in the world, it is efficient for the organization to store their USD reserves into American banks where these funds are, eventually, invested into US financial products. 

Of course, OPEC funds investments in the US is only one example of how the US benefits from the organization's trade.

A second way in which the U.S. benefits from the petrodollar system is through the demand for U.S. dollars that it creates. As oil-producing countries accumulate large reserves of U.S. dollars through their oil exports, they need to buy goods and services from other countries, which creates a demand for U.S. dollars. This helps to support the value of the U.S. dollar and allows the U.S. to borrow at lower interest rates, which can boost its economic growth.

Lastly, the U.S. benefits from the petrodollar system is through the influence it gives the U.S. over the global economy. By requiring payment for oil exports in U.S. dollars, oil-producing countries are effectively tied to the U.S. dollar and the U.S. financial system. This gives the U.S. a degree of control over the global economy and allows it to wield a significant amount of influence around the world.