The term, petrodollar warfare, refers to a theory that one of the driving forces of the foreign policy of the United States has been the status of the United States dollar as the world's dominant reserve currency and as the currency in which oil is priced. The term was coined by William R. Clark, who has written a book with the same title. The phrase oil currency war is sometimes used with the same meaning.
The United States dollar is the de facto world currency. Accordingly, almost all oil sales throughout the world are denominated in United States dollars (USD). According to proponents of the petrodollar warfare hypothesis, because most countries rely on oil imports, they are forced to maintain large stockpiles of dollars in order to continue imports. This creates a consistent demand for USDs and ostansibly supports the USD's value, regardless of economic conditions in the United States. This in turn allegedly allows the US government to gain revenues through seignorage and by issuing bonds at lower interest rates than supposedly they otherwise would be able to.
As a result, the U.S. government, according to this theory, can run higher budget deficits at a more sustainable level than most other countries can. The theory points out that a stronger USD also means that goods imported into the United States are relatively cheap (although the country's exports become relatively more expensive for the rest of the world).
Another component of the hypothesis is that the price of petroleum is more stable in the U.S. than anywhere else since importers do not need to worry about exchange rate fluctuations. Since the U.S. imports a great deal of oil, its markets are heavily reliant on oil and its derivative products (jet fuel, diesel fuel, gasoline, etc.) for their energy needs. As the price of oil can be an important political factor, U.S. administrations are quite sensitive to the price of oil.
||The examples and perspective in this section may not represent a worldwide view of the subject. (February 2014)|
||This section may be unbalanced towards certain viewpoints. (February 2014)|
The petrodollar system originated in the early 1970s in the wake of the Bretton Woods collapse. President Richard Nixon and his Secretary of State, Henry Kissinger feared that the abandonment of the international gold standard under the Bretton Woods arrangement, combined with a growing US trade deficit, and massive debt associated with the ongoing Vietnam War, would cause a decline in the relative global demand of the US Dollar.
In 2005, William Roberts Clark, Professor and Faculty Associate, Political Science Department, Center for Political Studies, University of Michigan, Ann Arbor, published a work which claimed that a "petrodollar warfare" was under way between mainly the Euro and the United States Dollar waged in the field of world petroleum trade.