Why Oil Is Only Traded in US$—Understanding Petrodollars

As a commodity, crude oil has been quite important for the world over the last century. There are two types traded on the market—WTI crude oil, which is used as a benchmark for pricing oil derivatives in the US (Texas, Louisiana, and North Dakota.), and Brent crude oil, used as a benchmark for pricing in Europe, Africa, and Asia.

Regardless of the type of crude oil being traded, the price is always denominated in US dollars.

» Read more about Brent crude vs. WTI crude

What Are Petrodollars?

Petrodollars are US dollars that are earned through the sale of petroleum products. They encompass all crude oil export revenue and are denominated in dollars because the US is the world's largest economy and goods importer.

Petrodollars are not a currency nor a trading system —they're nothing more than the revenue that has been earned from oil exports.

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Origin of Petrodollars

The term "petrodollar" was first coined in the 1970s when President Richard Nixon shocked the world by unilaterally breaking the Bretton Woods system—a monetary management system that was established to manage foreign currency exchange rates.

Prior to this event, the US dollar was pegged to gold, meaning that it could be exchanged for gold at a fixed rate.

President Nixon rendered the system obsolete, de-pegging the dollar from gold, and making all crude oil trades denominated in USD.

As a result, some oil-exporting countries, like Saudi Arabia, were racking up large surpluses of US dollars. To prevent these countries from cashing in their dollars for gold and destabilizing the US economy, President Nixon agreed to peg the dollar to oil instead of gold. This meant that other countries had to buy dollars to purchase oil, effectively creating a currency that was pegged to a widely-used commodity.

The likelihood of another currency replacing the USD remains low, as the United States still holds its stance as the world's biggest economic powerhouse.