What Is the Petrodollar? Oil, the Dollar and the Reserve System

A petrodollar is a dollar earned by selling oil. The petrodollar system is the practice of pricing oil in dollars and recycling oil exporters' surplus dollars into US assets such as Treasury debt. It grew out of American deals with Saudi Arabia after the oil shock of 1973–74, and it was never a treaty with an expiry date.

It matters because it is part of how the dollar stayed at the centre of world money after it left gold, and because it shows what a reserve system built on one country's debt looks like: the arrangement bitcoin offers an alternative to.

What is a petrodollar?

Georgetown University's page for the economist Ibrahim Oweiss credits him with coining the word. His definition is plain: “oil revenues denominated in U.S. dollars”. A country earns petrodollars whenever it sells oil for dollars.

Oweiss also described petrodollar surpluses: the dollars an exporter earns beyond what it can use at home. Those surpluses have to go somewhere, and the natural home for dollars is dollar assets: US bank deposits, shares and Treasury bonds. Economists call this petrodollar recycling.

Why dollars at all? Partly history. When the Saudi oil industry began, American companies ran it and dealt in dollars, and Saudi Arabia kept selling oil for dollars after it bought them out, as the historian David Wight explained to PolitiFact. Partly convenience: the dollar is the world's most traded currency, so pricing in it suits buyers and sellers alike.

How did the petrodollar system start?

It started with a crisis. In the autumn of 1973, during the Arab–Israeli war, Arab members of OPEC imposed an oil embargo on the United States. The price of a barrel “first doubled, then quadrupled”, and the embargo was not lifted until March 1974 (Office of the Historian). It came soon after the dollar's break with gold, and it left oil exporters, Saudi Arabia above all, with more dollars than they could use at home.

What happened in 1971? The day the dollar left gold →

Washington's answer was to bind Saudi Arabia closer. In a cable of 6 March 1974, Secretary of State Henry Kissinger told his ambassador to propose joint commissions on economic, military and scientific cooperation. One aim, in his words, was “raising Saudi production … in order to get prices down” (FRUS).

On 8 June 1974, Kissinger and Prince Fahd issued a joint statement that set up the US–Saudi Arabian Joint Commission on Economic Cooperation. Its stated purpose was “to promote programs of cooperation between the two countries in the fields of industrialization trade, manpower training, agriculture, and science and technology” (Joint Commission, Annual Report). Saudi Arabia paid for the work; American government agencies supplied the expertise.

Did Saudi Arabia agree to buy US Treasuries?

Yes, though not in any public treaty. In July 1974, Treasury Secretary William Simon flew to Saudi Arabia to persuade the kingdom that America was the safest place for its oil money. Bloomberg reported in 2016, citing a diplomatic cable from the US National Archives, that King Faisal insisted the purchases stay “strictly secret”. The Treasury let Saudi Arabia buy outside the normal auctions, in sales left out of the published totals (Bloomberg).

The money flowed. A US embassy cable of 2 March 1975 reported that in the past year Saudi Arabia had bought or committed itself to over $4 billion of Treasury notes, and almost $1 billion of debentures issued by FNMA, the government-sponsored mortgage agency (FRUS).

For decades the Treasury published Saudi holdings only inside a total for oil exporters. It began listing Saudi Arabia by name on 16 May 2016: $116.8 billion at the end of March 2016 (US Treasury). By July 2026 the figure was $142.4 billion, about 1.5% of the $9.2 trillion of Treasury securities held abroad (US Treasury, TIC). Japan, Britain and China each hold several times as much. The Treasury warns that its country figures follow where securities are held in custody, so they can understate what some countries own.

Other People's Debt: who holds the debt behind the dollar →

Did the petrodollar agreement expire in 2024?

No. In June 2024, posts claiming that a 50-year US–Saudi “petrodollar agreement” had run out, and that Saudi Arabia would not renew it, spread across social media; one that PolitiFact checked had more than 1.5 million views. PolitiFact rated the claim False: the experts it consulted knew of no such agreement (PolitiFact). The record backs them up:

• No oil-currency clause. The one agreement from that time, the joint statement of 8 June 1974, set up a commission for industry, trade, training, farming, and science and technology. The commission's own statement of its purpose says nothing about the currency of oil sales.
• No 50-year term. The commission ran on a technical cooperation agreement signed in February 1975 and later extended to 12 February 1985 (US Treasury). Nothing in the record shows a term anywhere near that long.
• The aim was output, not currency. Kissinger's founding cable was about Saudi production and oil prices. The Treasury purchases were real, but they were a separate, secret arrangement, not a contract to price oil in dollars.

Saudi Arabia does tie itself to the dollar in a more visible way. Its central bank keeps the riyal at 3.75 to the dollar, a policy it calls a strategic choice (Saudi Central Bank).

Is the US dollar backed by oil?

No. The dollar is not backed by oil, gold or anything else you could claim. The Federal Reserve says its notes “are not redeemable in gold, silver, or any other commodity” (Federal Reserve). Oil sold in dollars creates demand for dollars, because buyers need them to pay. That is not backing: no one can hand in dollars and receive a fixed quantity of oil.

The cause may run the other way. As Wight put it to PolitiFact, selling oil in dollars “is not fundamentally what makes the dollar powerful” in global trade. In his view, the dollar's wider role is why oil is priced in it.

What is fiat money? How it works, and why it loses value →

How dominant is the dollar today?

Very, though less than it was. In the second quarter of 2026, 56.7% of the world's foreign exchange reserves were held in dollars, down from 71.2% at the start of 1999 (IMF, COFER). The euro's share has edged up from 18.1% to 20.6%, and the Chinese renminbi's is 2.1%. Most of the rest of the dollar's loss went to smaller currencies, such as the Australian and Canadian dollars.

In currency trading its lead is larger still: the dollar was on one side of 89.2% of all trades in April 2025, up from 88.4% in 2022, in a market turning over $9.6 trillion a day (BIS).

What would happen if oil were not sold in dollars?

Some demand for dollars would move elsewhere. Oil importers would need fewer of them, and exporters might keep more of their reserves in other currencies or in gold. That would wear away one support of the dollar's role. It would not remove the others.

The figures above show why. Oil is one commodity; the dollar sits on one side of most currency trades of every kind, and it is still the largest share of reserves by a wide margin. De-dollarisation, if it comes, looks more like the slow drift in the IMF's data than a single day when an agreement lapses.

Why a neutral reserve asset matters

A reserve held in dollars is a claim inside the American financial system, and the United States can freeze it. On 28 February 2022, after Russia invaded Ukraine, the US Treasury barred dealings with Russia's central bank, an action that in its own words “effectively immobilizes” the bank's assets held in the United States or by US persons (US Treasury). Oweiss, who also coined the term hostage capital, applied it to exactly this: petrodollar surpluses placed in the United States.

That is the case for a reserve asset no state issues. Gold has long played the part; the IMF's currency figures do not even count it. Bitcoin is a newer candidate. It is nobody's liability, its supply is capped at 21 million, and coins held with their own keys cannot be frozen by an issuer, because there is none.

None of this means bitcoin will replace the dollar. It is young and small next to the reserve system, and whether central banks will ever hold much of it is an open question. The point is the property, not a prediction: a reserve that does not depend on another country's debt, or its goodwill.

What backs bitcoin? →

How many bitcoins are there? The live count →

Questions people ask

What is the petrodollar in simple terms?

Dollars earned from selling oil. The petrodollar system is the practice of pricing oil in dollars and investing oil exporters' spare dollars in US assets such as Treasury bonds.

Why is oil priced in dollars?

Mostly history and convenience. American companies ran the Saudi oil industry in its early decades and dealt in dollars, and the dollar is the world's most traded currency, so buyers and sellers find it the easiest to use.

What is de-dollarisation?

A gradual move away from the dollar, in trade, in reserves or in borrowing. The IMF's data show the dollar's share of reserves falling from 71.2% in 1999 to 56.7% in 2026: a slow drift, not a collapse.

Does Saudi Arabia still sell oil in dollars?

Its currency is still pegged to the dollar at 3.75 riyals, and in 2024 the experts PolitiFact consulted knew of no evidence that it planned to stop selling oil for dollars.

Money 101: the reading list →

Sources

• The 1974 arrangements: Office of the Historian, Oil Embargo; Foreign Relations of the United States, vol. E-9, part 2, Document 104 (Kissinger's cable); US–Saudi Arabian Joint Commission on Economic Cooperation, Annual Report, and US Treasury briefing (Miller Papers, via FRASER); Foreign Relations of the United States, vol. E-9, part 2, Document 130 (embassy cable); Bloomberg, The Untold Story Behind Saudi Arabia's 41-Year U.S. Debt Secret.
• Treasury holdings: US Treasury, TIC data release with the change to country detail; US Treasury, Major Foreign Holders, historical; US Treasury, Major Foreign Holders of Treasury Securities.
• The claim and the peg: PolitiFact fact-check; Saudi Central Bank, exchange rate policy.
• The dollar today: IMF, Currency Composition of Official Foreign Exchange Reserves (COFER); BIS, Triennial Central Bank Survey; Federal Reserve, Is U.S. currency still backed by gold?; US Treasury, sanctions on Russia's central bank.
• The word: Ibrahim Oweiss, Definition of Petrodollars (Georgetown); Ibrahim Oweiss, faculty page (Georgetown).