What is Petrocurrency?

Petrocurrency, also commonly referred to as 'petrodollars,' is cash -- usually U.S. dollars -- resulting from the sale of oil and deposited by oil exporters into foreign (usually American) banks.

Petrocurrency Definition & Example

Let's assume that an oil-rich country sold US$50 billion of oil last year. The money that country deposits into an American bank is called petrocurrency or petrodollars. The country makes these deposits in order to earn the highest return possible on its money and perhaps later use it to fund infrastructure projects, combat budget imbalances, or pay for other governmental initiatives.

A study published by the Federal Reserve Bank of New York found that oil exporters use approximately half of their petrocurrency to import goods and services (particularly from Europe and China), while they invest the other half in foreign assets (particularly in the United States).

This is important because when oil prices are up, oil exporting countries can afford to import more, which stimulates the economies of the countries the oil exporters buy from. Also, when oil prices are up, the oil exporters make more foreign investments, which then drives up security prices in the markets in which they invest.

However, the reverse is also true. When oil prices are down, a smaller amount of petrocurrency is in circulation, so there is less investment and consumption by oil exporting countries in foreign countries.

Why Does Petrocurrency Matter?

Petrocurrency is a good example of how one country's economic prospects affect other countries.

For instance, countries that rely on petrocurrency for economic stability can experience rapid gains when the price of oil increases. Likewise, they are hard hit by decreases in oil prices, which often causes foreign investors to flee the market and ultimately forces these countries to diversify.