# Understanding Petrodollars: Definition, History, and Global Impact

![Petrodollars](https://www.investopedia.com/thmb/ELg688LjsrS1xfriBxQ7puK03y8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/petrodollars.asp-final-fe0f66c762ab44d98d9edc0a963de517.png)

*— Investopedia / Laura Porter*

> **Definition**
>
> Petrodollars are crude oil export revenues denominated in U.S. dollars.

Petrodollars, U.S. dollars earned from crude oil exports, play a crucial role in the global economy. Emerging in the 1970s, they reshaped trade balances for oil-rich nations, highlighting the dollar's dominance in global trade.

Back then, as now, oil sales and surpluses were measured in dollars because it's the most widely used currency. The U.S. dollar's global popularity isn't reliant on oil exporters' goodwill. It's based on the U.S.'s status as the largest economy, with robust and secure capital markets.

### Key Takeaways

*   Petrodollars are U.S. dollars received by oil-exporting countries in exchange for crude oil exports.
*   The U.S. dollar's global acceptance as a currency for settling oil sales makes it easier for oil exporters to invest the proceeds.
*   Petrodollar recycling refers to the reinvestment of oil revenues into financial assets like stocks and bonds, often through sovereign wealth funds.
*   While the petroyuan is periodically suggested as a rival to the petrodollar, Chinese currency is less accepted worldwide compared to the U.S. dollar.
*   Speculation about the collapse of the petrodollar system is common but the U.S. dollar remains the top global reserve currency with no real rival.

## Understanding Petrodollars

Petrodollars are oil export revenues denominated in U.S. dollars. Petrodollars are not a distinct currency; they are simply the U.S. dollars accepted as payment by an oil exporter.

Global oil production averaged about 96 million barrels per day in 2023. That pace would generate an annual global petrodollar supply of about $2.98 trillion annually, assuming an average price of $85 per barrel.

Petrodollars are the primary source of revenue and wealth for many members of [OPEC](https://www.investopedia.com/terms/o/opec.asp), as well as non-OPEC oil and gas exporters, including Russia, Qatar, and Norway.

Just as the petrodollar is not a currency, neither is it a global trading system. The wide use of the U.S. dollar as payment for crude oil reflects the traditional preferences of non-U.S. oil suppliers.

## How Petrodollar Recycling Works

Oil exporters prefer the USD because it is the preeminent global investment currency. That makes it the most convenient store of value for accumulated oil revenue, which needs to earn a [rate of return](https://www.investopedia.com/terms/r/rateofreturn.asp) to be useful.

An early example of petrodollar recycling is the 1974 deal between the U.S. and Saudi Arabia to funnel Saudi petrodollars into U.S. Treasurys.

Subsequent deals deployed Saudi oil export proceeds to pay for U.S. aid and development projects in Saudi Arabia and to finance U.S. weapons sales to the kingdom.

Many oil exporters now invest their petrodollars in stocks, bonds, and other financial instruments through [sovereign wealth funds](https://www.investopedia.com/terms/s/sovereign_wealth_fund.asp). Norway's sovereign wealth fund, the world's largest, had a value of about $1.5 trillion at the end of 2023. Inflows into the fund from the Norwegian state during the year amounted to just over $67 billion, and they were awarded with an annual return of 16.1%. In 2023, 71% of the fund was made up of stocks, with significant holdings including Microsoft Corporation ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)), Apple Inc. ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)), and Alphabet ([GOOG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOG)).

## Assessing the Stability of the Petrodollar System

Speculation is often found online about this—usually springing up in crypto forums from people who show little knowledge of what it means, only that it's doomed—that the petrodollar system is on the brink of collapsing. More serious analyses examine U.S. facing rivalries with rising powers, its aggressive use of sanctions against other countries, and the development and strengthening of relations between major OPEC nations and [BRICS](https://www.investopedia.com/terms/b/brics.asp) members. An increasing number of powerful and fast-growing countries, including China and Russia, are making settlements in currencies other than the U.S. dollar.

The petrodollar might become less influential, but that's unlikely soon. Right now, a petrodollar collapse seems unlikely. Although holdings of U.S. dollars have dropped, it's still the top global reserve currency, with no real competition.

According to the International Monetary Fund, in the first quarter of 2024, the U.S. dollar accounted for about 58% of allocated currency reserves. That's significantly more than the reserves held in euros (20%), Japanese yen (5.5%), British pound sterling (4.9%), and Chinese renminbi (2.6%).

## Understanding the Petrodollar vs. Petroyuan Debate

To assess the advantages of an oil exporter getting paid in U.S. dollars, consider periodic claims over the past decade that the petrodollar would soon face a challenge from the petroyuan: oil exports denominated and paid for with Chinese currency.  

All buyers of exported oil hold or can easily access U.S. dollars, while only China and mostly Chinese companies hold the Chinese national currency, called the yuan or renminbi. Unlike the U.S. dollar, the renminbi is not a freely [convertible currency](https://www.investopedia.com/terms/c/convertible-currency.asp); its exchange rate against other currencies, including the U.S. dollar, continues to be managed by China's central bank.

U.S. dollars from crude exports can be easily invested worldwide, including in the huge eurodollar market for short-term dollar-denominated deposits in European banks. Crude export proceeds in Chinese currency cannot be invested outside China as widely as USD and can only be invested inside China at the discretion of the Chinese government. Though Chinese capital markets have grown fast, they remain much smaller and less liquid than those of the U.S.

In short, it's not the dollar's use for oil settlements that makes it primary; its role as the global reserve currency is what makes it vital for oil exporters. The dollar was the established global store of value decades before non-U.S. crude oil exporters rose to prominence.

## Examining the Controversies Surrounding Petrodollars

Petrodollars recycled into investments overseas or development programs at home can produce positive financial and social returns. Results are decidedly less positive when petrodollars are spent on fortifying domestic oppression, fueling an arms race, or waging war abroad.

In recent years, actions, including the murder of U.S. resident Jamal Khashoggi by Saudi state agents in Turkey and Russia's invasion of Ukraine, have raised concerns that petrodollars are financing war and human rights violations while shielding perpetrators from accountability. While Russia, in the wake of U.S. sanctions, has been working with its allies to counteract the crushing sanctions imposed in 2022, it's not an example others are likely to want to follow in [de-dollarization](https://www.investopedia.com/what-is-de-dollarization-7559514).

## Is the Petrodollar a Currency?

No, petrodollars are simply [U.S. dollars received in exchange](https://www.investopedia.com/articles/forex/072915/how-petrodollars-affect-us-dollar.asp) for oil exports. There isn't an official "petrodollar system." The reinvestment of oil export proceeds has sometimes been called petrodollar recycling.

## Does the U.S. Dollar's Global Role Depend on Its Use to Settle Oil Sales?

No, the U.S. dollar is used to settle oil sales because of its wide global acceptance. That acceptance makes it easier for oil exporters to invest the export proceeds.

## Is the Petroyuan in Sight?

Not as dominant rival to the petrodollar. Oil exporters are free to accept payment in a [currency](https://www.investopedia.com/terms/c/currency.asp) of their choosing. Accepting Chinese currency would be most useful for investment in, and purchases from, China. Chinese capital markets are much smaller and less liquid than those in the U.S., and Chinese currency is not widely accepted outside China.

## Are Petrodollars Fueling War and Oppression?

Saudi human rights violations and Russia's invasion of Ukraine have led to suggestions that those countries' rulers have been emboldened by their oil wealth. Like any other resource, petrodollars can be deployed for good or ill. But they also show the limits of trying to get around the power of the U.S. dollar.

## Did Saudi Arabia Drop the Petrodollar?

In June 2024, rumors spread on social media that Saudi Arabia, the world’s largest oil exporter, was refusing to renew a secret 50-year deal with the U.S. to price oil in dollars. This was later confirmed to be fake news, with experts pointing out the various flaws in the accounts, including that there has never been a formal agreement with a specified expiration date. Before the rumors were debunked, Google searches for the term "petrodollar" spiked and people, including segments of the media, began speculating that the U.S. dollar’s status as the de facto global reserve currency was over and that its economy could face turmoil as a result.

## Final Thoughts on the Future of Petrodollars

Petrodollars, which are U.S. dollars earned from oil exports, play a vital role in global trade and finance, reinforcing economic ties between oil-exporting and importing nations. The preference for settling oil transactions in dollars underscores its status as the world’s foremost currency due to its global acceptance and investment convenience. Despite speculation about alternatives like the petroyuan, the likelihood of the U.S. dollar losing its dominance in global oil trade and as a principal reserve currency remains low in the foreseeable future.

> **Article Sources**
>
> 1.  International Monetary Fund. "[Reserve Currency Data](https://data.imf.org/regular.aspx?key=41175)."
>     
> 2.  Federal Reserve System. "[FEDS Notes: The International Role of the U.S. Dollar](https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.htm)."
>     
> 3.  The Energy Institute. "[Statistical Review of World Energy](https://www.energyinst.org/statistical-review)," Page 4.
>     
> 4.  U.S. Energy Information Administration. "[Petroleum](https://www.eia.gov/petroleum/)."
>     
> 5.  Vasudevan, R. "[Dollar Hegemony, Financialization, and the Credit Crisis](https://journals.sagepub.com/doi/abs/10.1177/0486613409335044)." _Review of Radical Political Economics_, vol. 41, no. 3, 2009, pp. 291-304.
>     
> 6.  Bloomberg. "[The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret](https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret)."
>     
> 7.  Congress of the United States-Congressional Budget Office. "[A CBO Study-Limiting Conventional Arms Exports to the Middle East-September 1992](https://www.cbo.gov/sites/default/files/102nd-congress-1991-1992/reports/1992_09_limiting.pdf)."
>     
> 8.  Norges Bank. "[Highest Return in Kroner Ever](https://www.nbim.no/en/the-fund/news-list/2024/highest-return-in-kroner-ever/)."
>     
> 9.  Norges Bank. "[Government Pension Fund Global Annual Report 2023](https://www.nbim.no/contentassets/75e18afc40974cb189e3747164def669/gpfg-annual-report_2023.pdf)," Page 106.
>     
> 10.  MarketWatch "[Reports of the Petrodollar System's Demise Are 'Fake News.'](https://www.marketwatch.com/story/reports-of-the-petrodollar-systems-demise-are-fake-news-heres-why-4e712804)"
>      
> 11.  U.S. Global Investors. "[Is This The End Of The Petrodollar?](https://usfunds.com/resource/is-this-the-end-of-the-petrodollar/)"
>      
> 12.  International Monetary Fund. "[Currency Composition of Foreign Exchange Reserves](https://data.imf.org/?sk=e6a5f467-c14b-4aa8-9f6d-5a09ec4e62a4)."
>      
> 13.  Lehman, Lee & Xu. "[The Renminbi Is Not Fully Convertible. How Does This Affect Business Foreign Investment in China?](http://www.lehmanlaw.com/resource-centre/faqs/foreign-exchange/the-renminbi-is-not-fully-convertible-how-does-this-affect-business-foreign-investment-in-china.html)"
>      
> 14.  Bruegel. "[Third Time Lucky? China’s Push to Internationalise the Renminbi](https://www.bruegel.org/policy-brief/third-time-lucky-chinas-push-internationalise-renminbi)."
>      
> 15.  Bank for International Settlements. "[The Dollar’s International Role](https://www.bis.org/review/r240216c.pdf)."
>      
> 16.  Bank for International Settlements. "[BIS Working Papers No. 524-Breaking Free of the Triple Coincidence in International Finance](https://www.bis.org/publ/work524.pdf)," Pages 19-33.
>      
> 17.  Congressional Research Service. "[U.S. Capital Markets and China: Issues for Congress](https://crsreports.congress.gov/product/pdf/IF/IF11803)."
>      
> 18.  Reuters. "[US-China World Equity Share a Yawning Chasm](https://www.reuters.com/markets/us-china-world-equity-share-yawning-chasm-mcgeever-2024-02-14/)."
>      
> 19.  Office of the Director of National Intelligence. "[Assessing the Saudi Government's Role in the Killing of Jamal Khashoggi](https://www.dni.gov/files/ODNI/documents/assessments/Assessment-Saudi-Gov-Role-in-JK-Death-20210226v2.pdf)," Page 3.
>      
> 20.  OEC. "[Crude Petroleum](https://oec.world/en/profile/hs/crude-petroleum)."
>      
> 21.  MarketWatch. “[Reports of the Petrodollar System’s Demise Are ‘Fake News’ — Here’s Why](https://www.marketwatch.com/story/reports-of-the-petrodollar-systems-demise-are-fake-news-heres-why-4e712804).”
>      
> 22.  UBS. "[The Dangers of Confirming Your Beliefs](https://www.ubs.com/global/en/wealth-management/insights/chief-investment-office/market-insights/paul-donovan/2024/dangers-of-confirming-your-beliefs.html)."
>      
> 23.  American Institute for Economic Research. "[Sense and Nonsense on Petrodollars](https://www.aier.org/article/sense-and-nonsense-on-petrodollars/)."