Front Burner - How the petrodollar took over the world

Episode Date: April 30, 2026

The shockwaves triggered by the U.S.-Israeli war on Iran have made clear the extent to which the global economy relies on oil, and the U.S. dollar. It’s no accident. So today we are going to try and understand how and why the U.S. and Saudi Arabia created this system, and how severely it’s being tested by this war. David Wight is our guest. He’s a lecturer at the University of North Carolina Greensboro and the author of Oil Money: Middle East Petrodollars and the Transformation of U.S. Empire, 1967–1988.For transcripts of Front Burner, please visit: https://www.cbc.ca/radio/frontburner/transcripts

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That's C-A-R-G-U-R-U-S-C-A. Cargooros.ca. This is a CBC podcast. Hey everybody, I'm Jamie Poisson. The shockwaves triggered by the U.S. Israeli War on Iran have made clear the extent to which the global economy relies on really two things. Oil and the U.S. dollar. It's no accident.

So today we're going to try and understand how and why the U.S. and Saudi Arabia created the system and how severely it's being tested by this war. David White is the guy for this. He is a lecturer at the University of North Carolina Greensboro and author of Oil Money, Middle East PetroDollars and the transformation of U.S. Empire, 1967 to 1988. David, hey, great to have you. Thank you so much for having me. So just to start with the basics here, can you just briefly explain to me in kind of layman's terms what a petro dollar is and the function that it serves? Sure, so a petrodollar simply means dollars that are sold to purchase oil. And the reason why they're considered important is because oil for many decades now has been the single most traded commodity internationally, both in terms of value and in terms of volume. So the currency that is used to purchase, oil will have a major impact on what currency is used for international trade more broadly and what currencies are used as reserve currencies that are held by central banks, that are held by

private investors. And of course, since it's traded in U.S. dollars, this benefits the United States. Yeah, it's a key component in maintaining the dollar as a the international reserve currency, and that accrues certain benefits to the United States. In terms of oil, it makes it easier for the United States to purchase oil internationally, whereas all other countries have to obtain dollars from the United States in some way, whether through trade or loans, for them to be able to purchase dollars, since they can't just print it the way that Washington can. Prior to the Iran War, were there any countries that did not use the petro dollar?

So the dominance of the petro dollar really starts post-World War II when the dollar becomes kind of the, you know, de facto reserve currency internationally. And it maintains, you know, some oil dealings would be done in like the British past. but that became increasingly less common. And really throughout the Cold War and post-Cold War era, the vast majority of trade is done in dollars. So the first lasting shift away from the Petro dollar is Iran, starting around 2008. And then you see Venezuela start to do that a few years later.

And then the biggest probably shift is Russia abandoning the dollar after its invasion of Ukraine. And in all of these cases, it's an effort to try to evade U.S. sanctions. So to do that in a different currency. I want to come back to how effective, I guess, that has been with you a little bit later. But you mentioned that the dominance of the petro dollar really started after World War II. right? But then you also hear people talk about how it really came to fruition in the early 70s, right? And just explain that to me. Sure. So I would say, and yeah, often you see that framing this idea that this gets started in like 1974, when in truth, it's really a reaffirmation of the system and a doubling down on the petrodile or rather than it restarting. But what happens in 1973, 1974 is pretty critical. So in 1973, you have the Arab-Israeli war

where the United States provides a lot of aid to Israel during that war, and that triggers a backlash where the Arab countries, including Saudi Arabia, launch an oil embargo against the United States. What we want is the complete withdrawal of the Israeli forces from the occupied Arab territories.

And then you will have the oil at the same level of September 73. Is this demand absolutely and rigid or is this just a negatulating position? Definitely. We won't give up any inch of these lands. This coincides with a very tight oil market and an increase, a rapid increase in oil prices. And so there's an unprecedented amount of money flowing into the oil exporting countries, especially Saudi Arabia. And at the same time, Saudi Arabia and the other Arab...

oil exporters are at one of their lowest points in the relationship with the United States. You know, traditionally, Saudi Arabia was an ally of the United States, but there's this real genuine fear that there might be a permanent rupture between the two countries over the Arab-Israeli dispute. Doesn't this new massive increase in the price of oil mean a change in the world balance of power between the developing nations like you, the producers, and us, the developed, industrialized nations. Yes, it will. And what do you think arises from that? Well, a new type of relationship. You have to adjust yourself to the new circumstances. And I think you have to sit down and talk seriously with us about this new era. And so the United States and Saudi Arabia both have

interest to try to fix this relationship. Again, the long-standing partners. And now Saudi Arabia is much more important in terms of oil exports in terms of its financial wealth than it had been before. So there's strong reasons for the United States to want to patch up this relationship. We cannot have a new trading system in which we will all benefit, where each tries to gain at the expense of others. But the world is only going to be one in which we have a trading pattern which will be for the benefit of all, if we have mutual benefit on both sides. The same is true of what negotiations we make engage in in terms of monetary affairs. And I would suggest to you also in the field of energy.

What the United States basically does is they say, we will offer you Saudi Arabia lots of new weapons, lots of training for these weapons. The package for Saudi Arabia is not just sidelineers, and we're trying to work out with the State Department and obviously with the Saudi Arabian government a package of defense items that is reasonable that is within the policy constraints of the American government

and that does not in any way violate our interest in and our commitment to Israel. We'll offer new financial instruments. We'll give you access to preferential purchases of U.S. Treasury securities, we will give you, you know, good investment opportunities in both the public and private sectors of the U.S. economy. And in exchange, the Saudi Arabia will help lead an end to the Arab oil embargo. They will, you know, sell oil in dollars, continue to sell oil and dollars and indeed Saudi Arabia decides to only sell its oil and dollars going forward after

1974 and the Saudis will be very firmly invested within the U.S. economy and in that way there's kind of a mutually assured sort of both benefit but destruction if either side tries to pull out right so if the Saudis are investing all of their money in dollar denominated assets in U.S. institutions. They're basically, you know, pinning their economic prosperity on the strength of the dollar and they can't take actions that would be so angering to the United States that they would risk seeing, you know, their wealth get seized, you know, having their assets get frozen within the United States. And this was all born out of a series of secret meetings and negotiations in 1974, right?

that started with a visit by Richard Nixon's Secretary of State, Henry Kissinger to Saudi Arabia. I've heard it called like the Grand Bargain, right? Yeah, absolutely right. And I mean, you know, the meetings were publicly announced, but the content, you know, what they were discussing behind the scenes was, to a degree, kept secret. Why was it kept secret? So certain aspects, I think, was important, especially for Saudi Arabia to maintain a, element of deniability because both within Saudi Arabia and the larger Arab world, the United States

was broadly unpopular because of its support for Israel. And also many of these financial investments in kind of orthodox understandings of Islam, you know, things like earning interest, that these might run a foul of Islamic teaching. And so for both legitimate in the Arab and Islamic worlds, you know, many aspects of these deals would not have been popular. So for the Saudi leadership, being able to have plausible deniability, even if it was kind of an open secret, that they were investing in dealing so closely with the United States was important. And so one of the things that the Saudis really wanted to keep secret was that they were purchasing so much U.S. Treasury securities. Yeah, I mean, just to be clear, like Saudi Arabia,

was financing U.S. government spending, essentially, just to understand. Oh, absolutely. Yeah. And especially in the mid-1970s, you know, for the period from like 1974 to 1976, just from the available data, it's clear that they were funding something on the order of 12% of U.S. federal deficit spending. And it could be even more if they had kind of like camouflaged some of their other purchases. But yeah, I mean, if you're buying U.S. Treasury securities, you're basically buying U.S. debt. You're helping to fund the U.S. government operate where it would have to find a lender elsewhere otherwise. Shopping for a car should be exciting, not exhausting. But sometimes it can feel like a maze.

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The Power and Politics Podcast answers these questions and more six days a week. We have you covered from all angles. Our reporter roundtable joins us every Friday and you can get caught up with the weekly wrap every Saturday. Follow and listen to Power and Politics wherever you get your podcasts. Who else was pulled into this deal? So to a lesser degree, you had Treasury securities being purchased by, like the Kuwaitis, by Iran. But Saudi Arabia was by and far the largest.

Now, the broader sort of structures of, you know, opportunity to invest in the U.S. economy, to purchase U.S. weapons. You know, this was something that also Iran was a major player in Kuwait and later down the line, increasingly, the United Arab Emirates, Qatar. And just how benefits? was it for those Gulf countries in the immediate aftermath, as well as in the long term? So there were many distinct benefits to this system. They got weapons that they wanted. They had a place, and especially for like Saudi Arabia, Kuwait, you know, sparsely populated Arab countries.

in the short term, they did not have many other ways to use their money because they were just receiving so much money that they had to invest some. They couldn't spend it all immediately on investments or weapons, even though they spent quite a bit on those things. So this gave them a safe place to have a solid return on their investments. it helps to develop their infrastructure, their financial sectors, their industry. And so there's a lot of benefits that they accrue. And they also get closer security ties with the United States. The downsides, however, is that, again, much of this is not popular with the broader populations in many of these countries. And especially in the case of Iran, much of the opposition to the monarchy to the Shah in Iran kind of rally around the issue of kind of perceived injustices or grievances, the notion that Iranian oil wealth is being used in service of U.S. empire and for U.S. corporations rather than for the Iranian people.

And so one of the things that the Ayatollah Rahola Khomeini really rails against during the 1970s and 1980s, both during the revolution and afterwards, one of his big attacks against the Shah and the monarchy in the United States is this notion that this petrodollars system is actually being used to fleece the Iranian people and it's just going to, you know, the corrupt elites. and to Americans. And so it's kind of this very anti-globalization narrative and very populist that, you know, the United States is basically robbing the Iranian people. And this resonates with a lot of Iranians who do not see the immediate benefits or only seeing inflation or only seeing U.S. contractors kind of, you know, swarming their cities. And so, yeah, this really resonates. And I argue is one of, one of the United States. And I argue is one of, you know, of the core reasons that motivates people during the Iranian Revolution to revolt and overthrow the Shah. And the Iranians, they were the only ones to feel this way, obviously, right? And I've seen it described as not just a bargain, but a heist. You've called it a lose-lose for much of the rest of the world. And why is that? Yeah. So for much of the global South, if they are not oil-rich, if they're not oil exporters, Initially, there was some hope that this could be both a model for them and that they would be receiving large amounts of aid from an investment from countries like Saudi Arabia. But they largely came to feel that that was not the case, that they were not receiving nearly enough to develop their economies or even to offset the higher prices of energy that they had to pay. And so to take one example, you know, Egypt, in Egypt, many Egyptians quickly came to rail against Saudi Arabia and other countries, kind of accusing them of getting rich while they were the ones who were kind of on the front lines, you know, challenging Israel or fighting. And so they kind of pointed to the 1973 war and argued that the Egyptians spilled blood and the Saudis.

earned money. They got profits off of it. So, you know, we've talked about how this was so beneficial for the United States, obviously something that they want to preserve, right? And so how much of U.S. foreign policy would you say has been underpinned by the desire to make sure oil continues to be traded in U.S. dollars? I would say it's definitely been a priority across many, you know, U.S. presidential administrations to encourage and pressure countries to sell oil and U.S. dollars. So in our most recent sort of case, you know, with the war with Iran, I don't think that Petrodollars is the sole or driving reason why the United States went to war with Iran. But I do think it's one of this key sort of concerns or consideration is the United States doesn't want to see

Iran generating lots of, you know, petro-Ewan revenues, it would certainly like to see instead Iran go back to the dollar. And it certainly wants to keep other countries selling oil in dollars rather than other currencies. To this day, we see a massive amount of American weapons sold to Gulf countries, especially Saudi Arabia and the United Arab Emirates, which have been. and tied up in proxy conflicts with each other in Yemen, Libya. Amirati purchased weapons have been found in Sudan, where there's been a brutal civil war. And how do you see these as the ripple effects of the petro dollar scheme? Yeah, I think that's a very important part is that so many weapons

have been sold to the Middle East. And many of these are coming from the United States, but many of these are also coming from other countries. Previously, the Soviet Union, now Russia, you know, major European countries like Great Britain, France, also China, and many others. And yeah, the Middle East has become just, you know, for many decades now, just this hit of weapons that then get, you know, inevitably put to use or transferred to conflicts, all over the world

and that this has been very destabilizing and very destructive and that this sort of fuels the longevity and destructiveness of these conflicts and it's a very hard thing to curb

because there's just such a strong financial incentive for the sellers of arms and all the countries in the region are very eager to have the most advanced weaponry to either try to challenge their neighbors or defend themselves against. Do you ever wonder what the world would look like now if the petro dollar didn't come to be?

Yeah, no, I mean, that's an interesting question. I think it would, you know, probably be a very different one. It's almost hard to imagine what the last 50 years would be like if the petro dollar not come to be. I think kind of looking forward, there's this kind of question of will the petrodollars stay in place and, you know, will that lead to changes? And especially kind of this attention again to China and the possibility of the petro yuan. You know, will that, you know, create something that's just kind of similar? I don't know. It's an interesting question. Well, let's get back to that. The challenge to the petro dollar was pick up where we left it at the beginning of the conversation.

Since restricting the Strait of Hormuz, Iran has reportedly been collecting tolls in Yuan, the Chinese currency, from some ships looking to pass through. And he's just like, how much of a disruption does the yuan present to the petro dollar regime at the moment? Yeah, I mean, I would say between Iran and. And Russia, which in some ways is actually the bigger oil exporter, right? So that's an even larger amount of oil that's being sold in Yuan than even Iran. Those two defections from the petrodollars system is pretty remarkable. I mean, even during the Cold War, the Soviet Union largely sold its oil for dollars. And so in the last couple years between Iran increasingly selling its oil for Yuan and then Russia after its invasion of Ukraine, those are some major long-lasting defections from the petrodollars system.

And I think this, you know, combined with the fact that most of the Middle East already primarily trades both imports and exports with, China. China is their number one trade partner that this kind of speaks to the rise of the Yuan and Chinese influence more generally in the Middle East, in Asia, and in the

global economy. So I don't think, you know, the petrodollar is just going to immediately disappear, but I think it is facing arguably its greatest sustained challenge, you know, since the end World War II. I want to talk to you about or ask you about some news from this week. The UAE announced on Tuesday that they will be leaving OPEC and OPEC Plus. Reuters reported this as a win

for U.S. President Donald Trump as he secures the organization of ripping off the world. OPEC has a dozen members in the Middle East and Africa and includes Venezuela. They produce roughly one-third of the world's oil, but the group holds nearly 80 percent of known reserves. Saudi Arabia and the UAE were the leading members of OPEC and OPEC Plus, which includes other oil producers like Russia. Worth noting that last week, the UAE approached the U.S. for a currency swap line as a way to help ease the financial strain from the Iran War. We don't know yet if there's a direct connection,

but now as they break away from the oil cartel, how does this fit into the conversation that we are having right now about the petro dollar and, I guess, the somewhat decline of U.S. influence. Yeah, I would say that the decisions that the United Arab Emirates has made recently and the signals that they've been giving actually kind of speak to the durability of the U.S. Petra dollar system. In that, you know, faced with a crisis that is largely created by the United States in the region, the Emirati has appeared to be doubling down again.

again on the dollar. They're looking for an increase in dollars, both through these credit lines. And in leaving OPEC, you know, the only reason really to do that is if they want to try to sell more oil than their partners in OPEC would have allowed. And they're planning, it appears to continue to sell those in dollars. So, you know, we've seen this repeatedly. know, a crisis occurs in the region and the Arab monarchies double down, try to re-institute or further integrate themselves with the United States because they see the United States as

their key economic and military backer. And so, yeah, I think this is evidence that, at least for the Emirati leadership, they, in the near term, see the United States. as the key player and they see the ties to the dollar as you know their plan going forward I mean also just listening to you I mean I certainly

get the vibe that you don't see the petro dollar going anywhere anytime soon no I don't think that the petro dollar is just going to disappear overnight if they were to decide to shift away from the Petra dollar, it would be a very gradual sort of shift for them that, you know, conceivably,

okay, maybe they'll start doing some oil sales in yuan or in euros, but they're not going to just abandon it overnight. It would just be way too costly for them. And then the sort of sense of military security agreements or protections from the United States, I think that they want to keep financial. ties with the United States to try to encourage the U.S. government to continue to listen to their security concerns and needs, and that, you know, right now the United States remains the predominant military force in the region, and they're not going to want to lose their

influence or access to that. Okay, David, this was great. Really interesting. Thank you so much. Thank you. All right, that's all for today. I'm J.B. Poisson. Thanks so much for listening. Talk to you tomorrow.