In order to understand what the petrodollar is, you have to first take a look at history. In 1945 The Brettonwoods agreement established the dollar as the world reserve currency. What this meant was that all international commodities were priced in US dollars. This was based on the fact that the United States agreed that it would convert currency into gold (and gold into US dollars) at a rate of $35 per ounce of gold. This was done on the honor system since the Federal Reserve would not allow auditing of any of their books or printing presses.
In the years leading up to the Vietnam war (late 1960’s), it became apparent to the world that the US was printing more dollars then it had gold and countries around the world started demanding their gold back from the US. (The US has been holding gold for other countries around the world in Fort Knox and other locations) Finally, in 1971 when France asked for all its gold back, President Nixon refused.
It was true that the US was printing more money than it had gold to back it up at $35 an ounce so President Nixon “temporarily” took the United States off of the gold standard it would no longer convert gold into dollars at a rate of $35 per ounce. For all the countries around the world that the US was holding gold for, this was nothing less than THEFT!!!
In 1973, President Nixon asked The king of Saudi Arabia to except only US dollars as payment for oil into invest any excess profits in US treasury bonds, notes and bills. In exchange, Nixon offered full military protection of all of Saudi Arabia’s oil fields. This offer was also extended to all of the key oil producing countries and in 1975 every member of OPEC had agreed to only sell their oil in US dollars.
This act resulted in what is called the petrodollar whereby every country in the world was forced to buy their oil in US dollars which meant that they had to keep reserves of US dollars. How did they get these dollars? They had to send real physical goods to America in exchange for the US dollars which resulted in America becoming the richest nation in the world