Over the past several years, and with accelerating frequency in the past six months, oil producing nations like Russia and Saudi Arabia have signaled their intent to break with the so-called “petrodollar” system. The petrodollar system, which emerged starting in roughly 1973, is the nearly uniform use of U.S. dollars to denominate, and often settle, worldwide oil trades.

David Z. Morris is CoinDesk’s chief insights columnist.

Though it is sometimes mistaken for a formal rules-based system, the petrodollar is better understood as one aspect of the broader role of the dollar as a global reserve currency, and the resulting “exorbitant privilege” the U.S. enjoys. Specifically, historians regard the petrodollar as one of the most important consequences of the transition from the Bretton Woods framework for global finance, which centered on a managed gold standard, to the more decentralized and market-based neoliberal money system that supplanted it.

Signals of a reduction in petrodollar trade have added to persistent anxieties about the dollar’s reserve currency status, which is also currently under pressure thanks to inflation. An erosion of the dollar’s reserve status could seriously undermine U.S. debt financing and other economic fundamentals.

That’s why some recent news in oil markets has raised anxiety about the dollar. In March, it was reported that Saudi Arabia and China were accelerating talks to price and settle oil contracts in Yuan via a Shanghai petroleum exchange. China has also conducted talks with Brazil, a significant crude oil exporter, about ditching the dollar. Indian traders have reportedly settled some Russian oil purchases in rubles and dirham, the currency of the United Arab Emirates. That all sounds very worrisome for the dollar, and for U.S. financial hegemony.

But a deeper dive suggests much of this is empty posturing – not because the world loves the dollar or the U.S., but because no other national fiat currency is positioned to supplant their role in the system. At the same time, the petrodollar system has given oil exporters large and sometimes troubling influence over the United States via investment. Viewed on a long enough horizon, the deadlock highlights potential demand for a truly neutral, global currency not subject to politicized manipulation by a single issuer.

In short, the tensions at the heart of the petrodollar system point towards a solution that looks something like Bitcoin.

DEFI OIL: Brent Crude Futures value the production of crude oil in the North Sea, one of two major oil benchmarks.

Power politics? Or just economics?

Because the petrodollar system emerged very soon after the Nixon administration ended the Bretton Woods regime of gold-backed U.S. dollars, the two are sometimes viewed as analogues. One widespread but reductive characterization describes dollars as “backed” by oil starting in the 1970s, the way they once were by gold. This framing is often accompanied by a conspiratorial view that the system emerged through a backroom arms-for-debt financing deal between the Nixon administration and Saudi Arabia.

But “none of this was a conspiracy,” according to economic historian David Spiro. “Whatever they refer to as the petrodollar standard, it doesn’t exist. It shows no understanding of the international monetary system and its goals.” Spiro’s 1999 book “The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets” is one of the definitive texts on the subject.

The U.S. certainly engaged in deceptive and secretive behavior. But this was not in pursuit of a multi-decade agenda to cement the dollar’s reserve status with an oil deal. Rather, the immediate burning issue was a global trade imbalance and potential resulting instability. As the price of oil rose in the early 1970s, oil exporters, and Arab nations in particular, began to enjoy huge trade surpluses. Those trade surpluses left them with large and growing piles of cash, of various sorts, and parked in an increasingly far-flung web of banking institutions.

In a worst-case scenario, if those oil earnings didn’t get back into the global capital system, credit markets could have seized up and collapsed. The most conspiratorial view of the petrodollar system hangs on the genuinely secretive U.S. efforts to help solve the issue. The fate of the credit system and funding for U.S. debt, far more than the future dominance of the dollar, was the priority when Nixon administration Treasury Secretary William Simon traveled to Jeddah, Saudi Arabia in 1974 to pitch the Saudis on investing in U.S. Treasuries.

Simon offered to let the Saudis bid on U.S. Treasury bonds via the so-called “add-on” system, rather than via the standard Treasury auction. This gave the Saudis better pricing, but more importantly, it made the purchases secret. This secrecy, according to Spiro, was necessary because the U.S. was breaking a trade agreement with Europe by cutting a bilateral deal to recruit Saudi capital. The subsequent Saudi purchases of a total of $117 billion dollars’ worth of Treasuries was kept secret from the world until 2016, when Bloomberg reporter Andrea Wong uncovered Saudi holdings through a Freedom of Information Act request.

The yen, yuan, ruble, and euro all have individual shortcomings for filling that role

But many experts also believe that the Saudi-U.S. deal included an unrecorded agreement for the U.S. to aid in Saudi defense. Some historians argue that the two Iraq Wars were pursued in service to a clandestine Saudi-U.S. defense pact.

Petrodollars and the neoliberal order

Spiro argues that this U.S. deal amounted to America using political and military leverage to maintain economic hegemony. His views contrast, though, with another line of thinking that claims Saudi investments were guided by market forces, not by U.S. power. According to this so-called “institutionalist” view, the petrodollar system essentially emerged because dollar assets were appealing places to put capital. This line of thinking aligns with so-called “neoliberal” ideas about the power of free-market forces in global finance, in contrast to the more managed gold-standard monetary regime.

One piece of evidence for this naturalist, free-market interpretation is financial data predating Simon’s deal. Dollar assets held by oil-exporting countries in European banks stood at $0.8 billion in 1964, according to 2009 research by Christopher Kopper, but had rocketed to $10 billion by 1972 – well before the Nixon deal. This is even more striking because the U.S. in 1963 had begun passing rules intended to reduce U.S. bank lending to foreign borrowers.

Those investments rose not because of any deal, then, but despite formal barriers, seemingly attracted by the fundamentals of the dollar assets themselves. The desire to skirt U.S. barriers, in fact, led to an offshore market for dollar bonds and deposits in Europe, sold via London- and sometimes Luxembourg-based banks and branches. These became known as “Eurodollar” assets. This financial market was already developed, then, when a long-term climb in oil demand and prices began in 1973, leaving oil exporters with even more money to invest.

The idea that U.S. defense of Saudi is part of a secret oil deal is also debatable. An early mutual defense pact between the U.S. and Saudi was signed in 1951, more than two decades before William Simon went to Jeddah. Moreover, the broader Cold War context may be as or more significant than oil per se: before the 1990s, Saudi’s hereditary monarchs wanted good U.S. relations as a bulwark against both domestic insurrection and the nearby Soviet Union.

And whatever the public or private terms of the U.S.-Saudi relationship, it never had juridical power over the broader oil market. Economist Dean Baker wrote in 2009, for instance, that “oil producers are free to construct whatever terms they wish for selling their oil, and many often agree to payment in other currencies.” In fact, even the Saudi relationship has had to be shored up occasionally, as in a 1978 meeting when Saudis reiterated their commitment to the dollar.

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The paranoia of global finance

Questions about the petrodollar system’s origins are important because they help us understand its future. At the highest level, if U.S. political maneuvering was a key determiner of where petrodollar surpluses wound up invested, that should make it relatively simple to escape the petrodollar system through similar political deals, such as those discussed among India, Russia, and China.. By contrast, if market forces are the main factor pushing oil surpluses into dollar assets, and in turn maintaining the dollar’s reserve status, it’s far less plausible that even a command economy can will an alternative into existence.

On this count, the neoliberal explanation seems to be winning: political attempts at creating a petrodollar alternative have been fizzling for decades. Current worries about Russia and China cutting deals with Saudi Arabia are easily recognizable in this 2009 account of similar discussions, which ominously warned “an extraordinary transition from dollar markets within nine years.”

Obviously, that didn’t happen. Economist Dean Baker argued characterized those 2009 fears of a game-changing anti-dollar deal as something that “would make a good plot for a Hollywood movie, but it doesn’t make much sense as economics.” According to that view, meetings and discussions amongst non-U.S. oil trading nations can hardly hope to bend the monumental economic forces that make the dollar the preferred instrument for global trade in general, not just for oil.

Global finance theater

Even if a political exit from the petrodollar were possible, even David Spiro doesn’t think the current Saudi-China-Russia constellation has much chance of accomplishing it.

“I think the Saudis are trying to become more of an international player and power,” Spiro told me. “And they’re trying to move away from the U.S.” In other words, having meetings with China about pricing oil in yuan is something like a threat of economic blackmail from Saudi Arabia, aimed less at actually transitioning away from the dollar than at influencing U.S. monetary and foreign policy in the short term.

But there’s been little evidence so far that this kind of threatening gesture is effective, and Spiro is deeply skeptical of the upside for the Saudis. “The crown prince is young and ambitious and not terribly well-educated about some of this stuff.”

There’s rich historical irony here. Many Americans in the 1970s were anxious that “the Arabs, and the Saudis, in particular, could use their money, as well as their oil, as an economic weapon,” as Judith Miller summarized in 1979, “And throw the American markets into chaos by abruptly liquidating assets and transferring them abroad.” That exact scenario was even explored in a popular novel, “The Crash of ’79.”

But it has become clear that holding U.S. debt doesn’t actually translate to much power. This was demonstrated quite clearly with the 2016 revelation of Saudi holdings of U.S. treasuries. The secret had been kept by U.S. administrations for decades on national security grounds before Bloomberg’s Andrea Wong sent her Freedom of Information Act request and finally got the numbers. Spiro speculates that information was finally released by the U.S. as a strategic ploy in a then-simmering conflict between Saudi and U.S. officials over legislation connecting Saudi to 9/11 .

“The Saudis made some sort of stupid comment threatening to sell off their treasuries,” Spiro recounts. “It was an idle threat. But … [Wong] requested the information and the request happened to coincide with the Saudi’s making this stupid comment, and the Treasury released the data.”

We have the capability now to do something entirely different: to build a system that’s more genuinely fair, precisely because no one controls it

The released data showed $117 billion in Saudi holdings of Treasuries. That’s hardly a pittance, but it was far smaller than the $750 billion the Saudis claimed to be prepared to sell. That gap may result from not counting the holdings of quasi-governmental investment funds – or the Saudis may simply have been exaggerating their holdings in pursuit of leverage. Economists have argued, however, that neither number represents a serious threat to the market for U.S. Treasuries, because aggregate demand for Treasuries remains strong.

In other words, despite the worst fears of the 1970s or 2023, the U.S. debt held by Saudi Arabia doesn’t seem to actually offer them terribly much in the way of leverage.

Petrodollars forever: Why the system can’t change

To crudely synthesize the historical debate over petrodollars, it doesn’t seem a stretch to accept that both U.S. power politics and liberalized economic forces contributed to the emergence of the petrodollar system. But in the present day, it seems the economic reality of the dollar trumps any politicking. As so often seems the case in a supposedly free-market system, there simply is no alternative.

China’s yuan and Russia’s ruble offer none of the liquidity and convertibility of the dollar, and add risks to boot. China’s yuan does not trade freely, making it unusable as a reserve currency. China’s rulers have also recently demonstrated their willingness to compromise property rights and reshape laws on the fly. Russia’s economy, already a dog before the Ukraine invasion, is flailing under international wartime sanctions, making its currency utterly laughable as a dollar replacement.

In short, threats of a shift away from the dollar have strategic political benefits for the likes of Saudi Arabia, but that doesn’t mean they’ll be stockpiling rubles and Russian equity any time remotely soon.

Officials in the Middle East agree with that analysis, if quietly, according to Bloomberg columnist Javier Blas. On the question of converting to a petroyuan (to say nothing of a petroruble), Blas reports, Blas says oil exporters are skeptical: “The greenback is freely convertible, the yuan isn’t; the dollar is liquid, the yuan isn’t. That’s the polite version; the more candid answers sounded even more emphatic about the absurdity of turning to a managed currency produced by an opaque and unpredictable financial machine.”

In short, while many global actors resent the privilege it represents, the “petrodollar” isn’t going anywhere, anytime soon. More generally, the dollar is unlikely to be supplanted by another fiat currency for global trade more generally. The current wave of posturing by Saudi, Russian, and Chinese officials is aimed at enhancing those nation’s leverage and influence, but won’t alter the deadlock of dollar finance.

Money talks: Petrodollars and venture capital

While Arab holdings of U.S. debt don’t seem to intimidate the U.S. government, reinvested petrodollars do have seemingly serious sway over another powerful block: U.S. businesses on the hunt for capital.

This is nothing new: back in the 1970s, for instance, AT&T took a $650 million loan from the Saudi central bank (That’s over $2.8 billion in 2023 dollars). But for a time, the murder of Jamal Khashoggi made Saudi entanglements in particular a serious reputational risk.

Khashoggi was a complicated figure rumored to have intelligence ties, but his most public role was as a journalist for the Washington Post. That made his gruesome dismemberment on the orders of Saudi Crown Prince Muhammed Bin Salman particularly emblematic of the Kingdom’s much broader illiberalism, which also includes the oppression of women and labor practices sometimes indistinguishable from slavery. For years after Khashoggi’s murder, U.S. firms stayed away from the Saudi’s Future Finance Initiative (FFI) summit, also known as Davos in the Desert.

But rising U.S. interest rates over the past year seem to have made morals an unaffordable luxury for some – in particular, U.S. venture capital funds. Last year’s Davos in the Desert was viewed as a kind of return to polite society for the Saudis, attracting JPMorgan’s Jamie Dimon, among other U.S. financiers dependent on Saudi money. At a recent smaller event backed by Saudi’s sovereign wealth fund, a16z cofounder Ben Horowitz offered his belly like a subservient dog, declaring Saudi a “startup country,” and that “Saudi has a founder; you don’t call him a founder, you call him his royal highness.”

This is pathetic stuff, but it’s merely a small index of the much deeper perverse influence that recycled petrodollars have on U.S. investing. Petrodollar reinvestment has been a huge factor in the recent startup ecosystem – and arguably, not for the better. Mohammed bin Salman (pre-Khashoggi) contributed nearly half the capital to SoftBank’s $100 billion Vision Fund. SoftBank founder Masayoshi Son has joked that his meeting with MBS amounted to raising “$1 billion per minute.”

But as they say, easy come, easy go. The Vision Fund became emblematic of the dangers of too much money, with its winner-take-all approach to helping companies like Uber buy market share with subsidies instead of worrying about profits. The approach hasn’t quite panned out, and the Vision Fund since its founding has underperformed the boring old S&P 500. Headline Vision Fund investments like WeWork, Uber, Opendoor and Doordash have been yawning sinkholes for capital, and are now in zombie-like states of perpetual unprofitability.

Saudi does get something in return, though: a veneer of legitimacy. In 2018, Masayoshi Son, former Uber CEO Travis Kalanick, and Y Combinator’s Sam Altman (now focused on OpenAI) were all named to the “global advisory board” for NEOM, a proposed “smart city” to be built in the Saudi desert. NEOM is a pet project of Muhammed bin Salman, and reflects the same high-concept, low-IQ approach as the Softbank investments. Sam Altman quickly resigned from the board, but Kalanick and Son seem to be ride or die for the Saudis, who reportedly invested $400 million in Kalanick’s CloudKitchens startup.

All this paints the picture of a startup ecosystem grown fat and lazy on the perpetual Arab petrodollar spigot. The job of VCs like Ben Horowitz is increasingly not to build companies that work, but to do a Sheherezade act for one Prince or another, spinning never-ending stories about the future thrilling enough that the prince spares their lives (or at least their extremely lucrative jobs) for another day. And while the a16z crew is the most transparently thirsty, they’re far from alone. Sanabil Investments, the venture arm of Saudi’s sovereign wealth fund, recently revealed ties to 40 U.S. venture firms.

Though hardly comparable in scale or impact, these compromises could be the venture capitalists’ equivalent of the Iraq invasions, pursued to keep the Saudis, their allies and their money happy.

As the New York Times’ Judith Miller wrote both presciently and ironically back in 1979, “If the [1973] oil embargo was the stick, the [Arab] investments are the carrot — some would say drug, on which [the U.S.] has become increasingly dependent.”

The bitcoin option

While the specifics of Arab petrodollar reinvestment may be toxic, the existence of trade imbalances as such isn’t necessarily bad. In a capitalist global trade system, there will be periods of economic dominance by one force or another. In the postwar environment, the United States has enjoyed both structural advantages as a sole economic superpower, and a real competitive edge, particularly in technology. That gives the rest of the world plenty of motive to give Uncle Sam loans.

An early oil derrick from Alberta, Canada, 1898. (Wikipedia, modified by CoinDesk)

The problem is that the same economic titan also effectively controls the global money supply, in which its own debts are denominated. Through that control, the U.S. also substantially controls global monetary infrastructure, giving it significant power to change the rules of the game to suit itself.

The Arab world may be making unhappy noises about the petrodollar system largely in an attempt to raise its global standing, but the other major players in the drama have more concrete concerns about being trapped in a dollar-denominated world. For Russia, there was the recent humiliation of having $600m worth of foreign reserves seized by the West. China, as a major holder of U.S. debt, is likely unhappy to see recent U.S. money-printing devalue its holdings.

But even focused and coordinated efforts to exit the petrodollar system, and the broader dollar reserve system, have failed. In large part, it seems that’s because there simply is no viable alternative. The yen, yuan, ruble, and euro all have individual shortcomings for filling that role.

But more fundamentally, any single dominant currency would simply reproduce most of the same problems that dollar dominance has, such as risk of debasement.

This finally brings us to the case for Bitcoin. Or perhaps more accurately, the case for a neutral, global money – of which Bitcoin is the best existing example. The non-U.S. nations trying to leave the petrodollar system seem to at least partly share this view: the 2009 discussions revolved around creating a new unit of trade consisting of a “basket” of various currencies, with the seeming goal of preventing dominance by any one national scrip. That plan didn’t pan out, perhaps because the creation of such a synthetic instrument would itself be almost endlessly contentious.

Bitcoin has the advantage of already existing, without formal ties to any national currency. Of course, since we’re talking about deficits, adoption for global trade would involve denominating debt in bitcoin terms instead of dollars – which might be a hard sell given persistent volatility.

That’s just one of what would certainly be endless technical and administrative hurdles and nuances in the transition away from dollar dominance. It doesn’t seem likely to happen any time soon, and by the time it comes to fruition, a different kind of neutral ledger and unit of account may well have supplanted Bitcoin itself.

But if nothing else, those who feel they’re under the heel of the petrodollar should look to Bitcoin as a model. It’s not enough to simply move away from the dollar to another fiat currency, even if a viable option existed. We have the capability now to do something entirely different: to build a system that’s more genuinely fair, precisely because no one controls it.

Edited by Ben Schiller.