Petrodollar and Gas Prices

Not many people have heard of the petrodollar, and many people don’t know what affects gas prices. Gas is one of the only necessities we allow for such drastic price fluctuations. 

The petrodollar is a system that most of the world uses to buy crude oil. Gas prices are determined by many factors, including supply and demand and crude oil prices. 

Petrodollar History

Before we understand petrodollar, we must first understand its history in terms of currencies and economics [1]. 

• In current society, there is no gold backing of the US dollar. We have a fiat currency, money without any support by any reserves. 
• Post-WWI, with a war-torn Europe, the US had the most gold and a strong currency. It was before WWII money was backed by gold. In 1944 a conference of 44 countries was held in New Hampshire to discuss currencies. 
• The decision was then made to back currencies by the stable US dollar and then have the US dollar be backed by gold.
• Imports and exports worldwide were bought and sold using the US dollar, which gives the US a lot of power through sanctions. In 1971 Nixon proclaimed that the US dollar would not be backed by gold. 
• The Vietnam war was financed entirely and funded by debt. When Nixon broke away from the gold as the reserve, the dollar dropped in value, making it hard to pay off debt, and shooting crude oil prices from $2 a barrel to $12 over two years. 
• To save the US, Nixon and his Secretary of State and National Security Advisor Henry Kissinger came up with a plan. Treasury Secretary William Simon was sent to Saudi Arabia. 
• Their idea was the petrodollar. 
• It was the concept of having the US dollar be used in exchange for oil. With that agreement, Saudi Arabia would get military and economic support. 

The petrodollar is the agreement between the US and Saudi Arabia to sell its oil in dollars. The most valuable resource is oil. It allowed the USD to be the most dominant currency and a hedge for other countries [2].  

What Determines Gas Prices

The first thing that affects oil cost is crude oil. Starting with the quality, there are different types of oil depending on where it comes from. There is a grading system for oil. OPEC regulates oil supply by their largest manufacturers [3]. 

• Crude oil has the most significant influence on price. The cost is determined by supply and demand. It includes the resources it takes for exploration, to remove it from the ground, and transport it to where it needs to go. Demand is higher in the summer months and lowers in the winter; the price follows the market. Some countries also store gasoline to drive demand. 
• Tax is another influencer on gas prices; federal and state taxes are also pushed on consumers. In July 2019, the federal, state, and local taxes on a gallon of gasoline totaled an average of 18% of the total price. Federal tax made up 18.4 cents, while state tax made 29.66 cents. Marketing and distribution costs are also pushed on the consumer. You’re not only paying for the gas but also the cost of advertisements and everything in between [4].

The top five sources of U.S. total petroleum (including crude oil) imports by share of total petroleum imports in 2020 were

1. Canada 52%
2. Mexico 11%
3. Russia 7%
4. Saudi Arabia 7%
5. Colombia 4%

Want to know more about how Petrodollar works? Check out the full episode here 👇

SHOW NOTES:

0:09 Introduction with the Hosts/Affiliates/Updates
0:21 Petrodollar
16:11 What determines gas prices
17:45 Crude oil
19:43 Tax
31:15 Marketing distribution costs