What Does CFR’s Brad Setser Say About Petrodollar Myth and Reality?

“The glory days of the petrodollar are over,” says Brad Setser CFR fellow.

Petrodollars. Myths and Reality

Please consider Petrodollars. Myths and Reality by Brad Setser, emphasis mine.

The foundation of the dollar’s global role, it is sometimes argued, rests on the willingness of the Gulf countries (but not Russia) to price their oil in dollars.

But it was never quite clear why oil pricing mattered quite as much as some claim.

To be sure, there are network effects around dollar pricing. But it isn’t hard to pay for oil in a global currency like the euro, even if the underlying contract is priced in dollars. There is a deep and liquid market for converting euros into dollars, and a firm aiming to lock in the euro price of oil 3 months forward can buy oil forward in dollars and dollars forward with euros, thereby locking in a euro price.

Dollar settlement is a problem for countries that are sanctioned by the U.S. and the EU and for frontier economies that cannot settle their oil bill in local currency, but it hasn’t required most European oil importers to build up big stocks of dollar reserves just to pay for oil.

What has mattered at times is how the big oil exporters manage their surplus funds when there is a surge in the global price of oil.

Yet the myths around petrodollars persisted long after they had lost most of their substance: the 1970s deal between Saudi Arabia and the United States to price oil in dollars never dictated the accumulation of dollar reserves in East Asia, and it should be clear by now that the U.S. commitment to defend the Saudis is based on much more than dollar pricing of oil.

While transparent economic data has never been a forte of the GCC countries, over time some of the oil exporters started reporting quarterly balance of payments data that makes it possible to track a decent portion of the core flow out of the GCC into global markets.

As a result, we more or less knew three things going into the current oil shock:

First, the Saudis, along with most other oil exporting economies, weren’t running current account surpluses going into the latest oil shock. The Saudis actually have run deficits in 2024 and 2025.

The Saudis were thus a net drain on the liquidity of the global banking system; Aramco, the Public Investment Fund (PIF) and the Kingdom itself have been significant issuers of international bonds.

Second, the remaining oil surplus was concentrated in a small set of countries with tiny populations relative to their oil and gas endowments and wasn’t being accumulated in the form of central bank reserves—in that sense, the world of classic “petrodollars” had come to an end.**

The GCC countries and Norway do still have a significant surplus, but that oil surplus had fallen to around $200 billion dollars or so in 2025 ($35 billion in Kuwait and the UAE, $25 billion in Qatar, and around $50 in Norway; the Saudi deficit $33 billion.

That is tiny relative to the $1.5 trillion surplus of “manufacturing Asia”—the buildup of dollars in the Chinese state banks and the buildup of offshore dollars in Hong Kong and Singapore from Chinese exporters drove the Eurodollar market.

Third, there are notable differences in how the remaining oil surplus is invested.

It isn’t going into classic reserves and traditional reserve assets.***

Tracking these flows isn’t easy—and the Emirates remains a black box.

But there is enough real data for me to refute the modern financial fairy tale that there is a big float of petrodollars sustains the dollar system.* This is fun to believe, but not really based in reality.

There is too much talk about Kissinger’s 1974 deal with the Saudis, and perhaps Treasury Secretary Simon’s deal. That deal wasn’t for all time.

The Saudi surplus from ‘73 and ‘79 had disappeared by the late 80s and early 90s, but at the time, few talked about the end of the petrodollar system.

It is time to update a lot of priors. The U.S. is now a net oil exporter, not an importer, and has no direct need for Saudi supply. The Saudis today are borrowers rather than lenders, big issuers of dollar-denominated bonds not buyers of Treasuries. The Gulf monarchies are more equity investors than “bankers” to the world.

The Saudis aren’t going to generate a big surplus to reinforce the postulated petrodollar system with oil at around $100—not when their balance of payments breakeven (on around 7 million barrels a day of exports) is over $90 a barrel.

And even with oil above $100, the big sources of offshore dollar liquidity (dollars in banks, available to be lent out) are the Asian manufacturing exporters, not the Gulf monarchies.

* The UAE’s reserves are up, but that stemmed from pre-Iran “excursion” financial flows; the CBUAE is the federal central bank and it doesn’t manage the budget reserves of any individual emirate to my knowledge.

** A fairy tale that is also widely believed in the national security community, which has convinced itself that dollar “dominance” is critical to U.S. global power without carefully defining what is meant by dollar “dominance.” As an example, does the impact of the dollar’s reserve currency status hinge on the actual flow of dollar reserves, or the dollar’s share of a static stock of reserves?

*** To be clear, unless the U.S. walls itself off, stops exporting, allows efficient internal transport of Gulf Coast and Texan oil to the West and East Coast, and changes its stock of refiners to use light rather than heavy oil, the U.S. does rely on Saudi and GCC oil to keep the global price of oil and thus the domestic price of oil stable. And of course, the U.S. public remains incredibly sensitive to swings in the price of oil.

I have been fighting petrodollar nonsense for two decades.

I last discussed petrodollars on April 14, 2026.

Please consider The Petrodollar Theory Is Dead. It Never Made Sense to Begin With

Several readers asked me to discuss the petrodollar. Here are two pertinent theories.

Theory #1 – War Is a Boon for the Petrodollar

Wall Street Journal writer Diana Choyleva claims The Iran War Is a Boon for the Petrodollar

Theory #2 – The Demise of the Dollar

Bloomberg writer Aaron Brown says The Iran War Just Broke the Petrodollar

My position is both theories are silly, that the petrodollar idea never made much sense, but if it ever did, it sure doesn’t now.

Here are the three pillars of the Petrodollar idea.

Three Pillars of the Petrodollar Theory

1. Oil priced in dollars
2. Transactions settled in dollars
3. Oil revenue recycled into dollar-denominated assets

Mish vs Setser – Total Agreement

Mish – Pricing Unit

Pillar number one is nonsense. The pricing unit, outside of something totally illiquid like Yap Island stones, is irrelevant.

Yet, masses of economic illiterates still believe the Iraq war started because Hussein was going to price oil in euros.

Here’s the theory: Hussein made a threat to price oil in euros. War started. So the war was over the pricing unit.

Here’s the reality: Major currencies are fungible and can be traded at will. It does not take dollar reserves to buy oil anymore than it takes dollars to buy gold (which is not at all).

Q: Would oil priced in yuan or euros change the oil price in dollars?
A: No

Q: Would pricing oil in something other than dollars force countries to hold receipts in something other than dollars?
A: No.

Q: Then why would it matter?
A: It wouldn’t. End of story

Setser – Pricing Unit

It was never quite clear why oil pricing mattered quite as much as some claim.

It isn’t hard to pay for oil in a global currency like the euro, even if the underlying contract is priced in dollars.

There is a deep and liquid market for converting euros [Mish: or Yen etc.] into dollars, and a firm aiming to lock in the euro price of oil 3 months forward can buy oil forward in dollars and dollars forward with euros, thereby locking in a euro [Mish: or yen] price.

Mish – Settlement

Currencies are fungible. Something immediately settled in dollars does not have to remain in dollars.

What does matter is where a nation holds its reserves. But that is largely forced by trade surpluses, not conscious decisions.

Setser – Settlement

Dollar settlement is a problem for countries that are sanctioned by the U.S. and the EU and for frontier economies that cannot settle their oil bill in local currency, but it hasn’t required most European oil importers to build up big stocks of dollar reserves just to pay for oil.

What has mattered at times is how the big oil exporters manage their surplus funds when there is a surge in the global price of oil.

Yet the myths around petrodollars persisted long after they had lost most of their substance: the 1970s deal between Saudi Arabia and the United States to price oil in dollars never dictated the accumulation of dollar reserves in East Asia, and it should be clear by now that the U.S. commitment to defend the Saudis is based on much more than dollar pricing of oil.

Mish – US Independence

Direct Gulf state accumulation of dollars from the US has declined because the US is now largely (but not totally) oil independent. The US buys more from Canada for our needs than the Mideast.

Thus, the Gulf states are now dependent on Europe and Asia (especially China and India) for oil sales instead of the US.

Setser – US Independence

The U.S. is now a net oil exporter, not an importer, and has no direct need for Saudi supply.

The Saudis today are borrowers rather than lenders, big issuers of dollar-denominated bonds not buyers of Treasuries.

The Gulf monarchies are more equity investors than “bankers” to the world.

Mish – Oil Transactions

Oil ranks among the top traded commodities by value, but it represents a modest slice of total global trade (goods + services).

• Global Trade Total: Roughly $35 trillion (2025 UNCTAD estimate).
• Oil’s Share: Roughly $1.31 trillion for crude (OEC data for 2024) That’s about 3.7 percent of total trade.
• Mideast Assignment: Let’s generously assign 60 percent of that $1.31 trillion to Mideast petroyuan. The Mideast petroyuan would then be 2.2 percent of total global transactions that was a previously mix of dollars and euros.

The dollar share of global transactions as measured by payments is 50 to 60 percent. That would make the dollar-related transaction hit 3 to 4 percent.

Q: That’s it?
A: Yes. Even if 100 percent of all Mideast oil transactions were priced in yuan, settled in yuan, and reserves held in yuan, global US dollar transactions would only decline by 3 to 4 percent.

In contrast to the theories of Brown and Choyleva, I see a continued slow drip abandonment of dollars.

Setser – Oil Transactions

The Saudis aren’t going to generate a big surplus to reinforce the postulated petrodollar system with oil at around $100—not when their balance of payments breakeven (on around 7 million barrels a day of exports) is over $90 a barrel.

The GCC countries and Norway do still have a significant surplus, but that oil surplus had fallen to around $200 billion dollars or so in 2025 ($35 billion in Kuwait and the UAE, $25 billion in Qatar, and around $50 in Norway; the Saudi deficit $33 billion.

That is tiny relative to the $1.5 trillion surplus of “manufacturing Asia”—the buildup of dollars in the Chinese state banks and the buildup of offshore dollars in Hong Kong and Singapore from Chinese exporters drove the Eurodollar market.

“The glory days of the petrodollar are over,” says Brad Setser. That’s assuming there ever were glory days, something that Setser definitely hints at in his post.

Setser and I see things very much alike.

Instead, please note that slow drip abandonment of the dollar is what’s really happening. From my article …

Slow Drip Abandonment

1. Trump’s actions have increasingly alienated US allies. Countries are genuinely sick of Trump, for the right reasons.
2. The US has weaponized the US dollar (both Trump and Biden did this). Countries are fearful of getting caught in the crossfire.
3. Tariffs and tariff avoidance.
4. Trump has turned the US into an unreliable trading partner with his repeat threats, contradictions, and constant position shifts.
5. America First has become a “My way or no way” set of demands, not negotiation tactics.
6. Trade with the US is down and heading further down as a direct result of points 1 through 5.
7. Importantly, it’s not just petrodollars. There is pressure on all dollar-denominated transactions.
8. There’s a global incentive to shift away from dollars, when and where possible.

When and where possible is the key component of the slow drip abandoment idea. Dollar avoidance is not that easy or it would have happened in a major way already.

Trump has turned the US into an unreliable trading partner.

There are long-term consequences to Trumps threats. One of those consequences is US dollar avoidance.

Death of Dollar Silliness

Despite the above, the idea that the yuan will soon replace the dollar as the world’s reserve currency was then, and still is ridiculous for currency reasons, political reasons, and economic reasons.

Consider my October 25, 2017 take called Gold-Backed Petro-Yuan Silliness.

A massive amount of hype is spreading regarding China’s alleged ambitions to dethrone the dollar. The story this time involves China’s plan is to price oil in yuan using a gold-backed futures contract. Even if that were true, the impact would be zero. CNBC is now in on the hype: China has grand ambitions to dethrone the dollar. It may make a powerful move this year.

Repeat after me: It’s meaningless what currency oil is quoted in. Once you understand the inherent truth in that statement, you immediately laugh at headlines like that presented on CNBC.

Nothing has fundamentally changed regarding the yuan replacing the dollar as a major reserve currency.

China Flunks Five of Five Reserve Currency Tests

1. Currency Requirement: If China wants to assume the role of having the world’s reserve currency, something I highly doubt actually, it will need to have a free-floating currency.
2. Bond Market Requirement: If China wants to assume the role of having the world’s reserve currency, it will need to have a very large, if not largest, freely trading global bond market.
3. Balance of Trade Requirement: China would have to be willing to run trade deficits instead of seeking trade surpluses via subsidized exports.
4. Reserve Currency Curse Requirement: Having the world’s reserve currency is a curse because it necessitates a willingness to have endless trade deficits . Mathematically, as long as China runs surpluses, foreign holding of yuan will not match foreign holding of dollars. A mathematical corollary to having massive trade deficits year in and year is the need to have a very large, freely trading bond market. Adding gold into the yuan-futures mix does not alter the picture other than to add costs.
5. Capital Controls Requirement: The currency must move freely without capital controls.

No fundamental requirements have changed. Yet, here we go with “Déjà Vu all over again” on the petroyuan discussion.

The one thing that has changed is the desire to avoid dollars has grown stronger. There is a definite leak in the US dollar desirability boat.

But it’s a slow leak. And the petroyuan has little, if anything, to do with it.

Rather, persistent fiscal deficits and Trump’s treatment of allies have everything to do with it. The US has weaponized the dollar with sanctions on Russia and China.

Trump and Biden are both guilty of excess sanctions and weaponizing the dollar, but the origin of this mess starts well before either of them.

Dollar Debasement

Dollar debasement accelerated way back in February 1965 when French President Charles de Gaulle announced his intention to exchange its U.S. dollar reserves for gold at the official exchange rate of $35 per ounce.

Lyndon Baines Johnson was then president. The War in Vietnam and Johnson’s “War on Poverty” increased the US deficit and inflation.

On a campaign that promised to restore law and order to the nation’s cities and provide new leadership in the Vietnam War, Richard Nixon won the election in 1968.

Arthur Burns was Fed chair.

In 1971 President Nixon appointed the then Democrat John Connally as Treasury Secretary. That’s when things started rolling.

Our Currency But Your Problem

Shortly after taking the Treasury post, Connally famously told a group of European finance ministers worried about the export of American inflation that the dollar “is our currency, but your problem.”

By 1971, US money supply had increased by 10%. In May 1971, West Germany left the Bretton Woods system, unwilling to revalue the Deutsche Mark. Switzerland also started redeeming dollars for gold.

On August 5, 1971, the United States Congress released a report recommending devaluation of the dollar to protect the dollar against “foreign price-gougers“.

On August 9, 1971, as the dollar dropped in value against European currencies, Switzerland left the Bretton Woods system.

On August 15, 1971 Nixon directed Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold. He also issued Executive Order 11615, imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government had enacted wage and price controls since World War II.

So Much for Temporary

The move was not temporary. Abandonment of the gold standard removed all constraints on deficit spending.

There have not been any restraints on deficit spending since. Wars became easy to finance. Deficits? No problem. Congressional spending is out of control.

Paul Volcker, who replaced William Miller as Fed Chair, expressed regret over the abandonment of Bretton Woods.

China Joined the World Trade Organization (WTO)

China officially joined the World Trade Organization (WTO) on December 11, 2001

China’s inclusion into the WTO exacerbated global trade problems but did not cause them.

China did take advantage of WTO rules, adding to the “Reserve Currency Curse” set of problems.

What to Do About It?

Gold provided an enforcement mechanism that would have ended these imbalances.

No one wants to go back to gold because every nation and central bank wants to inflate at will.

China (and the world) would greatly benefit if China voluntarily stopped its export mercantilism. But China won’t.

Until this setup blows up in a global currency crisis, expect continual small leaks (unrelated to oil) in global dollar-denominated transactions.

When? I don’t know. Nor does anyone else.

Expect More Oil Priced in Whatever Silliness

Meanwhile, relentless Déjà Vu hype over meaningless “oil priced in whatever” nonsense will continue for many reasons.

• Hype sells
• Death of the dollar theories and conspiracy theories are sexy
• Petrodollar theories are like religion, not easily abandoned.
• Authors promote nonsense to sell books
• People hear something interesting and think they are geniuses for passing it on.