Financial encyclopedia

In recent years, Saudi Arabia has begun exploring more possibilities for non-dollar settlements. The one most concerned about this is never the oil companies, but rather the United States. Because over the past few decades, aside from America's economic strength, oil has actually played a crucial role in making the dollar the world's most important currency. 

The world needs oil: airplanes run on it, cargo ships rely on it, factories use it, and power generation depends on it. Oil is like the blood of the modern economy. For decades, the international oil market has primarily been priced and settled in U.S. dollars. 

The Origin of the Petrodollar  
After World War II, the Bretton Woods system established the dollar's central role in the global monetary system. At that time, the U.S. dollar was pegged to gold, and other major currencies were pegged to the dollar. In other words, even before the emergence of the petrodollar, the dollar had already become the core currency of the global financial system. 

By the 1970s, the U.S. dollar was decoupled from gold, causing significant turmoil in the global monetary system. In 1974, the United States reached a key agreement with Saudi Arabia: Saudi Arabia agreed to price its oil exclusively in U.S. dollars, while the U.S. promised military protection and security guarantees. This arrangement, later known as the "petrodollar deal," was subsequently followed by other OPEC member countries. 

The energy crisis triggered a sharp rise in oil prices, further embedding the dollar-denominated oil system into global trade.  
Thus, more accurately, it was not oil that created the dollar's dominance, but rather oil that further solidified it. 

Why not buy oil in one's own currency?  
In theory, it's certainly possible—China could use the yuan, Japan the yen, and Europe the euro.  
But the reason the U.S. dollar has remained the dominant currency in the oil market for so long is not merely due to convenience; rather, it stems from several interrelated factors:  
• The dollar itself is already a major global reserve currency  
• U.S. financial markets are large and deep, providing high dollar liquidity  
• Oil-exporting countries have long priced their oil in dollars, naturally sustaining this system 

If each country used its own currency to buy and sell oil, buyers and sellers would constantly need to exchange different currencies, resulting in higher transaction costs and more complex settlement processes. In contrast, using a single common currency makes transactions more convenient and increases liquidity. Over time, the U.S. dollar has become the most widely used settlement currency in global energy markets. 

Whether in China, Japan, Europe, or other countries, anyone wishing to purchase oil must prepare in U.S. dollars. Over time, central banks, financial institutions, and corporations have come to hold substantial amounts of dollars on a long-term basis. This demand has become a key pillar supporting the dollar's dominant position. 

What truly began to change the world was this:  
After the outbreak of the Russia-Ukraine conflict in 2022, Western countries froze over $3 trillion in Russia's foreign exchange reserves. This event sent shockwaves through many nations worldwide. For the first time, people realized that foreign reserves are not just assets—they can also carry geopolitical risks. Previously, convenience had been the top priority. But from then on, some countries started placing greater emphasis on security. 

Are oil-producing countries gaining more options?  
Another significant shift is emerging from the energy market itself. With the shale oil revolution, the United States has become one of the world's leading oil producers, greatly reducing its reliance on Middle Eastern oil. Meanwhile, Asian countries such as China and India are gradually becoming key customers for oil-exporting nations like Saudi Arabia. As the structure of their largest clients begins to change, oil-producing countries naturally consider more diversified settlement methods. 

In fact, some crude oil transactions between Saudi Arabia and China were already settled in renminbi in 2023. Although the volume remains small, this development itself carries symbolic significance. In recent years, discussions about renminbi settlements, local-currency trade, and cross-border digital payments have grown increasingly common. This does not mean the dollar is about to be replaced, but it does indicate that the global community is beginning to seriously explore alternatives beyond the U.S. dollar. 

What does this have to do with gold?  
This also explains why central banks have been continuously buying gold in recent years. If a country is concerned about overreliance on a particular currency, it may not immediately sell its dollar assets, but typically takes one step first: increasing its gold reserves. The reason is that gold belongs to no country, depends on no bank, and requires no government promise of redemption. For central banks, gold is more like an insurance policy. Therefore, even as gold prices have repeatedly hit new highs in recent years, global central banks have continued to accumulate gold. What they are buying is not necessarily the short-term opportunity for price gains, but rather a sense of asset security. 

What does this mean for ordinary investors?  
The U.S. dollar remains the world's most important currency and is unlikely to be replaced in the short term. However, as more countries begin exploring non-dollar settlements and increasing their gold reserves, this reflects not an imminent collapse of the dollar, but a growing multipolarity in the global financial system. When even central banks are hedging against "currency risk," should individual investors also consider whether their asset allocations are sufficiently diversified? 

Gold might be one option worth seriously considering.