The phrase petrodollar warfare refers to a hypothesis that one of the driving forces of United States foreign policy over recent decades[when?] 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 wars is sometimes used with the same meaning.
Most 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 upwards pressure on 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 they otherwise would be able to. As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries. A stronger USD also means that goods imported into the United States are relatively cheap.
Another component of the hypothesis is that the price of oil 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. The price of oil can be an important political factor; U.S. administrations are quite sensitive to the price of oil.
Political enemies of the United States therefore have some interest in seeing oil denominated in euros or other currencies. The EU could also theoretically accrue the same benefits if the euro replaced the dollar. However, the European economy could also be seriously damaged if the euro were to appreciate significantly against the dollar or other world currencies, particularly its exports which would become relatively more expensive for the rest of the world. The same dynamic can apply to the dollar and the U.S. economy, as well.
In 2000, Iraq converted all its oil transactions under the Oil for Food program to euros. When U.S. invaded Iraq in 2003, it returned oil sales from the euro to the USD.
The Government of the Islamic Republic of Iran takes this theory as fact. As retaliation to this policy seen as neoimperialism, Iran has made an effort to create its own Iranian Oil Bourse which has sold oil in Gold, Euros, Dollars, and Japanese Yen since its opening. The theory is supported historically by Iranian intellectuals as a move made by the American elites after World War II with the Bretton Woods Act, taking away Gold backing from the Pound Sterling and discreetly starting the eventual pegging of Gulf Arab Oil producers' currencies after Britain gave them independence in 1961 and 1971. These countries were further secured militarily after the Gulf War in 1990. This pegging of the currencies along with the exchanges being exclusively in USD in only two places, the IPE in London and NYMEX in New York City, has given the United States a near monopoly, with growing economies such as India and China waiting in line for orders. Critics say this revolutionary move by Iran in creating a rival market may also be one of the reasons for the ongoing energy-related US competition with Iran.
In mid-2006 Venezuela indicated support of Iran's decision to offer global oil trade in the euro currency.
A controversial change like that in Iran would have limited ability to influence the denomination of sales one way or the other. A large number of traders would have to agree to a change in denomination before a significant change would occur.