Petrodollar refers to United States dollars earned through the sale of its petroleum (oil) to another country.
Origin
In 1971 Richard Nixon was forced to close the gold window taking the U.S. off the gold standard and setting into motion a massive devaluation of the U.S. dollar. In an effort to prop up the value of the dollar Nixon negotiated a deal with Saudi Arabia that in exchange for arms and protection they would denominate all future oil sales in U.S. dollars. Subsequently, the other OPEC countries agreed to similar deals thus ensuring a global demand for U.S. dollars and allowing the U.S. to export some of its inflation. Since these dollars did not circulate within the country they were not part of the normal money supply, economists felt another term was necessary to describe the dollars received by petroleum exporting countries (OPEC) in exchange for oil, so the term petrodollar was coined by Georgetown University economics professor, Ibrahim Oweiss.
Because the United States was the largest producer and consumer of oil in the world, the world oil market had been priced in United States dollars since the end of World War II. International oil prices were based on discounts or premiums relative to that for oil in the Gulf of Mexico.[4] But, although oil sales prior to 1973 were denominated in U.S. dollars nothing precluded settlement in local currency.
In October 1973, OPEC declared an oil embargo in response to the United States’ and Western Europe’s support of Israel in the Yom Kippur War and this tension (and new power of OPEC) led to fear that the dollar would become insignificant in the oil trade.