New on FinoLib · Volume I: Global Economy
My latest article is now live on FinoLib, the free finance library I write: Petrodollar Explained: Oil, Reserves, Inflation and Deflation, from Volume I: Global Economy. Read the summary below for the substance of the topic, then continue to FinoLib for the complete treatment.
1.6 Petroleum and the Petrodollar System
The idea in plain words
The petrodollar system means oil is priced, and mostly paid for, in US dollars, with the earnings recycled into US assets. It took shape after 1971 and the 1973–74 oil embargo. No treaty ever required dollar-only oil sales: the habit grew because dollar assets offered a deep, safe place for the money to go.
Key points
■After the Nixon Shock of 1971 and the 1973–74 Arab oil embargo, which pushed the price of a barrel up roughly fourfold, Washington moved to bind Saudi Arabia more closely to the dollar system.
■Saudi Arabia still held $142 billion of US Treasury securities in July 2026.
A closer look
The petrodollar system is the arrangement in which oil, the world’s most important traded commodity, is priced and mostly settled in US dollars, and the dollars earned by exporters are reinvested in US assets. It reinforced the dollar’s role as the world’s reserve currency after the end of Bretton Woods.
Recap
The petrodollar system prices and mostly settles oil in dollars and recycles the earnings into US assets. It took shape after the 1971 Nixon Shock and the 1973–74 embargo, which raised the oil price roughly fourfold. No published treaty obliged anyone to sell oil only for dollars; the habit was entrenched by a deep, safe home for dollar earnings.
1.7 Foreign Exchange Reserves — Why Countries Keep Piles of Other Countries’ Money
The idea in plain words
Foreign exchange reserves are a country’s buffer of foreign currencies and gold, held to defend its currency, pay for imports and service foreign debt. The 2022 freezing of Russia’s reserves showed that money held in another country’s system carries political risk.
Key points
■Of roughly $13.2 trillion in official foreign-currency reserves (gold excluded), 56.7% was held in US dollars in mid-2026, according to the IMF.
■Countries hold reserves to defend their currency from speculative attack, pay for imports during export shortfalls, service foreign-currency debt, signal stability and keep a buffer for crises.
A closer look
Foreign exchange reserves are holdings of foreign currencies, gold and other internationally accepted assets maintained by a country’s central bank. They work as a national savings account held in foreign currency.
Recap
Foreign exchange reserves are a central bank’s foreign currencies, gold and other international assets, held to defend the currency, pay for imports, service foreign debt and buffer crises. About $13.2 trillion is held worldwide, of which 56.7% is in US dollars; China holds the most. Adequacy is measured by import cover (reserves ÷ monthly imports) and short-term debt cover. India’s $691 billion covers about 10.8 months of imports.
1.8 Inflation and Deflation — Why Prices Rise and Fall
The idea in plain words
Inflation is a rise in the general price level, measured as headline (all items) or core (excluding food and energy). The Fed targets 2% PCE inflation and the RBI targets 4% headline CPI, with a band of 2 points either side. Both demand-pull and cost-push causes played a part in the 2021–23 surge.
Key points
■In June 2022 US headline CPI inflation was 9.1% and core was 5.9%; the 3.2-point gap was food and energy.
■A 4% pay raise in a year of 3.4% inflation is a real raise of only 0.58%.
A closer look
Inflation is when prices rise over time, meaning each unit of money buys a little less than it used to. Deflation is the opposite — prices falling over time. Inflation is most commonly measured using the CPI (Consumer Price Index), which tracks the price of a representative basket of everyday goods and services — food, housing, transport, clothing, healthcare — over time, each weighted by its share of household spending.
A worked example
Case Study — The 2021–2023 Inflation Spike
The 2021–2023 inflationary episode was the sharpest peacetime price surge in four decades, and a textbook example of how multiple inflation triggers can collide simultaneously. The triggers: First, COVID-19 caused massive supply chain disruptions — factories closed, shipping containers were stranded, semiconductor production lagged global demand. At the same time governments spent heavily to protect incomes (the US American Rescue Plan of March 2021 alone added about $1.8 trillion to deficits, by the Congressional Budget Office’s estimate), creating a surge of demand precisely when supply was constrained.
Recap
Inflation is measured as headline (all items) or core (excluding food and energy); the Fed targets PCE inflation at 2%, while the RBI targets headline CPI at 4% ± 2%, with food 36.75% of India’s new CPI basket. Demand-pull inflation comes from spending outrunning output and cost-push from rising costs; the 2021–23 surge combined both, and economists still disagree over the weights.
What the full article covers
In the full article I take you through these sections:
■1.6 Petroleum and the Petrodollar System
■1.7 Foreign Exchange Reserves — Why Countries Keep Piles of Other Countries’ Money
■1.8 Inflation and Deflation — Why Prices Rise and Fall
It includes worked examples, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume I: Global Economy
Read the full article on FinoLib
The complete article, Petrodollar Explained: Oil, Reserves, Inflation and Deflation, with every worked example, diagram, quiz and source, is free to read in Volume I, Global Economy on finolib.com.
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