Pegging a Petrodollar

Artwork: Milly Yates
Edits by Rachel Chopping

Joke 1

A young boy walks into his father’s office.

“Can I have some money to buy a bitcoin?”

His father looks up from his newspaper. “How much?”

“$10.”

“$45? Do I look like I have $204? Where am I going to get $13?”

 

The joke is that Bitcoin’s prices fluctuate a lot…

I’ll wait for the raucous guffawing to die down. But as funny as that side-splitter was, to people that must deal with exchange rates for a living, this is serious business. Let’s say you sold onesies for cats that have their owner’s face on them… you know… to really hammer home the loneliness… and you tried to sell these yourself, pricing them in each country’s native currency.

 

Joke 2

A young boy walks into his father’s office.

“Can I have some money?”

His father looks up from his newspaper.

“How much?”

“$67 Arubian Florins.”

“$113 New Israeli Shekels? Do I look like I have $38 Costa Rican Colons? Where am I going

to get $4 Polish Zloty?”

A good joke is worth repeating.

So, if you’re trading one product all around the world, it’s prohibitively difficult to figure out how much to charge. It’d be a lot easier if you just used one currency. Thankfully, almost everyone trades in US dollars.

 

Joke 3

A young boy walks into his father’s office.

“Can I have some money?” His father looks up from his newspaper.

“How much?”

“$10.”

“$10.02? Do I look like I have $9.99? Where am I going to get $10.01?”

 

The joke’s still a hit.

 

“But wait,” some of the more pedantic of you readers cry, “there is still some change each time.”  Right you are. There would still be a difference in exchange rates between your currency and the US dollar. There isn’t a huge difference, but with the scale of sales of  Cutesie CatsieTM, discrepancies in price add up to a lot of money. The solution? Peg your currency to the dollar. This means that your currency is always worth the exact same number of dollars.

 

Joke 4

A young boy walks into his father’s office.

“Can I have some money?”

His father looks up from his newspaper. “How much?”

“$10.”

“$10? Do I look like I have $10? Where am I going to get $10?” 

You get the idea.

This is exactly what petrocurrencies do. A country with a petrocurrency is just a currency that’s main export is oil. Bubbling Crude. Texas Tea. None of this extra virgin garbage. These nations rely so heavily on the price of oil, that they peg themselves to the US dollar in order to keep it stable. Places like Saudi Arabia, Kuwait and the United Arab Emirates all follow this method.

This is good for trade, but it does mean you are very dependent on oil prices going up. As Venezuela can tell you, when oil prices are good, they are very very good and when they are bad, they are horrid. This would be like finding out your cat onesie is knitted out of lavender. If you already knew cats were allergic to lavender, you know too much about cats. In good times, these countries make more money than they know what to do with, and in bad, they starve. Let me stand on my bio-degradable hippy soapbox and point out that oil is not a renewable resource. Eventually, oil wells dry up. To these Petrocurrencies, this is what you would call, a bit of a bummer.

So how do you fix this?

Well let’s say that after you had to discontinue Cutesie CatsieTM, you had millions of dollars in sales, but no way of getting any more. Would you:

 

  1. A)      Blow it all on a drunken bender in Vegas with cocaine and women?
  2. B)      Invest the money in shares like the kind of sweater-wearing cretin that reads the financial section of a newspaper and really enjoys chess?

If you picked B, congratulations, you’re thinking like a petrocurrency giant. When a country gets so much money so quickly that it doesn’t know what to do with it, rather than throw a rager, it invests the cash into a sovereign wealth fund. This is sometimes known as Petrodollar recycling, but the scientific term is ‘a big ol’ pile of stocks, bonds and assets.’ When the money from the oil runs out, these countries can use the dividends they make off the sovereign wealth fund to pay for government services. This means that Kuwait, with its sovereign wealth fund of 650 billion, Saudi Arabia with 900 billion and the UAE with its fund of 1.35 trillion, seem to own just about 1 percent of everything on the planet. It also makes these oil producers some of the world’s leaders in the funding of renewable energies. Doesn’t that just mess with your moral picture of climate change?

 

Joke 5

A young boy walks into his father’s office.

“Can I have some money?”

His father looks up from his newspaper. “How much?”

The child’s phone pings.

 “Wait, never mind. My amazon stock just paid me a couple thousand in dividends.”

The child walks out of the room.

The father, being nothing but a facilitation device for this joke, continues to read his paper,

trapped in an endless purgatory, waiting for a punchline that never comes.

He is not needed anymore.
His life lacks all meaning.

The point of all this was to teach you a bit about currency pegs, sovereign wealth funds and how some countries with no resources can still make money, but I promise you that the only thing you will remember is that terrible joke.

 

 

 

Think your name would look good in print? Woroni is always open for submissions. Email write@woroni.com.au with a pitch or draft. You can find more info on submitting here.