Most Americans are not familiar with the term “petrodollar.” But they should be.
In a nutshell, the US dollar is the only currency with which one can do large scale purchases of oil.
Though this is changing slowly, this is still generally the case. In order for a country to do business in oil, and every country must concern itself with oil, it must first buy dollars. It can then buy oil on the open market with those dollars. This creates demand for dollars. This makes the Federal Reserve and the US government happy.
However, if this system is disrupted, if another currency was to replace the dollar as reserve currency of the world, we’d be in very serious trouble.
Some even argue that the second war in Iraq was at least partly about defending “dollar hegemony,” as Saddam Hussein in the year leading up to the war unilaterally converted all of Iraq’s oil trades from the dollar to euros. It must be said however that this view is not widely held.
Widely held or not, Hussein’s actions were a direct shot at the petrodollar system. (After Saudi Arabia Iraq holds the most oil reserves of any country and so could potentially move the market.) It seems naive to believe that this had nothing to do with why we went to war. Again, this view is nevertheless not widely held.
My personal economic “head for the hills” moment (and I still think we have a long way to go) is when the dollar loses reserve status. If that happens then all bets are off as far as I am concerned. It will be a new game with very serious implications for the United States. But we are not there yet. Thank God.
However, with the Fed printing with complete and total abandon the end of the dollar as reserve currency in the relatively near future is increasingly a possibility. If the dollar = oil, then a depreciating dollar = a higher “price” for oil. China, and other countries, are not keen on this equation.
I am happy to see the below report by Ben Swann, a respected journalist. Often discussion of the petrodollar system is given short shrift because it is a complicated concept. But it is a vital one for the United States, and I am pleased that Mr. Swann is talking about it.
By the way, the above picture is of an unpublished novel I wrote a few years ago on the topic of the petrodollar, entitled The Oil Card.