Credit: Slug Signorino

A friend warns that the impending collapse of the petrodollar, devised by Henry Kissinger as the world’s reserve currency when the United States dropped the gold standard, will bring down the entire U.S. financial system. How worried should I be? —Kingsley Day

How many gallons of water should you stock in the emergency cellar? Will three AR-15s suffice, or does the well-equipped arsenal really demand four? If these be your concerns, Kingsley, you’ll find a fantastic resource in the Internet, the petrodollar and the havoc that’ll result from its impending collapse being an extremely popular topic among the black-helicopter set. You can’t go wrong with freeze-dried peas, I hear.

A calmer assessment reveals a more prosaic concept. What we talk about when we talk about petrodollars is international oil sales as transacted in U.S. dollars—which is to say, oil sales: the dollar has long been the standard currency for all such dealings.

The primary world reserve currency, meanwhile, is the very same dollar—full stop. The origins of this arrangement hark back to Bretton Woods, the 1944 confab of Allied nations where it was decided that the dollar would be the world’s backup buck, backed itself by gold at a fixed rate of $35 per ounce. International spending, though—and it was a spendy era, what with the rebuilding of Europe, the Great Society, the Vietnam War, etc—promptly grew to dwarf the Fort Knox reserves, which at one point held only a third of the gold needed to cover the dollars in foreign circulation, prompting fears of a run on the place. In 1971 President Richard Nixon suspended the direct convertibility of the U.S. dollar into gold, bringing about a system of floating, rather than fixed, exchange rates. Among other things this move, the so-called Nixon Shock, increased the ability of the Federal Reserve to influence monetary policy, which in turn, decades later, led yahoos like Ron Paul and Ted Cruz to pine for a return to the gold standard. (Most economists continue to see this as a pretty bad idea.)

But the key development of the era, for our purposes, was a deal where, in exchange for U.S. military support and other preferential treatment, the Saudis agreed to conduct oil transactions in dollars only. Soon OPEC as a whole signed on. As prices shot up in the ’70s, oil-exporting countries in the Middle East found themselves with more dollars than they knew what to do with; they placed them in U.S. and British banks, which in turn used the dollars to make loans to developing countries that needed the money to . . . import oil, the resulting relationship of indebtedness a boon to U.S. global hegemony. Sound a bit Kissingerian? Well, the whole thing was Henry’s baby: he called the scheme “recycling petrodollars.” (“Petrodollars” as opposed to, say, “dollars” because they don’t circulate in the U.S.; economists thought it’d be useful to make the distinction.) Conveniently, the Saudis also used their petrodollar surpluses to buy munitions from American arms manufacturers, who, with Vietnam winding down, were grateful for the business. All around, a shining example of U.S. foreign policy: we enrich ourselves and impoverish the developing world while selling weapons to jerks.

Doffing your tinfoil hat, then, you come to see the petrodollar bathed in the glow of ’70s and ’80s nostalgia, like disco and Oliver North. What relevance does it have nowadays? Well, to hear the, er, more concerned parties tell it, if the oil-producing countries decide to stop using the dollar for oil transactions—switching to, say, the euro—it’ll send the world economy into a tailspin. There has been a little attrition, most notably in 2000 when the United Nations’ “oil for food” program gave Iraq permission to sell its oil for euros; hardcore skeptics cite this threat to the rule of the petrodollar as a contributing factor in the U.S. invasion. Since then Iran has switched to conducting its oil transactions in euros, and recently Gazprom Neft, Russia’s third-largest oil producer, began selling oil to China in exchange for renminbi. But an abrupt abandonment of the petrodollar system is in nobody’s best interest: since most major nations continue to back their own currency with the U.S. dollar, everybody’s got some skin in the game vis-à-vis keeping that currency stable.

That’s not to say the petrodollar regime isn’t a bit sensitive these days, but it’s for another reason: fracking. Environmental implications aside, hydraulic fracturing (discussed here in 2013) has put major shale oil reserves in play and (for now, at least) upended the world energy market. In 2011, for instance, the U.S. imported about $360 billion worth of oil; by 2015, that number had dropped to $120 billion. One estimate last year pegged OPEC’s 2015 profits at $350 billion lower than those in 2014—the largest year-over-year drop ever. Oil gazillionaires who spent the commodity-boom aughts buying up Manhattan penthouses are now rapidly burning through their petrodollar savings; if the trend continues, Bloomberg suggested, demand will fall for “everything from European government debt to U.S. real estate.” Not nothing, in other words, but neither is it global collapse. —Cecil Adams