Abstract

This paper explores an under-researched aspect of US prestige, power, and strategy, namely, the pricing of oil in US dollars since 1973. US petrodollar hegemony has enabled the United States to run large current account deficits and to borrow and consume while other countries have had to save and invest. It has contributed to a rise in living standards in the United States that would otherwise not have been possible. It has allowed the US to dominate global energy markets.

Some commentators, such as Doug Stokes (2014), see little sign of this situation changing. In 2012, for instance, there was still high demand for US treasuries yielding 0% interest, because US dollar-denominated securities were widely seen as a secure store of value and medium of exchange. At that time, the Chinese yuan, which was not convertible and was not allowed outside China before 2004, was not seen as a potential competitor, at least not for many decades.

Nevertheless, there are signs that several countries are intent on ditching the dollar. The fact that Iraq and Libya both suffered regime change after challenging US petrodollar hegemony has not deterred Iran from pricing oil in Euros since 2016. Russia recently began selling oil to China in exchange for yuan-denominated gold futures contracts. Venezuela now refuses to accept US dollars as payment for its oil.

In March this year, China opened a new oil futures market, to be coordinated through a new stock exchange, the Shanghai International Energy Exchange. The new oil contract, priced in renminbi, is the first Chinese futures product that can be traded by overseas entities without a presence in China, representing Beijing’s latest step in promoting the global use of its currency.

This paper provides a brief history of the petrodollar, then discusses the challenges that have arisen to the petrodollar, their limitations, and possible wider ramifications should those challenges continue to mount.