“I’m going to Saudi Arabia. I
made a deal with Saudi Arabia. I’d usually go to the U.K. first. Last time I
went to Saudi Arabia they put up $450 billion. I said well, this time they’ve
gotten richer, we’ve all gotten older so I said I’ll go if you pay $1 trillion
to American companies, meaning the purchase over a four-year period of $ 1
trillion and they’ve agreed to do that. So, I’m going to be going there. I have
a great relationship with them, and they’ve been very nice but they’re going to
be spending a lot of money to American companies for buying military equipment
and a lot of other things.” – Donald Trump, 7th March 2025.
The United States–Saudi
“petrodollar” arrangement has underpinned American economic and military power
for nearly five decades. In essence, oil exports from Saudi Arabia (and later
OPEC broadly) have been priced in U.S. dollars since the 1974, ensuring a
constant global demand for the dollar and U.S. Treasury assets.
This monetary system forms the
hidden backbone of a web of consequences – from U.S. imperialism and
geopolitical maneuvering to environmental degradation and extreme wealth
accumulation. Today, roughly 80% of global oil transactions are still conducted
in USD, illustrating the petrodollar system’s enduring influence. Below, we
analyze the historical origins of the petrodollar, explain how this monetary
system became a root cause linking finance to geopolitics and ecological
crisis, and discuss proposed alternatives like Modern Monetary Theory (MMT)
that could break the cycle.
Background
In the aftermath of World War II,
the Bretton Woods system (1944) established the U.S. dollar as the world’s
anchor currency, pegged to gold, which cemented U.S. economic dominance.
However, by 1971 the U.S. faced mounting trade deficits and dwindling gold
reserves, as countries sought to trade USD for gold they didn’t have, US
President Nixon ended dollar convertibility to gold – a move that threatened
the dollar’s supremacy.
The solution emerged via oil: in
1974, one year after the oil crisis, Washington and Riyadh struck a pivotal
deal (kept secret until 2016) that ensured Saudi oil would be priced
exclusively in dollars. In return, the U.S. provided military protection and
lucrative arms sales to Saudi Arabia, and Saudi leaders would recycle their oil
revenues into U.S. Treasuries and American investments. This U.S.–Saudi
arrangement laid the foundation of the petrodollar system, firmly tying the
world’s most traded commodity (oil) to the American currency.
The timing was crucial. The 1973
oil embargo had quadrupled oil prices from about $3 to $12 a barrel, sparking a
global energy crisis. The U.S. sought to tame this “oil weapon” by binding oil
exports to the dollar – thereby turning petrodollars into a pillar of U.S.
financial might. By the late 1970s, most OPEC producers followed suit in
trading oil for USD, and surplus petrodollars were funneled into Western banks
and U.S. debt.
This recycling of oil revenues
back into American markets propped up U.S. budget deficits and helped finance
Cold War expenditures. In effect, oil-exporting nations accepted dollars (often
investing them in the US) in exchange for security guarantees and access to
American goods and technology. The long-term implications were profound: the
dollar became the default currency for global oil trade, bolstering its reserve
currency status and enabling the U.S. to maintain economic and military
pre-eminence “almost as a matter of course”. This petrodollar order has
remained largely intact through the present, anchoring U.S. dominance in the
world economy.
2. The Monetary System as the
Root Cause
The petrodollar system entrenched
the U.S. dollar’s global monetary hegemony, allowing the United States to exert
outsized influence without the typical constraints faced by other nations.
Because countries worldwide need dollars to buy oil, they hold vast USD
reserves and invest in U.S. assets (like Treasury bonds), which funds U.S.
deficits and keeps American interest rates lower than they otherwise would be.
In practical terms, this means
the U.S. can run the printing presses – or more accurately, expand money supply
– to finance government spending (military, infrastructure, etc.) without
triggering hyperinflation, as the excess dollars are absorbed abroad to settle
trade and reserve needs. This unique privilege, often dubbed “exorbitant
privilege,” roots many subsequent geopolitical and economic dynamics.
More broadly, the modern money
creation process itself is a key structural driver. In most advanced economies,
money is created predominantly by private banks issuing loans, not by
governments minting cash. About 97% of money in circulation is created by
commercial banks when they extend credit (e.g. granting loans), whereas only
~3% is physical cash from central banks. Debt-based money comes with a built-in
growth imperative: banks lend money into existence with an obligation to be
repaid with interest, meaning total debt continually exceeds the money
available to repay it.
New loans must constantly be
created so borrowers can obtain the funds needed to pay interest on yesterday’s
loans. If this expansion falters, the result is a contraction – loan defaults,
bankruptcies, and recession – since under our interest-bearing system “an
expanding amount of loans are needed to keep the system running smoothly” and
avoid a cascading collapse.
Jem Bendell , author of
Breaking Together, refers to this phenomenon as the “Monetary Growth
Imperative,” wherein the economy “must expand whether society wishes it to or
not” just to service the debt overhead. In other words, continual GDP growth is
structurally required to sustain the monetary system.
This dynamic has fostered a
financialized economy where speculation often outranks production. With easy
credit and abundant petrodollars sloshing through global markets, capital tends
to chase quick returns via financial instruments rather than long-term
productive investment. Private banks, seeking secure profits, create money
disproportionately for assets like real estate and stocks (fueling price
bubbles) instead of lending to manufacturing or local businesses.
As a result, we see huge asset
bubbles that benefit the mega-rich but relatively underfunded productive
sectors. The monetary system’s incentives thus tilt toward Wall Street over
Main Street – leveraging debt to amplify wealth for those at the top. Additionally,
the constant need to avoid contraction pressures governments to prioritize
policies that stimulate growth (often measured as rising GDP) above all else,
sometimes at the expense of social or environmental considerations.
In sum, the
petrodollar-reinforced debt-money system creates self-perpetuating cycles: the
U.S. can flood the world with dollars to sustain its dominance, and globally
the pursuit of dollar profits drives speculative finance and a
growth-at-all-costs mentality. This underlies many downstream effects from
military interventionism to ecological overshoot.
3. Imperialism and Geopolitics
Control over the international
monetary system, anchored by the petrodollar, has directly enabled U.S.
imperial reach and the expansion of its military–industrial complex. Since
foreign governments must hold dollars, they effectively help finance U.S. deficit
spending – including the Pentagon’s budget – by purchasing U.S. treasuries.
This recycling of petrodollars allowed America to run “guns and butter”
policies (funding warfare and domestic programs simultaneously) without
bankrupting itself.
Petrodollar inflows have
explicitly financed U.S. weapons exports and military aid, especially in the
Middle East. For instance, petrodollar-rich Gulf states like Saudi Arabia have
spent hundreds of billions on American arms over the years, funneling their oil
proceeds back into U.S. defense contractors. This symbiosis solidified a
regional security architecture with the U.S. as the guarantor – protecting
friendly oil monarchies in exchange for their loyalty to the dollar system.
The U.S. has likewise used its
monetary and military might to suppress challenges to this order. During the
Cold War, pan-Arabist and socialist-leaning movements in the Middle East –
which aimed to unite Arab states or pursue independent economic policies – were
seen as threats to U.S. “vital economic interests” (i.e. access to oil on U.S.
terms. The Eisenhower Doctrine (1957) explicitly targeted Egypt’s Gamal Abdel
Nasser and other Arab nationalists, seeking to fracture Arab unity and keep
pro-Western regimes in power.
This strategy “sowed divisions
within Arab ranks, triggering a fierce Arab Cold War” and undermined any
concerted effort by oil-producing nations to chart an autonomous course. Later,
when individual leaders attempted to bypass the petrodollar system, they often
met harsh reprisals. Notably, Iraq’s Saddam Hussein switched to selling oil in
euros in 2000, and Libya’s Muammar Gaddafi proposed a gold-backed African
currency – moves that preceded U.S.-led military interventions that removed
them from power, summed up in the infamous video of Hillary Clinton reacting to
Gaddafi’s killing “We came, we saw, he died”. While many factors were at
play in those conflicts, the message was clear: the U.S. would not tolerate
challenges to dollar dominance in oil markets.
U.S. alliances in the region
further reflect petrodollar geopolitics. Israel’s role as a key American ally
(and military foothold) in the Middle East has been heavily financed by U.S.
dollars – the U.S. currently has provided Israel with over $250bn since 1959,
with unprecedented military-aid being sent to Israel since the beginning of the
genocide in Gaza, in excess of more than $20bn. This support, partly enabled by
America’s fiscal freedom under the petrodollar system, ensures Israel’s
qualitative military edge and U.S. influence over the region’s political
trajectory. Conversely, oil-rich countries that resist U.S. hegemony (Iran,
Venezuela) have been isolated via sanctions that leverage the dollar’s
centrality in global finance.
More recently, the U.S. has been
able to commit extraordinary sums to distant conflicts – for example, Congress
approved $175 billion+ in aid to Ukraine since 2022 – with relatively little
immediate economic fallout at home. This level of expenditure (unthinkable for
most countries) is buoyed by the dollar’s reserve status and the Federal
Reserve’s capacity to create money that the world will absorb.
In short, the petrodollar-backed
monetary order acts as a force multiplier for U.S. imperial strategy: it
finances a global network of hundreds of overseas bases and proxy engagements,
and it gives Washington a powerful economic weapon (control of dollar-based
transactions) to reward allies and punish adversaries. The result is a
geopolitical landscape where U.S. military supremacy and currency supremacy
reinforce each other, often at the expense of smaller nations’ sovereignty.
In fact, it is the debt-based
monetary system that has trapped many developing nations in a cycle of
borrowing and export dependency, often enforced by international financial
institutions and trade agreements. Under the current system, countries in the Global
South are pressured to extract and export commodities (oil, minerals, cash
crops) to earn the foreign currency needed to service debts and pay for imports
– effectively subsidizing affluent lifestyles elsewhere at the cost of local
ecosystems. Indeed, our “debt-based monetary system” creates a built-in
incentive for “world export warfare”, where nations must compete for export
markets to try to obtain debt-free income.
This wealth transfer occurs
through different mechanisms, primarily debt and price differentials in
international trade resulting in unequal exchange, which, according to a
2022 paper from Hickel et al, between 1990-2015 alone, resulted in a
wealth drain from the South totaling $242 trillion, equivalent to a quarter of
Northern GDP.
4. Environmental and Economic
Consequences
This debt-fueled, growth-obsessed
petrodollar system has also driven environmental destruction and locked in a
fossil-fuel-dependent global economy. The arrangement implicitly incentivizes
high oil consumption: oil exporting nations earn dollars and invest in growth, while
oil-importing countries need growth to afford expanding energy imports.
Consequently, the world’s energy and economic structures have been slow to
change. As of 2022, about 80% of global primary energy still comes from fossil
fuels, a statistic tied to the petrodollar era’s legacy.
There is a well-documented 1:1
coupling between global GDP and global energy use, particularly fossil fuel use
. In effect, economic growth has meant burning more oil, gas, and coal, leading
to rising carbon emissions. Under the current system, if we “don’t keep the
global economy growing by at least 3% per year, it plunges into crisis,”
doubling the economy’s size every ~20 years. This exponential growth mandate
collides with the reality of a finite planet. It translates into ever-expanding
extraction of natural resources and ever-expanding waste (greenhouse gases,
pollution), because efficiency improvements alone have not stopped total
resource use from climbing, due to Jevon’s paradox and the growth-paradigm.
Critically, the monetary growth
imperative undermines efforts to transition to sustainability. As Bendell
observes, our debt-based monetary system “does not allow a steady-state
economy” – it literally “prevents effective climate change mitigation…without
monetary reform” Governments are pressured to maximize short-term GDP (to
service debts and maintain employment), often prioritizing elite accumulation
through inflating asset prices, destructive economic expansion and consumerism
over conservation.
The petrodollar system reinforces
this by promoting fossil-fueled development; countries that grow faster (with
high energy use) accumulate more dollars, while those that try to curb fossil
fuels risk economic stagnation under current metrics.
Meanwhile, oil-rich states have
had little incentive to diversify away from hydrocarbons as long as oil revenue
secures their geopolitical standing. The result is a vicious cycle: debt drives
growth, growth drives fossil fuel combustion, and fossil fuels exacerbate
climate change and ecological harm. As one commentator put it, “American empire
is inextricably linked with fossil fuels, and to mitigate climate change, it
must come to an end”. In other words, genuine environmental solutions require
confronting the political-economic system that maintains fossil dominance.
The petrodollar link also
explains the slow global response to climate change. U.S. policymakers (and
other major oil stakeholders) have often been reluctant to fully embrace
decarbonization, not only due to oil industry lobbying but because a shift away
from oil threatens the basis of the dollar-centric order. A world less
dependent on oil could erode the automatic demand for USD, undermining U.S.
financial power. Indeed, analysts note that if renewable energy and
electrification significantly reduce oil trade in the coming decades, it “could
eventually lead to a reduction in petrodollar flows” and weaken the dollar’s
global standing.
Thus the climate crisis and the
petrodollar system are intertwined challenges. The very same debt-growth engine
that boosted GDP (and elite wealth) in the 20th century is now pushing the
planet toward ecological breakdown, by making perpetual expansion the condition
for economic stability. Breaking this cycle is essential not only for
environmental reasons but to free economies from what Jason Hickel calls “the
logic of endless growth” that defies planetary limits.
5. Alternative Solutions and
MMT
Addressing these deeply
interlinked issues requires rethinking the monetary system itself. A range of
economists and scholars have proposed solutions to remove the growth imperative
and make finance serve people and planet rather than the elite few. One approach
is to shift from privately controlled, debt-based money creation to
democratically managed money that can be directed toward public purposes.
Instead of relying on commercial banks to create money (and channel it into
speculation or property bubbles), the state could create and spend new money
directly into the real economy, funding useful projects like renewable energy,
public infrastructure, healthcare, and education.
Such a system of sovereign money
(sometimes called “green quantitative easing” or public banking) would inject
liquidity where it’s needed for social and environmental goals, rather than
inflating huge asset bubbles that only benefit the mega-rich. The money supply
could grow or contract in a controlled way to meet societal needs, without the
destructive necessity of ever-increasing debt.
Notably, the proposal is not for
the government to print limitless cash, but to replace interest-bearing bank
loans with debt-free public spending as the primary way new money enters
circulation. This idea harkens back to thinkers like Samir Amin, who advocated
“delinking” developing economies from the dictates of Western finance in order
to pursue self-determined development.
By reclaiming monetary
sovereignty – whether through nationalizing credit creation or regional
alternatives to the dollar system – countries could invest in long-term
prosperity and sustainability without being trapped by dollar-denominated debt
and growth-at-any-cost policies.
Modern Monetary Theory (MMT)
offers another lens for solutions, especially for advanced economies like the
U.S. and those with their own currencies. MMT economists (e.g. Stephanie
Kelton , Fadhel Kaboub فاضل قابوب ) argue that a sovereign
government cannot “run out of money” in its own fiat currency the way a
household or business can. As Kelton puts it, for a country that issues its own
currency, there is never a danger of debt spiralling out of control, because it
can always create money to service its obligations.
The real limits are not financial
but resource-based – inflation will only arise if government spending pushes
total demand beyond the economy’s productive capacity (labour, materials,
technology). This perspective suggests that scarce funding is not the barrier
to tackling issues like poverty, infrastructure, or climate change; what’s
needed is political will and careful management of real resources.
For example, using an MMT
framework, the U.S. or any currency issuing country could finance a Green New
Deal – mass investments in clean energy, transit, and green jobs – by issuing
currency, without needing to tax or borrow first, as long as idle resources
(unemployed labour, etc.) are put to work.
Far from causing runaway
inflation, such spending would increase productive output and sustainability,
and any inflationary pressure can be managed via taxation or other tools.
Importantly, MMT also highlights that monetarily sovereign governments don’t need
petrodollar recycling or foreign loans to fund themselves; their spending is
constrained by what’s available to buy in their own currency, not by foreign
exchange.
This undercuts the rationale for
maintaining structures like the petrodollar – if the U.S. can afford to invest
in renewable energy and social programs without Saudi petrodollar recycling, it
might reduce the strategic obsession with oil-based dollar supremacy.
Leading voices have emerged to
champion these ideas. Economist Fadhel Kaboub, for instance, emphasizes that
developing nations can use MMT principles to achieve monetary sovereignty and
resilience, rather than depending on IMF loans or dollar reserves. He points to
strategies such as building domestic food and energy systems to reduce import
dependence and denominating debts in local currency, so that Global South
countries can escape the trap of dollar-denominated debt that forces austerity.
Jason Hickel, from a “degrowth” and global justice perspective, likewise calls
for moving beyond GDP growth as the measure of success and financing a fair
economic transformation (especially in the Global South) through public-led
investment and technology transfer.
Dr. Steve Keen and David
Graeber have both called for modern debt-jubilees, to liberate ourselves from
this unpayable debt cycle that has dictated and limited human societies for
millennia. Their work suggests cancelling odious debts, taxing or expropriating
the excess wealth of elites, and redirecting resources toward climate
mitigation, adaptation, and human wellbeing – all of which would be easier
under a redesigned monetary regime that isn’t predicated on private profit.
Even scholars of collapse like
Jem Bendell argue that monetary reform is central to any hope of mitigating
climate catastrophe; as he bluntly states, without altering how money is
created and allocated, societies “will be prevented from effective climate
change mitigation” and from adapting to coming disruptions.
In summary, these alternative
paradigms (sovereign money, MMT, degrowth) converge on a key point: freeing the
economy from the tyranny of the petrodollar and debt-driven growth would enable
humanity to prioritize ecological stability and equitable development. By
reclaiming the monetary commons for public good, we could break the cycle of
imperial warfare, environmental exploitation, and elite enrichment that the
current system produces.
Conclusion
The U.S.–Saudi petrodollar deal
of the 1970s created a self-reinforcing cycle that has shaped global politics,
economics, and the environment in far-reaching ways. It tethered the world’s
monetary order to fossil fuels and U.S. military might, allowing American
elites to amass wealth and power under the guise of “maintaining liquidity” for
global trade. The consequences – imperial interventions, entrenched petrol-states,
financial crises, and climate change – are not isolated problems but different
facets of a singular system.
Understanding the monetary root
cause clarifies why efforts to address issues like endless wars or carbon
emissions often hit a wall: the prevailing system is built to expand itself,
not to prioritize peace or planetary limits.
However, as we have seen, this
system is not immutable. History is now at an inflection point where the
petrodollar’s dominance is being quietly challenged. China, Russia, and other
nations are experimenting with oil trade in other currencies, and U.S. financial
sanctions on rivals have spurred talk of de-dollarization. At the same time,
the imperative of climate action is pushing the world toward renewable energy,
which in the long run will weaken the oil-dollar nexus. These trends suggest
that the petrodollar system’s grip may loosen in the coming years.
Yet simply replacing the U.S.
dollar with another currency for oil trade would not automatically dissolve the
deeper problems – it might just shift the locus of power. The more fundamental
change advocated by the thinkers cited above is to redesign how money works and
what it serves. By moving to a post-petrodollar era of cooperative monetary
policy, debt-free public investment, and truly sustainable economics, it
becomes possible to address the interconnected crises at their source.
That means breaking the feedback
loop of oil, dollars, and weapons, and instead using monetary tools to foster
global justice and ecological balance. In conclusion, the petrodollar deal was
not just a quirky historical pact – it has been the linchpin of an entire
world-system of U.S. hegemony, elite enrichment, and fossil-fueled growth that
turbocharged the ‘great acceleration’ that has pushed the global economy far
outside what our planet can sustainably support.
Recognizing that the monetary
system lies at the root of imperialism and environmental breakdown is the first
step toward imagining new systems that prioritize peace, shared prosperity, and
a livable planet. The challenges are immense, but so are the possibilities if
money creation and resource allocation are reclaimed for the common good. The
downfall of the petrodollar need not be a crisis; it could be an opportunity to
chart a different course for both the global economy and Earth’s future.
Daragh Cogley is a
Barcelona-based Sustainability & Economics Professor, and sustainable
business professional with a focus on fashion, degrowth and regenerative
business. He was a leading author of the first ever EU Bioeconomy Youth Vision,
and co-author of the ‘One day at a Time, Daily Sustainability Calendar.
-CounterPunch
