In the final days of WWII, 44 leaders from all Allied nations gathered in Bretton Woods, New Hampshire, to forge a new global economic order. The United States emerged as the world’s new economic leader, replacing Great Britain. The historic meeting established an international gold-backed monetary standard based heavily on the US dollar, which initially worked well but became unbearable by the 1960s.

On August 15, 1971, President Richard M. Nixon officially ended the international convertibility of US dollars into gold, effectively ending the Bretton Woods arrangement. Two years later, the United States and Saudi Arabia agreed in 1973 to accept only dollars in exchange for oil and to invest profits in US treasury bonds, notes, and bills.

Petrodollars have spread beyond oil and into every aspect of global trade, making them unstoppable. According to the Bank of International Settlements, the dollar will account for approximately 50% of global trade and 60% of global currency reserves by 2022. In comparison, the currency of the world’s second-largest economy, China, accounts for only 2.7% of global trade and currency reserves.

For over two decades, emerging economies have worked to reduce their reliance on the dollar. The IMF also argued for the creation of a new global reserve currency. Countries are preparing for a world without the dollar, whether that role is filled by the yuan, a BRICS currency, or a basket of national currencies.

The petrodollar system has greatly benefited the United States over the years by creating consistent demand for the dollar and allowing the country to print money and run large budget deficits without the negative consequences that other countries would face. However, there have been increasing signs of the petrodollar system’s instability and potential collapse in recent years.

The rise of alternative currencies for trading oil, such as the Chinese yuan and the euro, is one major factor contributing to this. As these currencies become more widely accepted for oil transactions, demand for the US dollar has decreased, causing its value to fall and undermining its position as the dominant global currency.

The collapse of the petrodollar system could result in widespread economic instability and geopolitical tensions. Policymakers must consider the implications of this potential collapse and work to develop alternative systems that can ensure global economic stability and sustainability.