Till 1971, the value of a dollar was tied to the value of gold known as the system of fixed currency exchange rates. But it collapsed in 1971 because the global economy and its demand for gold was much higher than the available supply of this metal.

In 1973, the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo (ban) in response to US support for Israel during the Yom Kippur War, which led to the increase in the oil prices.

To handle the situation, The US struck a deal with Saudi Arabia and other OPEC countries where oil would be traded exclusively in US dollars. In return, the US provided military protection and economic support to these countries. This agreement marked the birth of the petrodollar system.

Under the Petro-Dollar system, the US agreed to buy oil from Saudi Arabia and provide military aid and equipment, while the Saudis would invest their petrodollar revenue back into the US economy. This arrangement ensured a steady flow of oil to the US and financial stability for Saudi Arabia, benefiting both nations.

Petrodollars are not a currency but US dollars exchanged for crude oil exports. The term "petrodollars" refers to the US dollars earned by oil-exporting countries through the sale of oil.

But what now? The US-Saudi Arabia petrodollar deal has ended after 50 years on June 9, 2024. This deal was initiated on June 8, 1974, facilitated the exchange of US dollars for crude oil exports, bolstering the dollar's dominance.

What happens now?

With the deal's expiration, Saudi Arabia is now free to sell oil for currencies like Chinese yuan, European euros, Russian rouble, and Japanese yen, and even in digital currencies like Bitcoin.

This shift may accelerate the trend of using alternative currencies for international trade, potentially weakening the US dollar's global dominance.

Benefits of Petro dollars

1. The petrodollar system has provided significant benefits to the U.S. economy, helping to maintain the dollar's value and its status as the world's primary reserve currency.
2. It increased demand for U.S. dollars due to the global oil trade's reliance on the U.S. dollar helping to maintain its value and status as the world's primary reserve currency.
3. Since oil exporting countries invested heavily in US securities, there was increased demand for U.S. Treasury securities keeping U.S. interest rates lower benefiting the U.S. government and consumers.
4. The petrodollar system gives the U.S. a degree of advantage over oil-exporting countries adding to US’s geopolitical power.

What will happen further?  De-dollarization?

• Dollar dominance is decreasing. In 2018, China launched its first crude oil futures contract denominated in yuan, with the intention of creating an alternative "petroyuan" to the petrodollar system.
• Russia has also been working to reduce its dependence on the U.S. dollar, with President Vladimir Putin stating in 2019 that the country was aiming to "de-dollarize" its economy.
• Iran and Venezuela, also faced with U.S. sanctions, have turned to other currencies for oil transactions. Iran has been accepting euros, yuan, and other currencies for its oil for years already, while Venezuela has been using the euro and the Chinese yuan.

What is Recycling of petrodollars?

Oil-exporting countries often invest their excess U.S. dollars in U.S. Treasury securities and other dollar-denominated assets in order to keep them safe while earning a return. This process, known as petrodollar recycling, helps finance the U.S. government's budget and trade deficits.