Petrodollar System: How Oil Supports Dollar Dominance
The petrodollar is a system that connects oil, the U.S. dollar, and American debt. The statement 'the dollar is powerful because the world trades oil in dollars' leaves out part of the story.
A petrodollar is simply a U.S. dollar earned by an oil-exporting country through the sale of petroleum. For example, if Saudi Arabia sells oil to South Korea for $100 million, that $100 million becomes Saudi's petrodollar revenue.
The petrodollar system works in five stages: the oil importer needs dollars to purchase oil; oil is priced and settled in dollars; the exporter receives dollar-denominated revenue; they spend some of it on goods, services, or investments; and the surplus is reinvested, known as petrodollar recycling.
The Bretton Woods Era after World War II linked major currencies to the U.S. dollar, with dollars held by foreign institutions convertible into gold. However, in 1971, President Nixon suspended the dollar's official convertibility into gold, marking the beginning of the end of the Bretton Woods system.