PetroDollar: A story of oil, money, power and global economic dominance

In 1979, the US and Saudi Arabia established the United States-Saudi Arabian Joint Commission on Economic Cooperation, agreeing to use US dollars for oil contracts. These dollars were recycled back to the US through contracts.

Edited By: Top Indian News Desk

Last Updated : 13 June 2024, 09:59 PM IST

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New Delhi: US dollar is the primary currency used for oil transactions globally. Due to the high demand for oil, some oil-exporting nations accumulate more dollars than they can spend, leading to the term "petrodollars." Petrodollars now refer to US dollars used by any country to buy oil from an oil-exporting nation.

What is the Petrodollar?

The petrodollar emerged from a 1945 agreement between the US and Saudi Arabia, establishing the US dollar as the standard currency for oil transactions. This agreement led other oil-exporting countries to accept the dollar for oil payments, linking the dollar and oil closely.

Some countries export so much oil that they accumulate large amounts of US dollars, often more than they can use. These excess dollars, termed petrodollars, are effectively removed from circulation if not spent.

History of the Petrodollar

The petrodollar originated after the gold standard was abolished. Post-World War II, the US held most of the world’s gold supply and agreed to redeem any US dollar for its value in gold, provided other countries pegged their currencies to the dollar. This deal, formalized at the 1944 Bretton Woods conference, made the US dollar the world's reserve currency.

On February 14, 1945, President Franklin D. Roosevelt forged an alliance with Saudi Arabia, leading to the construction of an airfield in Dhahran in exchange for military and business cooperation. This crucial alliance survived despite subsequent disagreements over the Arab-Israeli conflict.

In 1971, US stagflation led many countries to redeem their dollars for gold. To protect gold reserves, President Richard Nixon removed the dollar from the gold standard. Consequently, the dollar’s value fell, aiding US exports but hurting oil-exporting nations as oil revenues, priced in dollars, dropped.

In 1973, Nixon’s request for military aid to Israel during the Yom Kippur War led to an OPEC oil embargo, quadrupling oil prices in six months. Prices remained high even after the embargo ended.

What is Petrodollar recycling?

In 1979, the US and Saudi Arabia established the United States-Saudi Arabian Joint Commission on Economic Cooperation, agreeing to use US dollars for oil contracts. These dollars were recycled back to the US through contracts with American companies to improve Saudi infrastructure via technology transfer.

Oil-exporting countries use petrodollars to fund domestic consumption, increasing imports, raising wages for government employees, and boosting local economies. The rest is invested through sovereign wealth funds in non-oil-related businesses to reduce dependence on oil prices. Here are the world's five largest petrodollar recyclers by assets:

Norway Government Pension Fund Global—$1.34 trillion
China Investment Corporation—$1.2 trillion
Kuwait Investment Authority—$738 billion
Abu Dhabi Investment Authority—$709 billion
GIC Private Limited—$690 billion

Can the Petrodollar collapse?

The US leverages petrodollars to enforce foreign policy, but many countries avoid opposing it to prevent a petrodollar collapse. For example, the US sanctioned Iran for its nuclear activities and imposed trade embargoes on Russia for its actions in Crimea and Ukraine.

While the shift to renewable energy raises concerns, it is unlikely to destabilize the US dollar in the near future. Despite calls from China to replace the dollar as the global currency, the dollar’s stability and lack of a viable alternative ensure its continued dominance. The transition to electric vehicles and renewable energy sources threatens oil-producing nations' economies, but the dollar's status as the world's primary currency remains secure.

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PetroDollar: A story of oil, money, power and global economic dominance