The PetroDollar is a myth. The Iran war confirmed it.

0:00 The entire petrodollar system is supposedly once

0:03 again under threat now that Iran floated asking

0:07 tankers passing through the Strait of Hormuz

0:11 to pay in Chinese yuan rather than in dollars.

0:16 There's just one tiny problem, though.

0:18 If you just look at the numbers, the entire idea of the petro dollar system

0:24 quickly reveals itself as the biggest myth in geopolitics.

0:28 That being said, as with any good myth,

0:32 there are, of course, some elements of truth to it.

0:35 For example, it is true that in the summer of 1974,

0:40 the US under Nixon and Saudi Arabia under King Faisal,

0:44 signed one of the most economically

0:47 and geopolitically relevant agreements of the 20th century,

0:50 which saw the establishment of a so-called

0:55 US-Saudi joint commission on economic cooperation.

0:59 However, for a long time, the details of that agreement were a secret,

1:04 which is probably how we ended up with the myth

1:07 of the establishment of the petrodollar system in the first place.

1:11 And it roughly goes like this: In 1971, Nixon abandoned the gold standard,

1:18 creating significant US dollar volatility and inflation in the United States.

1:24 Then in 1973, the US was hit by a big oil crisis,

1:31 which was caused primarily by Saudi Arabia

1:34 and on other Arab nations that cut supply in general

1:38 and embargoed oil to any nation who supported

1:41 Israel in their war against Syria and Egypt.

1:45 And as you can see here, that caused a massive spike in oil prices,

1:51 fuel shortages in the US, and it significantly raised inflation.

1:55 Then we get to our famous agreement.

1:58 In 1974, the US and Saudi Arabia signed it,

2:02 which stated that from the Saudi side, they would only sell in US dollars.

2:09 Number one.

2:10 And then point number two,

2:12 they would invest those dollars into the United States itself,

2:17 and this would be called recycling petro dollars

2:20 ,and these were then recycled into US banks and treasuries.

2:25 But of course, this would not be for free.

2:28 On the other hand, the US would defend

2:31 Saudi Arabia and help them to get started economically.

2:35 1974 was the start of the petrodollar system.

2:38 The US dollar was now backed by oil and this cemented

2:42 the US dollar's status as the unquestioned global reserve currency.

2:47 The importance of the petrodollar could then

2:49 also explain that every time a nation like

2:52 Iran or Iraq or Venezuela announced that they

2:55 would start selling oil in another currency,

2:58 the US would put a stop to this because

3:01 of course this undermined the fundamental power of the US dollar.

3:05 Very convincing sounding story.

3:07 And while the story about the founding of the petrodollar system is

3:11 at least a little bit closer to the truth than the modern-day petrodollar story,

3:16 the fundamentals underlying it are still a big fat myth.

3:20 And how do we know?

3:22 Well, luckily for us,

3:24 Bloomberg News requested the release of the exact details of the US-Saudi

3:29 1974 deal in 2016 under the US Freedom of Information Law.

3:34 So, what does it say?

3:36 Well, here are the previously confidential

3:39 documents detailing how the Nixon administration

3:43 believed that this deal would work and why it would help America.

3:48 It says "the commission was established on the heels

3:52 of the Arab oil embargo and price increases.

3:56 The embargo emphasized that closer US Arab ties were needed.

4:01 The oil price increases gave Saudi Arabia a substantial amount

4:05 of petrodollars which could be used for development purposes." So,

4:10 two things stand out to me.

4:12 Focus on price increases, and then number two,

4:16 we already have a mention of petrodollars here.

4:18 So, petrodollars themselves are not a myth.

4:20 Continuing the commission was perceived

4:22 as an important mechanism for number one,

4:25 fostering closer political ties between

4:27 the two countries through economic cooperation,

4:30 assisting Saudi industrialization and development,

4:32 while there we have it, recycling petrodollars.

4:35 So recycling petrodollars is absolutely in there.

4:39 And then number three, facilitating the flow to Saudi Arabia of American goods,

4:44 services, and technology.

4:46 And then finally, it says, "In helping the Saudis to find a way

4:49 to invest their large and growing financial reserves,

4:52 we will give them added incentives to continue to produce

4:55 oil in the quantity needed to meet world demand.

4:58 And this is crucial: "at a stable and hopefully lower price levels." So,

5:03 takeaway number one, what really stood out to me,

5:07 no mention at all whatsoever in these documents of the Saudis committing

5:11 to pricing oil in US dollars or the US finding this important.

5:15 It was not important.

5:17 And this is actually backed up by other

5:20 evidence presented by the Yaw Asamoah Substack which found

5:23 that the Saudis actually kept accepting British pounds

5:26 for oil for quite a while after the 1974 agreement,

5:29 which we now have seen is not surprising

5:32 given that it was not part of that agreement.

5:35 So in summary, what is myth and what is reality

5:38 when it comes to the establishment of the petrodollar system?

5:42 Well, first, let's look at what the US gives according to the myth:

5:47 economic development and security.

5:49 And according to reality, yeah, that's also the case.

5:53 But then here are the major differences Saudi gives.

5:58 Well, recycling petrodollars and reducing

6:00 borrowing costs potentially for the US.

6:03 Yeah, that was definitely in there.

6:05 But what was absolutely not in there

6:09 is US dollar transaction exclusivity not the case.

6:12 The thing that was in there clearly a couple of times was oil price stability.

6:19 And this is crucial because it changes the story

6:23 about the US motivation for this agreement completely.

6:26 The myth is: it was about supporting the dominance of the dollar.

6:31 Not true at all.

6:33 What matters is oil price stability.

6:35 And this will honestly make a lot of sense

6:38 once we start looking at the other supporting data.

6:40 The US did not need to make some fancy deal

6:43 for people to price their oil exports exclusively in US dollars.

6:47 The South American copper men were already invoicing their exports in dollars.

6:52 The European industrialists, the Japanese industrialists,

6:54 all of them invoiced their exports in dollars mostly already.

6:59 And everyone did it because by 1974,

7:03 the dollar was already the undisputed global reserve currency.

7:08 It's actually more likely that this dominance had been

7:12 cemented by something called eurodollars rather than by petrodollars.

7:16 But if you want to learn more about that, I have

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8:47 But for now, for this video about why

8:50 the petrodollar system is the biggest myth in geopolitics,

8:53 it's enough to know that the establishment of the Eurodollar market had

8:57 helped create the following situation around the time of the petrodollar deal.

9:02 Around 1976, we can see that the US as part of official central bank reserves,

9:09 the US dollar was absolutely dominating all other currencies,

9:14 including the British pound.

9:16 So the US dollar was already very much the dominant reserve currency.

9:22 And the second part of the puzzle is that if we look at the main reserve asset,

9:28 US treasuries in the 1980s when it was actually at its peak,

9:33 the Saudis had been buying a lot of them and also the other Gulf countries.

9:37 If we then look at US dollar treasuries,

9:39 we can see that the Saudis and other Gulf countries really

9:44 only held a very very very very small part of treasuries.

9:49 So they were actually not that important holders of US debt.

9:56 So crucially, the US dollar did not need the oil exporters.

9:58 It was actually the other way around.

10:00 The oil exporters needed the US dollar because US

10:03 financial markets were the only financial markets in the world

10:07 that were easily able to absorb the billions

10:10 and billions that the Gulf countries were earning from oil.

10:13 In other words, having only this tiny tiny fraction of US treasuries,

10:18 that is great news if you are a Saudi central banker or treasurer because

10:22 it means that if you get into trouble and you need to sell all

10:26 of these dollars to wage a war or something like that, then you can

10:30 just sell it all and the price of the asset will not drop at all.

10:34 On the other hand, had you invested in British government debt,

10:37 you may have caused a massive British government debt crisis if there was

10:41 a crisis in the Gulf and you had to sell all of it.

10:44 So yes, the 1974 US-Saudi agreement changed the world of geopolitics

10:47 by making the US the protector of the Gulf States and the 1974

10:52 agreement also changed the global economy because it led to lower

10:57 and more stable oil prices than would otherwise have been the case.

11:02 So, talking about oil-producing countries

11:04 accepting other currencies than the dollar

11:06 being a threat to the reserve currency status of the US dollar,

11:10 that actually from the beginning on was always simply wrong.

11:15 But today it's even more ridiculous than ever for two big reasons.

11:20 Reason number one, oil is actually far less important

11:24 in our economies today than it was in the 1970s.

11:28 For example, at the height of the 1979 oil crisis,

11:32 oil transactions accounted for about 13 to 15% of the American economy.

11:38 But today, that's only about 5 to 7% of US GDP.

11:44 The reasons are simply that our economies

11:47 got way more efficient about using oil.

11:50 For example, cars today use roughly half the amount

11:53 of petrol per mile or kilometer as they did in 1975.

11:57 Also, if we look internationally,

11:59 we can see that these bars here represent so-called

12:02 current account surpluses or trade surpluses by major oil producers,

12:08 earning them dollars.

12:10 And they used to be very significant.

12:12 Absolutely.

12:13 But today we can see that these are

12:16 just absolutely dwarfed by the East Asian manufacturing surpluses.

12:22 These are far more important sources of dollar demand today.

12:27 Next, reason number two,

12:28 the petrodollar myth is even more ridiculous than ever today.

12:32 Have a look at this incredibly important chart.

12:35 And what you see here are, in the blue line,

12:39 US energy imports and US energy exports in orange.

12:43 And of course, there used to always be a massive, massive difference.

12:48 The US was the biggest oil importer in the world.

12:53 But since 2020, that situation has changed.

12:56 The US is now a net oil exporter.

13:00 So even if at some point it was nice

13:03 for the US to have petrodollars be invested back

13:05 into the US and then they could potentially then

13:07 use them to continue importing all of that oil,

13:10 that story today is absolutely no longer true.

13:14 But okay, this oil deficit was still the case for decades.

13:19 So maybe the US used petrodollar recycling

13:22 to finance their imports for decades and now

13:25 the oil-exporting Gulf countries own much more of US debt than they did in 1980.

13:31 I thought this was fairly plausible.

13:33 A lot can happen in 40 years, after all.

13:36 And we know that the Gulf countries' wealth funds are absolutely massive.

13:40 They have trillions in US debt and equities.

13:44 That's absolutely true.

13:45 And, for my video on the Gulf economies, for example,

13:48 I calculated that they can survive a complete blockade

13:51 for years because of how insanely rich they are,

13:55 and that's truly unique across global economies.

13:58 So, does the US depend on Gulf petrodollars

14:02 that were invested between the 1980s to 2020?

14:05 When it comes to treasuries, the answer is absolutely clearly: no.

14:10 That's not the case.

14:11 Saudi Arabia, the biggest oil exporter, is all the way down the list,

14:16 behind so many economies that we barely talk about in geopolitics.

14:22 Um, India, Taiwan, Ireland, Luxembourg, Belgium, the United Kingdom, and Japan,

14:28 they all have far far higher holdings of US debt.

14:32 But okay, quite famously, the Saudis have switched to equities.

14:36 So, let's have a look at equities.

14:37 The stock market as well.

14:39 The Gulf countries are massive investors there, for sure.

14:43 But US stock markets are worth $72 trillion US dollars,

14:47 and if we look at the wealth of all wealth funds and central banks in the Gulf,

14:53 we get about $4 trillion combined.

14:55 And not all of that has been invested in stocks.

14:59 It's been estimated that they combined about 1% of the US stock market.

15:06 So while petrodollar recycling still happens, it's real.

15:10 The US clearly does not need petrodollars,

15:14 the petro states simply have no better place

15:17 to store their wealth than the gigantic US markets.

15:20 And just as the final icing on the cake to disprove

15:24 once and for oil that the petro dollar is still a thing.

15:29 The blue bar over here is the size of the entire oil market in 2025,

15:35 which was about $3 trillion.

15:37 That's a lot.

15:39 Absolutely.

15:39 It's a massive market.

15:40 But if we look at foreign exchange markets,

15:43 then we can see that their size traded per day was 9.6 trillion,

15:50 and that is per day.

15:53 Okay, that's per day.

15:56 Oil markets in a year are smaller than foreign exchange markets in a day.

16:00 So what happens if we look at a year for both of them?

16:03 Well, given that foreign exchange markets are open for about 260 days,

16:07 uh that means that their size is about $2,496 trillion

16:13 US versus $3 trillion on an annual basis for oil markets.

16:20 It is barely visible in our graph as a percentage of foreign exchange markets.

16:27 So in conclusion, the petrodollar story is the biggest myth in geopolitics.

16:32 The US dollar status as the world reserve currency is

16:36 not at all determined by oil producers invoicing in dollars.

16:40 Yes, the 1974 deal was important,

16:43 but it was about oil price stability, never about US dollar dominance.

16:48 It was already dominant by the time.

16:50 Sure, petro dollar recycling was mentioned in the agreement,

16:52 but even in the 70s and 80s, petrodollars from the Gulf were only ever

16:58 just a fraction of total US investments.

17:00 And fast forward to today, we see that the petrodollar support for the US

17:05 dollar argument is even more ridiculous than ever.

17:08 Despite, of course, being still important, well, clearly very important,

17:12 it's far less important for the global economy today than it was back then.

17:17 That's reason number one why it's ever more ridiculous.

17:19 And then second, the US is now a major oil exporter rather than importer,

17:24 which can explain why the original petrodollar deal,

17:27 after being renewed for years between Saudi Arabia

17:29 and the US is no longer in place, actually.

17:32 Um, and the Saudis have started hedging their geopolitical bets during

17:36 the breaks and accepting other currencies while the dollar is still dominant.

17:42 And while it could lose that dominance, there are a lot of countries around

17:47 the world that are looking to displace the dollar.

17:49 If this happens, it would have absolutely nothing to do with the petrodollar.

17:55 But yeah, that's my take.

17:57 What do you think?

17:58 Let me know in the comments.

17:59 And if you want to know the real details of how the global dollar system works,

18:04 go sign up to the economics of money and banking via

18:07 Coursera Plus in the link in the description or top comment below.

18:11 And see you next episode.