The myth of the petrodollar

The dominance of America’s currency runs deeper than oil

ECONOMISTS LIKE to preach prudence, but they do not always practise it. Ibrahim Oweiss was a young economist in Egypt’s Ministry of Industry when he offered some frank advice to his bosses. He warned against a suffocating overconcentration of industry in Cairo and Alexandria. And he later criticised General Nasser’s hollow boast that Egypt made everything “from the needle to the missile” (it made neither well). This incaution made it safer for him to leave the country in 1960, and hard to return.

In 1974, as a professor at Georgetown University in Washington, Oweiss turned his attention to another troublesome concentration of assets: the dollars accruing to the Gulf’s oil exporters faster than they could make use of them. “I wish to introduce a new term: petrodollars,” he said at a speech in March that year. This ensured the word would always be associated with his name (although it had also appeared in an earlier testimony by Peter Peterson, a former American commerce secretary).

Petrodollars, originally viewed as a threat to America and other oil importers, were later seen as the saviour of America’s currency and a cornerstone of its financial might. At the end of 1974 the Treasury Department agreed to let Saudi Arabia’s central bank buy Treasury bonds in secret, outside regular auctions, to shield the kingdom from criticism for financing a backer of Israel. At the same time, Saudi Aramco, the national oil company, decided to accept only dollars, and not pounds, in payment for its crude (a decision that awkwardly came to light during a visit to Saudi Arabia by Britain’s chancellor). The dollar pricing of oil created global demand for America’s currency. And the investment of oil earnings in dollar assets gave America an enviable amount of financial latitude. “This system has been a linchpin of US financial dominance for nearly half a century,” wrote Diana Choyleva of Enodo Economics, a research firm, last year.

Now the Iran war has cast new doubt on the petrodollar “regime”. The biggest customers for the Gulf’s oil now lie in Asia, not in the West. China has long paid for Iranian crude in yuan, not dollars. It has also begun to experiment with commodity purchases in digital yuan. Other countries, such as Russia and India, have also sought to settle their oil trade in their own currencies. Building on these trends, the Iran conflict “could be the catalyst for erosion in petrodollar dominance and the beginnings of the petroyuan”, argued Mallika Sachdeva of Deutsche Bank in March.

Is that true? And if so, how much would it matter? As Ms Choyleva points out, a growing number of companies and countries would like the option of paying for oil in something other than the dollar, even if they stick with America’s currency for most transactions. Some deals might be priced in dollars, which benefits from rich futures markets, but settled by other means, such as digital yuan. China’s currency could slowly gain ground, driven mostly by the country’s own sizeable oil purchases. But it is hard to imagine its percentage share of commodity transactions escaping the single digits in the next five years or so.

If the petrodollar regime were eroded, should America worry? Ms Sachdeva argues that oil pricing is “a crucial anchor” of the American currency’s broader dominance. Because companies purchase petroleum in dollars, they also tend to price their exports in the same currency, as a natural hedge against exchange-rate fluctuations. If the dollar becomes cheap or dear, the impact on a firm’s dollar payables, such as oil, is offset by the impact on their dollar receivables.

But this argument assumes the price of oil is no more flexible than the prices of other goods and services. In reality, crude and other commodities, traded on organised exchanges, are repriced continuously to reflect currency fluctuations and other market forces. If the dollar weakens, the price of oil is likely to rise. If companies cannot lift their export prices in tandem, their natural hedge will be of little benefit. Thus oil probably does not explain why so many companies invoice their products in dollars. In so far as they are trying to hedge against input costs, they are probably eyeing more specialised inputs, such as manufactured parts and components, which have “stickier” prices.

Oil does not explain the dominance of dollar assets, either. Although Treasuries and dollar deposits (onshore and off) captured a lot of Gulf money in the 1970s, those surpluses did not last for ever. By 1986 Oweiss was writing about the problem of “receding petrodollars”. And by 2000, points out Brad Setser of the Council on Foreign Relations, a think-tank, Saudi Arabia’s cumulative current-account surpluses since 1970 had been fully offset by subsequent deficits. The kingdom enjoyed another windfall in the run-up to the global financial crisis of 2007-09. But in 2024 and 2025 its current-account deficits were back. Last year the combined surplus of oil exporters, including Norway and Russia, was only about $200bn, according to Mr Setser’s calculations, compared with the $1.5trn surplus recorded by east Asia’s manufacturers.

The petrodollars described by Oweiss in 1974 are not now the fundamental source of the dollar’s dominance. And oil exporters will probably not decide the fate of the world’s monetary system. Still, the Iran war is not helping the dollar’s cause. America’s geopolitical adventurism as well as its aggressive use of financial sanctions is pushing more countries to consider alternative payment rails and other stores of value. In his speech over 50 years ago, Oweiss spoke of the fear that America might freeze or confiscate assets within its jurisdiction, despite its apparent fealty to free-market principles. He called these assets “hostage capital”. That idea, more than the petrodollar concept associated with his name, will explain the dollar’s fate in the coming years and decades. ■