The Intercollegiate Student Magazine

The Petrodollar’s Decline and the Future of Global Politics

graphic art of origami barrels of oil

The United States, in my lifetime at least, has been regarded as the world’s superpower, a hegemon with pertinent influence in the global system. This is largely thanks to the strength of the U.S. dollar, the primary currency in global trading. 

To understand the importance of the U.S. dollar, however, it is imperative to know how it became a frontrunner in the global monetary system. In the 1960s, The Organization of Petroleum Exporting Countries (OPEC) was founded by the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. This organization enabled oil-rich countries to assert control over their oil resources and negotiate for higher prices. About a decade later, President Nixon abandoned the gold standard, ending the convertibility of the U.S. dollar into gold. 

As oil prices rose in 1973 during the Yom Kippur War, OPEC countries began accumulating vast sums of U.S. dollars often deposited in Western banks. Western banks then lent these funds to other countries, often those with oil-related development needs. Thus OPEC officially priced its oil in U.S. dollars that same year, effectively solidifying the dollar’s role as the global reserve currency in global trade. As a result, the term ‘petrodollar’ became not only the way to describe the way we price oil but also an integral part of our global monetary system.

While this system has dominated the global order since its inception in the 1970s, its dominance will likely fall over the next few decades.

According to the New York Times, the International Energy Agency (IEA) predicts oil consumption will hit a peak in a few years, with gasoline use shrinking after 2026. Highly dependent on the global demand for oil, the petrodollar’s influence will likely decline because of the global shift to more renewable energy sources. 

With no other significant natural resource to invest in and export, Gulf countries hope to replace the oil money they expect to dry up with these other investments and mega-projects. The hope is that American companies will invest, create hubs, and contribute to the economies in the Middle East. Many countries have set low tax rates to incentivize companies to invest in the region, but it’s unclear if American companies will actually end up doing so. Saudi Arabia, for example, has largely failed, as they saw a 60% decrease in foreign direct investment in the last year. The Gulf countries have made a tremendous gamble on building tourism-oriented infrastructure, and it’s unclear if it will pay off.

So what might this mean for the U.S. dollar? 

A weakening dollar would certainly contribute to inflationary pressures in the United States. If the dollar loses value relative to other currencies, import prices would rise, especially for goods denominated in foreign currencies. This, in turn, would push up consumer prices domestically. 

Additionally, the decreasing demand for the U.S. dollar would mean that the United States would be “stuck” with excess money, further increasing inflation. If there is a reduced demand for U.S. government bonds and other dollar-denominated assets from foreign investors, it would put upward pressure on interest rates, making it more expensive for the U.S. government and businesses to borrow.

The United States’ economic power over the Global South — including many countries in Africa, South America, and South Asia — has created a precedent in which nations are heavily reliant on U.S. loans and foreign aid. If U.S. interest rates rise, the economies of these nations would experience disastrous levels of inflation. In order to cover higher interest payments, these governments would likely resort to borrowing or printing more money. 

For all of Latin America, total debt has grown to US $5.8 trillion, or 117 percent of GDP. While taking on debt may have allowed nations to persevere through instability, wars, or a pandemic, “it is now weighing down economies,” according to the Inter-American Development Bank. Countries indebted to the United States cannot invest funds into capital and rather use whatever profits they make to pay back debts. 

The decline of the petrodollar — and, by extension, the U.S. economy’s global dominance — could certainly accelerate China’s rise. China has been entering into bilateral currency swap agreements, ( large-scale currency exchanges), with numerous countries to promote the use of the Yuan in trade and finance. As these agreements expand, they reduce the need for the U.S. dollar in international transactions, contributing to a new diversification of the global monetary system. 

China can leverage its power and invest in countries within the Global South, employing similar methods to the U.S.  In 2013, they launched the Belt and Road initiative, a massive infrastructure project serving countries in Asia and now Africa, Oceania, and Latin America. While this project is growing in many economically stunted countries, many believe it is just a “debt trap” for countries borrowing from China. According to the Council on Foreign Affairs, “the contracts often contain clauses that restrict restructuring with the group of twenty-two major creditor nations known as the ‘Paris Club.’ China also frequently retains the right to demand repayment at any time, giving Beijing the ability to use funding as a tool to enforce Chinese hot-button issues such as Taiwan or the treatment of Uyghurs.” 

China’s newfound ability to gain global power challenges the United States’ long-term role in Latin America. In fact, twenty-one of the countries China is investing in are in Latin America and the  Caribbean. El Salvador’s president has been making headlines for collaborating with China to build a massive football stadium, among other projects. In Venezuela, Maduro is instituting Chinese technology to suppress adversaries. China has also been “financing railways, power lines, lithium projects and renewable energy in Argentina.” 

We are just at the beginning of a massive shift in the global order; one that may bring the end of the dominance of the U.S. dollar While the United States is still a global superpower, the petroleum industry was the root of our influence. As the petrodollar declines, the United States may follow.

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Louisiana State University

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