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

Beginner Investing • 6 min

Almost every barrel of oil sold anywhere in the world, by any country, is priced in US dollars — even when neither the buyer nor the seller is American. That traces back to a specific arrangement between the US and Saudi Arabia in the 1970s. After the US left the gold standard in 1971, the US struck a deal with Saudi Arabia: the US would provide military protection, and in exchange Saudi Arabia (and eventually OPEC broadly) would price oil exclusively in dollars — and recycle its oil profits back into US Treasury bonds. This became known as the petrodollar system.

Insider Angle: because oil is priced in dollars, virtually every country on Earth needs to hold dollar reserves just to buy energy — creating permanent global demand for dollars that has nothing to do with the US economy itself. That demand is a big part of why the US can borrow so cheaply and run large deficits without a currency crisis that would sink most other countries.
Try This: Check the current trade-weighted dollar index in a QuantAim macro report, then think through: how much of the dollar's strength do you think comes from the US economy itself versus this structural oil-trade demand?
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