By Dr. Saman Shali

What is Petrodollar?

"Petrodollars" is a term that refers to the revenues generated by oil-exporting countries through the sale of petroleum products, particularly crude oil. Often rich in oil reserves, these countries earn substantial money by exporting oil to other nations. "Petro" comes from "petroleum," another word for oil.

Petrodollars have had a significant impact on both geopolitics and the global economy. Oil exporting nations, such as those in the Middle East and several South American nations, typically deposit their substantial earnings in foreign banks. There are several potential outcomes from this cash inflow into the global financial system.

Petrodollars have had a complex and varied impact on Iraq, as the country is one of the world's major oil producers. Here are some key points regarding what petrodollars mean to Iraq overall:

1. Geopolitical Implications: Iraq's oil wealth has given it geopolitical influence and importance in political stages. Various international and regional political dynamics have influenced the country's oil production and exports.

2. Economic Dependency: Iraq's economy primarily depends on oil exports. Because oil exports account for most of the nation's income (87%), petrodollars are essential to financing public services, infrastructure development, and government operations.

3. Vulnerability to Oil Price Fluctuations: Iraq's dependence on petrodollars also makes its economy vulnerable to fluctuations in oil prices. When oil prices drop significantly, as has happened in the past, it can lead to budgetary challenges and economic difficulties.

4. Economic Prosperity: During high oil prices and increased production, Iraq can experience economic prosperity. High petrodollar revenues can enable the government to invest in infrastructure, healthcare, education, and other essential services.

5. Infrastructure Development: Iraq has used petrodollars to invest in infrastructure development projects, such as rebuilding after war and conflicts and improving its energy and transportation sectors.

6. Economic Diversification Efforts: Iraq has realized in recent years that it must diversify its economy away from its unwavering reliance on oil. The government has tried to support industries like manufacturing, tourism, and agriculture. Hence, they are less susceptible to changes in the price of oil.

7. Currency Exchange Rates: The petrodollar inflow can potentially impact exchange rates. Many conducted oil transactions in U.S. dollars, so increased oil revenues can contribute to the demand for the U.S. dollar, potentially affecting its value.

We must note that the Iraqi tripartite budget has allocated 5% (five percent) of revenues from crude oil produced in the region and producing governorates. Furthermore, 5% (five percent) of the revenues of crude oil refined in the refineries of the region and the governorates and 5% (five percent) of the revenues of natural gas produced in the region and the producing governorates, at the equivalent price of a barrel of oil based on the price specified in the budget and not based on selling Somo at the international price is unfair to the region and the governorates that produce oil and gas. Provided that the producing regions and governorates are free to choose one of the revenues produced above, this is another injustice to the regions and governorates that produce oil and gas together, depriving them of one of these revenues. Suppose that the producing regions and provinces have refineries in addition to crude oil and gas production. In this case, they will be deprived of the revues of two of these products, another injustice against these regions or governorates to revive their economy. Based on the tripartite budget until now, the Iraqi government has not paid the regions and the governorates their shares of petrodollars.

In conclusion, petrodollars play a critical role in Iraq's economy, providing the government with the necessary revenue to function and invest in its development. However, the country's heavy dependence on oil revenues also makes it susceptible to the volatility of global oil markets. It underscores the importance of diversifying its economy to ensure long-term economic stability.

Saman Shali has a Ph.D. in Science (1981) from the University of Sussex. Dr. Shali worked as an Assistant Researcher and Assistant Professor at the University of Sussex, King Saud University, and Pennsylvania State University. He is also a senior fellow at the Mediterranean Institute for Regional Studies.