What Is Petrodollar?

Petrodollar policy means that oil importers should pay in USD. For example, Thailand imports oil from Arab countries and should pay the United States Dollar to buy oil. This policy has made the dollar an international trade currency because trading with one currency is easier than many for different products. 

Pre-petrodollar Stage

From 1944 to 1971, the USD was convertible to gold and international trade currency due to the gold standard monetary policy of the United States.

During the above period, in the USA industries grew very fast, and the unemployment rate was low. At the same time, other countries accumulated USD, thought to be better than keeping gold because USD was convertible to gold.

During Vietnam War, the USA spent heavily on war to the extent that the dollar in circulation was more than the United States’s gold reserves. During this time, other countries such as Germany and France noticed the excess amount of USD and started converting their dollars to gold. For some time these countries could convert their dollar to gold.  

After suffering from mistrust of USD due to heavy spending by the United States, President Richard Nixon stopped the convertibility of USD to gold. It was the end of the gold standard of the USD and the beginning of the petrodollar.

Start of Petrodollar Policy

After the stoppage of the gold standard, the United States needed its dollar to continue being an international trade currency.

To keep the dollar as a reserve currency, the USA agreed with Saudi Arabia, a de facto leader of OPEC, to price its oil in the United States Dollar. In exchange, the US promised to protect Saudi Arabia economically and militarily. 

Since more countries import oil than export, importers need to keep USD to buy oil. This policy kept the USA the main reserve currency and trade currency of the world. Additionally, because the economy of the USA is the largest in the world, global trades, the USD continued to be the world reserve. 

Countries that Hate Petrodollar

Some exporters of oil, such as Iran and Venezuela, hate the petrodollar policy due to having a bad relationship with the United States. However, due to being small economies, they can do nothing to end this policy.

Additionally, there are oil importers that do not like the petrodollar policy as well, such as European nations, China, and Japan. This policy looks like the United States’ tax on other countries. The United States prints dollars and oil importers should buy it. They could buy with their currencies if this policy did not exist. 

Anyway, USD became the de facto international trade currency because of the petrodollar policy without being backed by gold. All other nations now need to buy USD to buy oil and trade with other countries.