Could Libra be the end of the petrodollar?

Let us start with, “What is the petrodollar?”; The petrodollar system is an exchange of oil for USD between countries that buy oil and those that produce it. The origin of the petrodollar can be traced back to the Bretton Woods Agreement, which replaced the gold standard with USD as the reserve currency. Under this agreement, the USD was pegged to gold, while other global currencies were pegged to USD. However, due to massive stagflation, President Nixon in 1971 declared that USD would no longer be the exchange for gold to boost economic growth for the U.S; this led to the petrodollar system, where the USA and Saudi Arabia agreed to set oil prices in USD. This meant that any country that wanted to buy oil from Saudi Arabia, would first have to buy USD. This leads the rest of the OPEC to also follow the same system. The next obvious question that anyone would ask would be, was this petrodollar good for the U.S?

The petrodollar system elevated the USD to the global reserve currency and via this, the USA enjoys a trade deficit and is also a global economic hegemony. As anyone who needs to buy oil needs to first buy USD, this makes USD the most dominant currency in the world. This gives the USA an exorbitant privilege. This essentially means that the USA can fund its current account deficit by issuing dollar-denominated assets at extremely low rates of interest. However, this could come to an end in the near future.

  • One of the reasons for this is that China and Russia have been setting up deals with Oil rich nations, without the use of the USA.
  • The USA historically has been forcing its foreign policy using the petrodollar. However, in the recent past, the USA was unable to do this. Iran, Russia, and Ukraine have signed a 5-year trade deal worth $20 billion. This will not take place in USD and includes the sale on Iran’s oil. Venezuela and Iran also signed a similar oil trade deal.

Could Libra replace the petrodollar?

Unlike most other cryptocurrencies, Libra is backed by real assets. It’s often referred to as ‘stable coin’ because it is backed by real assets and is linked to a basket of diversified global currencies and low-risk bonds. So, via Libra, you could immediately send money all over the world with negligible fees. Facebook is working on Libra along with companies such as Uber, eBay, PayPal, Visa, etc. So, the global acceptability of Libra should not be an issue. Therefore, as Libra is stable and could be accepted globally, we could price Oil in the international market in Libra instead of USD.

Author
Neil Jha
Team Leader – Fintech
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

Connect with Neil on LinkedIn
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