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The Petrodollar: Why Oil Is Priced in Dollars, and Why That's a Big Deal

Beginner Investing • 6 min

What this lesson is about

A 1970s deal between the US and Saudi Arabia still shapes why the dollar dominates global finance today.

2 parts · a quick check after each · then the quiz

Part 1 of 2

Almost every barrel of oil sold around the globe is priced in US dollars. This holds true even when neither the buyer nor the seller is American. It all goes back to a deal made between the US and Saudi Arabia in the 1970s. When the US abandoned the gold standard in 1971, it struck an agreement with Saudi Arabia. The US would provide military protection. In return, Saudi Arabia, and later OPEC. Would price oil only in dollars. They would also reinvest their oil profits in US Treasury bonds. This arrangement is known as the petrodollar system.

When the currency movesMove the rate. One side of every trade is pleased and the other is not.

Quick check

Under the petrodollar system, in what currency has crude oil historically been priced and traded globally?

Part 2 of 2

Insider Angle: Since oil is priced in dollars, almost every country needs to hold dollar reserves just to buy energy. This creates a constant global demand for dollars, independent of the US economy. That demand is a key reason why the US can borrow at low rates and run large deficits without facing a currency crisis like many other countries would.
Try This: Look up the current trade-weighted dollar index in a QuantAim macro report. Then consider this. How much of the dollar's strength do you think comes from the US economy versus this ongoing oil-trade demand?

Quick check

Because oil is priced in dollars, what do most countries need to hold in order to buy oil?

Quiz

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