The petrodollar system, which emerged starting in roughly 1973, is the nearly uniform use of U.S. dollars to denominate, and often settle, worldwide oil trades. But a deeper dive suggests much of this is empty posturing – not because the world loves the dollar or the U.S., but because no other national fiat currency is positioned to supplant their role in the system.
The petrodollar system is a deadlock, with the U.S. using its political and military power to maintain economic hegemony, and the dollar’s reserve status ultimately maintained by market forces. The Saudis, for their part, have found that their investments in U.S. debt don’t translate to much power. This deadlock points towards a solution that looks something like Bitcoin.
The petrodollar system emerged soon after the Nixon administration ended the Bretton Woods regime of gold-backed U.S. dollars, and is sometimes mistaken for a formal rules-based system. But it is better understood as one aspect of the broader role of the dollar as a global reserve currency, and the resulting “exorbitant privilege” the U.S. enjoys.
Signals of a reduction in petrodollar trade have added to persistent anxieties about the dollar’s reserve currency status, which is also currently under pressure thanks to inflation. An erosion of the dollar’s reserve status could seriously undermine U.S. debt financing and other economic fundamentals.
Questions about the petrodollar system’s origins are important because they help us understand its future. Political attempts at creating a petrodollar alternative have been fizzling for decades, and economist Dean Baker argued characterized those 2009 fears of a game-changing anti-dollar deal as something that “would make a good plot for a Hollywood movie, but it doesn’t make much sense as economics.”
The deadlock of the petrodollar system points towards a solution that looks something like Bitcoin. This could be a truly neutral, global currency not subject to politicized manipulation by a single issuer.