Geopolitics on Finance: Impact of Petrodollar on Financial Markets

The United States is the most powerful country in the world, and a key reason is its economic dominance and control over international trade. Furthermore, the United States was able to establish its dominance over international trade through a strategic alliance with Saudi Arabia and the creation of the Petrodollar. In today’s founder’s thought, we will examine the effect of the petrodollar on financial markets.

The Role of Petrodollar in Global Trade

In 1973, the United States reached an agreement with Saudi Arabia, where Saudi Arabia, a growing oil powerhouse, would price its oil in US Dollars in exchange for military protection and economic cooperation. Pricing oil in US Dollars forces every country to hold a reserve of US Dollars since they will need oil to keep their country afloat. Furthermore, this also leads oil exporting countries, namely those in OPEC (Organization of Petroleum Exporting Countries), to develop large reserves of US Dollars. Thus, since all countries need US dollars, the United States can possess such a large spending deficit that their currency will not be devalued as every country needs petrodollars.

Market Implications and Trends

The constant demand for US Dollars for oil purchasing strengthens the US Dollar against other currencies as well as the US economy. This currency dynamic leads the United States economy to stay in a relatively stable state of growth while other countries have to manage their currencies and inflation to a greater degree. Touching back on the OPEC nations that develop large reserves of US Dollars, many of them tend to invest in US-based assets, which further strengthens the United States economy as it receives advantages that no other country’s economy receives. This international investment into the United States economy helps support the United States in its spending deficit while also supporting liquidity in the US financial markets and increased investment into large corporations.

Future of the Petrodollar System

The Petrodollar system is clearly a biased system, favoring the United States both politically and economically. Thus, many are calling for changes to the system such as the use of additional currencies, such as the Great Britain Pound or Chinese Yuan. Others call for exploring decentralized currencies, such as Bitcoin or Ethereum. The collapse of the Petrodollar system could be disastrous for the United States as it will lose its edge in the current global landscape. Nonetheless, only time will tell.