Many people think money is controlled by banks, interest rates, or the stock market. But there is another system that has shaped global trade for decades. It is called the petrodollar system.
What the petrodollar system is
Oil is not just gasoline. Oil is used in shipping, farming (through fertilizer), plastics, and many everyday products. Since nearly every country needs oil, oil trade matters for the whole world.
The petrodollar system is a long-standing rule in global energy trade: oil is mainly priced and traded in U.S. dollars. That creates steady demand for dollars.
A key reason comes from history. After World War II, the U.S. dollar became central to global finance. Later, in 1971, the U.S. stopped letting countries exchange dollars for gold. That meant the dollar became fiat currency. Fiat currency means money that is not backed by a physical item like gold. It works because people trust the government and the system.
In the 1970s, the U.S. and Saudi Arabia made a major agreement. Saudi Arabia would sell oil in dollars. In return, the U.S. would provide military support. Over time, many oil trades followed this pattern.
How it affects countries and investors
If a country needs oil, it needs dollars. So it keeps dollar reserves. Often, those reserves are held in U.S. Treasuries. U.S. Treasuries are loans to the U.S. government. They are seen as one of the safest places to store dollars.
This system creates three big effects:
- A stronger dollar than expected. That can make imports cheaper for Americans.
- High demand for U.S. debt. When many buyers want Treasuries, U.S. borrowing costs can stay lower.
- Financial power through sanctions. If trade runs through dollars and U.S.-linked banks, the U.S. can block access and make it hard for a country to do business.
Why the system may be changing
Some countries are trying to trade more without dollars. This does not mean the dollar will “collapse” soon. Big systems often change slowly. But if dollar demand fades over time, it could mean a weaker dollar, higher interest rates, and more market uncertainty.
For readers who want more background on Felix Prehn and the community, one relevant page is: Felix Prehn Goat Academy.