AI Summary
5 min read“The notion that reserves are the source of inflows into dollars is a bit dated,” says Brad Setser, the Whitney Shepardson Senior Fellow at the Council on Foreign Relations. In a wide-ranging conversation on the Odd Lots podcast, Setser dismantles popular narratives about petrodollars, de-dollarization, and the 1970s oil shock analogy, offering a more nuanced view of how global financial flows actually work in a moment of geopolitical crisis.
Why the 1970s Oil Shock Analogy Doesn’t Fit
The instinct to compare the current Iran crisis to the 1970s oil shocks is understandable but misleading. Setser points out two critical differences. First, the magnitude is nowhere near comparable: in the 1970s, oil prices doubled or tripled, rising six- to seven-fold in dollar terms by the end of the decade. Today, prices are up maybe 50% from their February lows. Second, the U.S. and Israel are the instigators of this crisis, not passive recipients of an Arab oil embargo. “We sort of started it,” Setser notes. “We in theory can end it.”
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What you'll learn
- 1 (05:42) **Historic Analogy: 1970s Oil Shock vs. Today** - Brad Setser assesses whether the current oil shock is a repeat of the 1970s, highlighting key differences in magnitude and origin.
- 2 (08:00) **Explaining the Gap Between Physical Oil Shock and Price** - Brad explains why the market isn't pricing in the full scale of the physical oil supply interruption.
- 3 (11:14) **Who Wins and Loses from the Oil Price Shock?** - Brad identifies the unexpected winners and losers in the current oil crisis, challenging the traditional petrodollar narrative.
- 4 (16:49) **The 1970s Legacy: Petrodollars and Financial System Change** - Brad traces how the 1970s oil shocks reshaped the global financial system, from the birth of petrodollars to the Latin American debt crisis.
- 5 (22:31) **Where Petrodollars Went in the 2000s** - Brad explains how the 2003-2014 oil boom led to a shift from safe reserves to sovereign wealth funds and equity investments.
- 6 (25:23) **The "Mildly Annoyed Brad" Insight on Dollar Dominance** - Brad provocatively argues that the dollar's role as a reserve currency is less important than its role in global equity portfolios.
- 7 (26:50) **Why Reserve Portfolios Are Underweight Dollars** - Brad explains the structural reasons why central banks hold a smaller share of dollars than private investors.
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Guests on this episode
Show Notes
It's possible that the war in Iran could reshape financial flows in significant ways. Perhaps the Gulf states will end up as less desirable places to do business. Perhaps Iran will have a tollbooth at the Strait of Hormuz. Perhaps this episode will accelerate the world's shift away from oil. It's impossible to say. But given the uncertainty, fresh questions are being raised about the existing financial world order, upon the top of which the US dollar sits. On this episode, we speak once again with Brad Setser, the Whitney Shepardson senior fellow at the Council on Foreign Relations. We discuss how the war is already creating new global imbalances, and the degree to which this episode parallels past energy shocks. We also talk about broader trends in reserve management, other factors driving financial flows, and the unique situation facing East Asia, which is seeing a surge in its energy import bills at the same time its making making a fortune selling chips for the AI boom.
Read more:
US Probes Suspicious Oil Trades Made Before Trump Pivots
China’s $51 Trillion Savings Help Bonds to Outperform During War
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