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World Affairs and Geopolitics- History of Petrodollar Agreement 1973

 

Petrodollar System Explained

The global elimination of the gold standard led to the emergence of the petrodollar. Since it is denominated in US dollars, the rate of US inflation and, if necessary, the exchange rate on the global stock market will determine how much it is worth. Both the US dollar and the petrocurrency are equally influenced by financial and other factors, with corresponding legal and commercial repercussions.


Other nations committed to tying their currencies to the US dollar by signing the Bretton Woods Convention in 1944. However, stagflation led US President Richard Nixon to remove the currency from the gold standard on August 15, 1971. The Organisation of the Petroleum Exporting Countries (OPEC) dramatically raised oil prices in 1973 within a short period of time.



Petrodollar Agreement 1973

The collapse of the Soviet Union in 1991, which made the US the only superpower in the materialized unipolar world, is what gave rise to the history of the petrodollar. The world thereafter experienced a number of crises and destabilization to maintain the dominance of the petroleum currency regime.



The phrase first appeared in 1973 after the US decided to provide Saudi Arabia with armed security. In a deal including the whole sale of oil in US dollars, it additionally delivered weapons and other military supplies. Additionally, Saudi Arabia would use US treasury bills and bonds to recycle the surplus funds into the American economy.



By 1975, all OPEC members had agreed to the petrocurrency system and the export of oil in US dollars. As a result, the American dollar today accounts for approximately two thirds of the global economy. Considering that the US dollar is the primary currency required for trading in natural gas and oil, it serves as the reserve currency for the majority of central banks globally.

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