Oil prices have been rising this month, and on average rising all this year. Part of that is the expectation that summer demand will be strong. Whatever the demand, most of it will be traded in dollars.
If someone in France wants to buy oil from Saudi Arabia, they would usually use dollars, said Steve Kamin, a senior fellow at the American Enterprise Institute. If someone in Mexico wants to buy oil from Norway, he said, they would use dollars too.
So even though these countries have their own currencies, they use another country’s currency — the U.S. dollar — to buy oil or gas most of the time. Why? Well, history, for one thing.
“They U.S. was originally one of the world’s biggest oil producers. We sometimes forget that,” said Brad Setser, a senior fellow at the Council on Foreign Relations. “The Rockefeller empire was initially a domestic U.S. oil empire, and going into World War II, the U.S. was one of the world’s biggest oil exporters.”
But the real start of dollar dominance in oil markets came after the oil shock of the early 1970s, said Gregory Brew, an analyst for Eurasia Group’s energy, climate and resources team.
“Saudi Arabia had enormous fiscal surpluses. It was earning far more money than it could ever hope to invest in its own economy,” he said.
So it needed a place to park all that money. And the natural place was the American market, Brew said.
There was no secret agreement to do this, he said. It just made sense. And it still does, said AEI’s Steve Kamin.
“The dollar offers the safest, broadest, most liquid markets,” he said. “The U.S. is also protected by the rule of law, including foreign investors.”
This logic applies to more than just oil — most commodities are priced in dollars. This has perks for the United States. It increases demand for U.S. dollars the world over, pushing up the dollar’s value.
But oil doesn’t play the big role in this that it used to, said CFR’s Brad Setser. These days, Saudi Arabia invests its profits mostly in Saudi Arabia.
“Right now, the biggest surplus in the global economy is actually in China, it’s not in the oil countries,” Setser said.
And while some countries — like Russia — do not use dollars to buy oil, reports of the dollar’s imminent demise are greatly exaggerated.
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