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Knowledge Center » Economics » THE BRITH OF PETRO DOLLAR

The US Dollar remains the most important piece of paper in the world. The semi crisis back last year, which saw the INR fall to unprecedented levels caused a lot of misery and affected both economics and politics. To understand why the USD is so important,we need to first understand what the petro dollar is, how  it came to be and what it means.In 1945, the Bretton Woods agreement established the USD as the official reserve currency of the world and all commodities were priced in terms of dollars. These dollars were convertible into gold at a fixed rate of $35 an ounce. Other currencies were pegged to the USD while the USD itself was pegged to the value of gold. Thus, the USA had to back every bit of its currency with equivalent gold . After the war, when development started to take place, the demand for US Dollars started to increase as they  wanted to purchase American goods and services. Thus, this system of linking seemed to work perfectly well. At that point, the US owned more than half the world’s official gold reserves- Almost 600 million ounces..However, soon after the war, Germany and Japan started to recover, and US’s share of the total output in the world dropped significantly. Also, because of the huge expenditures incurred in the war in Vietnam and the deficit in balance of payments, countries lost faith in the system. They started to withdraw their gold from the system and hence, the dollar started to lose its value. It began to decline rapidly and forced the government to suspend the convertibility of the dollar into gold and took various measures to help protect the USD. In 1 973 Nixon persuaded King Faisal of Saudi Arabia to only accept US Dollars as payment for oil. He also asked him to invest in US Treasury bonds. Why would the King Agree? The US offered full military protection to the oil fields in Saudi Arabia. These terms were then offered to all the key oil producing countries under the OPEC.This move meant that all oil importing nations now were in constant need of the US Dollar to fund their oil imports. Also, very conveniently, the value of the USD was detached from gold and pegged to oil. This is known as the petro dollar.Many oil producing countries including Iraq have protested against this system and currently they seek to trade oil only for gold or Euros, but the US has shunned every voice that ever went against it.