Events

Petrodollar System

Petrodollar System

Full Name
Petrodollar System
Location
Start Date
1970
Parent Event

The Petrodollar System dated back in the early 1970s, when a falling dollar hurt oil-exporting countries because contracts were priced in U.S. dollars. The United States struck a deal with Saudi Arabia to standardize oil prices in dollar terms, it is also tied with the history of the gold standard, giving birth to the petrodollar system along with a shift away from pegged exchange rates and gold-backed currencies to non-backed, floating rate regimes. Petrodollars are dollars paid to oil-producing countries for oil. This system has become an exchange of oil for US dollars between countries that buy oil and produce it, elevating the US dollars to the world’s reserve currency. A move away from petrodollars could potentially increase borrowing costs for governments, companies, and consumers if sources of money become scarce.


High-Level Terms of the Petrodollar Agreement
  • The US would help the House of Saud stay in control of Saudi Arabia
  • Saudi Arabia Would:
    • Require that oil transactions with other countries be conducted in US dollars
    • Ensure that other OPEC members also required payment in US Dollars
    • Recycle dollars back into the US by:
      • Buying American weapons and other goods
      • Contracting with American infrastructure companies
      • Purchasing US treasuries
    • Help ensure an agreeable price of oil for the US
    • Prevent oil embargos in the US

The Petrodollar System Provides the United States With Huge Benefits
  • Gave foreign countries a new reason to hold and transact in US dollar
    • Every country that wants to buy oil has to purchase dollars first
    • This creates a huge non-local demand for the dollar
    • Once other countries are already using the dollar for oil, it's natural to use it for other trade transactions
  • Helped the US dollar retain its position as the world's reserve currency
    • The US dollar is used for roughly 80% of all international trade transactions
  • Ultimately allows the US to continue issuing more debt and run large budget deficits
  • Allows the US to print dollars for nothing and to use them to buy international goods
  • Helps Keep US interest rates low
    • The demand from foreign buyers with dollars drives down US rates
  • Also gives the US tremendous power
    • Since the US controls dollars, it can instantly cut off any country from the US dollar system
      • This hinders that country's ability to trade internationally
      • This creates an incentive for countries to succumb to the US's demand



Future Problems This System May Cause
  • The system works as long as other countries continue to accumulate and use US dollars
  • If other countries started to base their trade on alternative currencies or gold, the system could collapse
    • There would be a surplus of dollars
    • This could cause severe US inflation

    This could result in another Global Monetary Reset


    Case For Ending The System

    • The system has pitfalls that relate to the Triffin Dilemma
    • The US can't solve its structural problems if it is still the reserve currency
      • It has to let the value of its currency drop to become price competitive & export again
      • The opposite is what happend to the UK when they held the reserve currency
        • The UK's high currency value further reduced it's ability to compete globally and export