Hello, welcome to Investor’s Bookshelf. Today I will be interpreting for you this book, titled The Eye of Oil.
We know that oil is called “the blood of the modern economy.” Today, oil is widely used in all aspects of our production and daily life. It is not only the main fuel for cars on highways but also the primary source of power for ships in maritime transport and airplanes in air transport, while also serving as a fundamental raw material in the chemical industry. Not only does industry require oil, but modern agriculture and the service sector are inseparable from it as well. Although many people may never have seen crude oil with their own eyes, almost everyone has used petroleum-based products such as plastics, shower gels, and synthetic fiber clothing. Every day, our lives are directly or indirectly connected to oil.
In fact, the significance of oil to the modern economy goes far beyond that. It is both a commodity and a financial investment product, one of the most important trading assets in international commodity markets, and a pricing benchmark for many financial instruments in the capital market. Think of those familiar terms: “oil trade,” “oil finance,” “petrodollar,” “oil diplomacy,” “oil wars,” and so on. You will find that oil has already been deeply embedded into the operational cycle of the global economy, pulling on the lifeblood of every economic entity in the world market.
The Eye of Oil is a book about the oil economy. The topics it discusses include the distribution of oil reserves, oil production and consumption, and the economic rise and fall of oil-producing countries, presenting us with a panoramic view of the world oil market. But this book is not only about oil; it is also a book about the world economy. On the one hand, because the oil market is profoundly influenced by macroeconomics, any discussion of oil inevitably involves macroeconomic perspectives; on the other hand, because over years of economic research, the author increasingly found that the oil market is a pair of “eyes” for understanding the macroeconomy. Oil prices can be regarded as the pulse of the world economy. More specifically, we will explain this in detail later.
The author of this book is Feng Ming, a researcher at the National Academy of Economic Strategy of the Chinese Academy of Social Sciences. He obtained his PhD in economics from Tsinghua University and was a visiting scholar in the Department of Economics at Harvard University, as well as a research fellow at the China Center for Economic Research at Tsinghua University. His main fields of research are macroeconomics and international finance.
It is worth mentioning that when he completed this book, he was serving as a researcher of the Chinese Academy of Social Sciences while carrying out fieldwork in impoverished rural areas of Gansu Province. There, he lived in villages, visited households, and participated in road construction, constantly observing and reflecting in the process. He discovered that even in the deep inland of the Northwest, in the vast Gobi Desert, in such a remote rural town, people’s daily production and life could not escape reliance on oil, nor could they detach from dependence on the external economy. Moreover, by “external,” he did not mean the county town, provincial capital, or coastal regions of China, but rather the global economy. The petroleum products or petrochemical goods used in the town not only came from nearby Qinghai or Xinjiang but could also have originated in faraway Saudi Arabia, Angola, or even Venezuela on the other side of the globe. The rhythm of the world oil economy and the waves of the oil market affect an economy not only at the macro level but also penetrating into every micro corner.
In today’s interpretation, I will focus on the two main threads that the book seeks to present, to bring you closer to the oil economy. In the first part, we will emphasize “oil,” to look at the panorama of the world oil market and the role oil plays in national economic operations. In the second part, we will emphasize “economy,” focusing on an important thread in observing the world economy mentioned in this book—the petrodollar—to see how it has shaped today’s international monetary system and how the influence of oil prices has been transmitted into global financial markets and the real economy.
Part One
Alright, let’s begin with Part One. Let’s take a look at the panorama of the world oil market, and the role that oil plays in the operation of national economies.
Before we officially begin, we should spend half a minute clarifying the concept of “oil.” Generally speaking, when the international market or news reports mention “oil prices,” they usually refer to “crude oil prices.” Crude oil is oil that has been extracted from wells and has not yet been refined. What we usually call “petroleum products” in daily life—such as kerosene, gasoline, diesel, lubricating oil, and so on—are all products refined from crude oil. In today’s interpretation, when we mention oil, we are generally referring to crude oil.
The first wave of industrialized products that oil brought to humanity was kerosene. Because kerosene has a low boiling point, it is relatively easy to refine from crude oil. From the late 1860s to the 1880s, households around the world mostly used kerosene lamps for lighting. Later, however, with the invention and spread of electric lamps, the use of kerosene declined.
So, when did oil become truly indispensable in real life? Roughly at the beginning of the 20th century, around the time of World War I. By then, gasoline and diesel engines had been around for years, and automobiles and trucks were beginning to be widely used. It was then that liquid fuels refined from oil, such as gasoline and diesel, began to show their true value. Oil became an indispensable part of human economic and social life, marking the beginning of the oil economy.
Today, the operation of economies around the world cannot do without oil. First of all, it is a very important source of energy. According to statistics from the International Energy Agency, in 2021, oil accounted for 31% of global energy consumption, ranking first, meaning it was the most widely used. Natural gas was second at 27%, and coal was third at 25%. Together, these three sources already made up more than 80%, while the so-called “new energies” often mentioned today—such as hydropower, nuclear power, and renewable energy—added up to only a little over 10%.
Oil is not only the world’s number one source of energy but also an important industrial and chemical raw material. In the field of transportation, cars on the streets need gasoline; airplanes in the sky need kerosene; cargo ships on the seas need diesel. In agriculture, various machines used for planting and harvesting require gasoline and diesel for power; moreover, fertilizers, pesticides, and herbicides also require oil for their production. In addition, asphalt for highways, petroleum coke, sulfuric acid, plastics that we use daily, and synthetic fibers in our clothing—all come from the refining and processing of oil. Clearly, in today’s world, no economy can function normally without oil.
However, this precious and indispensable resource is unevenly distributed across the globe. Some countries are extremely rich in oil resources—“swimming in oil,” so to speak—while others have little or no reserves under their territory. This uneven distribution means that a small number of countries provide most of the oil needed for the global economy, while the majority of countries must rely on imports.
From the perspective of oil production, in 2021, the world’s largest oil producer was the United States, followed by Russia, and then Saudi Arabia. China’s annual oil output was also substantial, ranking sixth globally, but still far behind the top three, amounting to only about 37% of the output of the top producer, the United States.
At this point, you may feel puzzled. When we talk about major oil-producing countries, people usually think of many countries in the Middle East. How could it be that the world’s largest oil producer is actually the United States?
First, the United States does indeed have abundant oil resources, especially near the Gulf of Mexico. Moreover, in recent years, American oil and gas extraction technologies have made breakthroughs, enabling large-scale exploitation of previously difficult-to-extract shale oil. This gave U.S. oil production a huge boost.
However, not all oil-producing countries export oil. Although the United States is a major oil producer, it also consumes a lot of oil. Most of what it produces is consumed domestically. Therefore, producing a lot of oil does not necessarily mean exporting a lot of oil. Only countries whose production far exceeds their domestic consumption become major oil exporters.
According to 2021 statistics, the top three oil exporters in the world were Saudi Arabia, Russia, and Iraq. Among them, Saudi Arabia and Iraq are in the Middle East. Looking further at the top 20 oil exporters, the majority are located in the Middle East and Africa. This aligns well with our common impressions.
Apart from individual countries, there is also an organization called OPEC, the Organization of the Petroleum Exporting Countries. It includes 13 member states, all of which are major oil exporters, such as Saudi Arabia, Iraq, the United Arab Emirates, Nigeria, Angola, and Venezuela. More than half of the top ten oil exporters are OPEC members. As an international organization, OPEC adjusts its total oil production in response to the world oil market situation and global economic growth, setting production quotas for each member country in order to maintain stable oil prices and secure good revenues for oil-exporting countries.
However, not all of these oil-exporting countries are wealthy. Some, despite having abundant oil resources, have long struggled to escape poverty and underdevelopment—for example, Venezuela, Nigeria, and South Sudan.
Economic researchers have found that the more a country depends on oil, the lower its level of economic development tends to be. Specifically, such countries often have relatively undiversified industrial structures. Since they gain substantial profits from oil exports, their motivation to develop other industries is greatly reduced. This is detrimental to the overall health of the economy.
Looking more broadly, this issue is not limited to oil but also applies to many resource-rich countries or regions—for example, Mexico, Angola, and Zambia. Their level of economic development is often far lower than that of resource-poor countries or regions, such as Japan, South Korea, and Singapore. Moreover, their economies are prone to wide fluctuations and instability. This phenomenon is often referred to as the “resource curse.” The author believes that the underlying principle is similar to what we just mentioned. Behind the “resource curse” lies the “curse of industrial monoculture.” Excessive reliance on exporting natural resources—industries with low added value—not only harms an economy’s health and sustainability but also traps it in a precarious situation of “living off the heavens.” Here, “heavens” does not refer to climate conditions but to the fluctuations of the global economy. When the world economy prospers and resource prices are high, these economies enjoy more revenue. But once the global economy falls into recession and resource prices hit bottom, these economies face crises: trade deficits, currency depreciation, debt defaults, soaring inflation, and a series of other problems.
Therefore, a key way out of the resource curse is to optimize the industrial structure and shift the focus of industrial development toward higher value-added and more diversified industries. Countries such as Australia, Chile, and Norway have successfully broken the “resource curse” through this approach. This is also the direction that many resource-based economies are striving toward.
So far, we have discussed the role of oil in national economies, examined the supply situation in the world oil market, and touched upon the problem of the resource curse faced by economies dependent on resource exports. Next, let’s look at the demand side of the world oil market.
Which countries have the greatest demand for oil? Generally speaking, the larger the population and the bigger the economy, the greater the demand for oil. The United States, as the world’s largest economy, is also the biggest consumer of oil. Ranking second and third are China and Japan. These are the 2021 figures. As we can see, this ranking is consistent with the top three GDP rankings of the same year. Moreover, for at least the past decade, this pattern has rarely been broken.
If we look beyond the top three and compare the top 30 oil-consuming countries with the top 30 economies by GDP, we find that most rankings are also quite similar. However, there are exceptions. For example, although Singapore is a small country, in 2021 it ranked only 37th globally in GDP, yet it was the world’s 15th-largest oil consumer. Meanwhile, Saudi Arabia and Iran, though not large economies, are also major oil consumers.
This is because a country’s oil consumption depends not only on the size of its economy but also on its economic structure and energy structure. For example, shipping and petrochemicals are key pillar industries in Singapore. So, although Singapore’s economy is relatively small, its oil consumption is significant. Similarly, countries such as Saudi Arabia and Iran are rich in oil resources, and since oil accounts for a large share of their energy mix, with relatively little coal and natural gas, they also rank as major oil consumers.
Part Two
Earlier, we discussed the role of oil in the operation of national economies, as well as the supply and demand situation in the world oil market. Next, let’s turn to one of the key insights in this book—an important perspective for observing the world economy through oil: the petrodollar.
The so-called “petrodollar,” broadly speaking, refers to the U.S. dollars earned by major oil-producing countries through exporting oil. At first glance, this may sound like nothing more than a pile of money. However, the author reminds us that the role petrodollars play in today’s world economy is far greater than most people imagine.
First of all, the petrodollar established the current position of the United States in the international monetary system. This story begins in 1944. At the Bretton Woods Conference that year, the “gold exchange standard with the U.S. dollar” was established. After the conference, only the U.S. dollar had a fixed exchange rate with gold. Other currencies could not be directly exchanged for gold and had to be pegged to the dollar. This cemented the dollar’s “top dog” status in the international monetary system at the time.
However, to keep that position secure, the dollar had to maintain its fixed exchange rate with gold. By the mid-to-late 1950s, U.S. exports began to shrink continuously, leading to large trade deficits. In the 1960s, the situation worsened as the United States became mired in the Vietnam War, suffered severe domestic inflation, and experienced negative GDP growth. By the 1970s, the U.S. had accumulated massive trade and fiscal deficits, making it increasingly difficult to maintain the dollar-gold peg. Finally, in August 1971, President Richard Nixon decided to abandon the gold exchange standard, bringing the Bretton Woods system to an end.
But the United States had no intention of relinquishing its “top dog” status in the international monetary system. So what could be done? The answer lies in the petrodollar. At the time, the Middle East was in turmoil. U.S. Secretary of State Henry Kissinger advised the president that the U.S. could send troops there, offering military protection in exchange for OPEC members agreeing to accept the U.S. dollar as the sole pricing and settlement currency for oil exports. This meant that any country needing oil had to obtain dollars to pay for it.
This single move had two major economic consequences. First, it allowed the United States to purchase oil simply by printing money, thereby influencing—even manipulating—international oil prices. Second, and more importantly, it restored the U.S. dollar as the unavoidable, dominant reserve and settlement currency for countries worldwide, reinstating its top position in the international monetary system. As we discussed in interpreting the book The Pinnacle of Power, this not only meant that the U.S. could repay debts by printing money and levy seigniorage on the world, but also that the U.S. could influence other countries’ policies through its currency to safeguard its own interests.
Thus, by securing control over oil as a key “economic lifeline,” the U.S. consolidated its international position from three dimensions: the real economy, monetary and financial systems, and geopolitical strategy. This laid the foundation for the dollar’s present dominance in the global monetary order.
However, by 2022, the petrodollar system was no longer as stable as before. Recall that OPEC members, led by Saudi Arabia, had originally agreed to use the dollar as the sole unit of account for oil transactions in exchange for U.S. military protection, backed by America’s strong national credit. Yet after the outbreak of COVID-19 in 2020, the Federal Reserve acted “decisively” in March: cutting interest rates twice in one month to nearly zero, and launching unlimited quantitative easing, meaning the central bank could provide unlimited liquidity to markets. This seriously undermined the dollar’s monetary credibility. Moreover, the U.S. failed to fully honor its security commitments to Saudi Arabia and others, not providing sufficient military support.
In March 2022, multiple outlets including Global Times reported that Saudi Arabia was considering ending the dollar’s exclusive role in oil transactions. Around the same time, the Prime Minister of Belarus announced that Russia and Belarus were working on a new pricing formula for oil supplies, with plans to abandon dollar payments for energy.
Thus, while the petrodollar system still exists today and has yet to be replaced, we cannot ignore the cracks that have begun to appear. Once the petrodollar collapses, the international monetary market would undergo an upheaval of historic proportions.
As Gal Luft, Executive Director of the Institute for the Analysis of Global Security, said: the oil market is a commodity market that extends across the globe. It is the insurance policy for the dollar’s reserve currency status. “If this stone is removed from the wall, the wall will start to collapse.”
This is the first major economic impact of the petrodollar, and one important reason why we must continue to pay attention to both the oil market and the petrodollar.
The second reason we must focus on the petrodollar is that, as an important source of capital in international financial markets, its expansion or contraction creates major waves, even spilling over into the real economy. As mentioned earlier, broadly speaking, petrodollars are the dollars that oil exporters earn from selling oil. What do these countries do with those dollars? Primarily two things: consumption and investment.
Consumption mainly means importing goods and services. The goods are straightforward—cars, airplanes, home appliances, daily necessities, mineral products, etc. Services include consulting, financial, and legal services. Before the 1980s, this was the primary way petrodollars flowed out of oil-exporting countries.
After the 1980s, however, oil exporters began using their dollar earnings to build up foreign exchange reserves. Initially, these petrodollars were mainly invested in U.S. Treasury bonds or deposited in American and European commercial banks. Later, they expanded into corporate bonds, stocks, and real estate, with their capital flowing beyond the U.S. and Europe to places like Japan, Singapore, Latin America, and China. In this way, large amounts of petrodollars entered international financial markets.
If we liken the global financial market to a swimming pool, then the capital within it is like the circulating water. The inflow of petrodollars is like adding a large new inlet and outlet to this pool. Naturally, the volume flowing in and out through this channel creates strong ripples across the pool.
Consider the periods of high oil prices. During such times, oil-exporting countries accumulate massive petrodollar surpluses. Historical data shows that, after subtracting what is spent on consumption, more than two-thirds of the remainder flows into international financial markets. For instance, between 1974–1980 and 2000–mid-2014, international oil prices were high, trade surpluses of oil-exporting countries accumulated quickly, and petrodollars became a key incremental source of capital for global markets.
In the absence of a comparable increase in investable assets, this influx of capital pushes up the prices of existing assets. It is like pouring more water into a pool without expanding it—the water level rises rapidly, creating turbulence. If asset prices already contain bubbles during certain historical periods, the inflow of funds can inflate those bubbles further and accelerate their collapse. Research has suggested that the inflow of petrodollars was a contributing factor in the emergence and bursting of the U.S. subprime mortgage crisis.
That describes the boom times. But when oil prices fall, the situation reverses. As oil prices drop, exporters’ revenues shrink, leaving them with far fewer dollars to invest. Worse still, during such times, many oil-exporting countries face economic and fiscal difficulties, sometimes even forced to withdraw funds from international markets to cover budget deficits. As a result, the “water level” of global financial markets falls sharply.
This leads directly to declines in asset prices. For example, in the second half of 2014, falling oil prices reduced liquidity in international markets, triggering drops in many asset classes. In March 2020, Saudi Arabia unilaterally announced an increase in oil production, causing oil prices to crash, which in turn sparked declines in numerous other global financial assets.
Moreover, when market liquidity contracts, investors become more cautious and risk-averse. The global wave of selling risk assets from June to August 2016 was heavily influenced by the contraction of petrodollars. If this contraction persists long-term, the cost of capital rises, meaning real interest rates increase. This affects corporate financing and investment decisions, as well as household consumption and savings, ultimately impacting the macroeconomy.
Therefore, the author argues, fluctuations in oil prices do not merely affect oil markets or oil-producing and oil-consuming countries directly. Instead, through the mechanism of the petrodollar, these fluctuations transmit their influence to international financial markets, and even to the global real economy. Thus, at certain times, oil prices are a vital signal for observing the functioning of the world economy; and the petrodollar is the key transmission mechanism that allows this signal to exert its force. It is also a critical clue for us in understanding global economic dynamics.
Conclusion
The above is the key content from The Eye of Oil that I wanted to share with you. Let’s summarize:
In Part One, we discussed the role of oil in the operation of national economies and the supply and demand situation in the world oil market. We saw that in today’s world, no economy can function normally without oil. However, this precious and indispensable resource is distributed very unevenly across the globe.
At present, most of the world’s top twenty oil-exporting countries are located in the Middle East and Africa. Yet these oil-exporting nations are not all wealthy—some have long struggled to escape poverty and underdevelopment. The author argues that behind the commonly cited “resource curse” lies the “curse of industrial monoculture.” Excessive reliance on exporting low–value-added natural resources damages the health and sustainability of an economy, and also traps it in a precarious situation of “living off the heavens,” thereby amplifying economic volatility. One key way out of the resource curse is to optimize industrial structures and shift the focus of development toward higher value-added and more diversified industries.
On the demand side, we observed that, in general, the larger the population and economy, the greater the demand for oil. At the same time, however, a country’s oil consumption is also closely related to its economic structure and energy structure.
In Part Two, we examined an important clue for understanding the world economy from the perspective of oil: the petrodollar. The author reminds us that the petrodollar plays a much larger role in today’s global economy than most people realize. First, it helped the United States consolidate its international position across three dimensions—real economy, monetary and financial systems, and geopolitical strategy—shaping the international monetary system as it exists today. But now, cracks are beginning to appear in the petrodollar system. We should remain alert to these signals, because if the petrodollar system collapses, the international monetary market will undergo earth-shaking changes.
Furthermore, as today’s discussion shows, the rhythm of the oil economy and the flow of petrodollars are not isolated phenomena. They are deeply embedded in the operational patterns and business cycles of the global economy. If we compare the modern economy to a complex organism, oil is like the “blood” flowing through its circulatory system, while oil price fluctuations are like the “pulse” of that organism.
On the one hand, through oil price fluctuations, we can observe the health condition of this organism—or in other words, the state of the economy. Persistently high international oil prices indicate strong demand for oil, suggesting a relatively prosperous or even overheated world economy. Persistently falling oil prices, by contrast, point to a sluggish global economy, perhaps even sliding into recession or depression.
On the other hand, as we discussed, the petrodollar is an important source of capital in international financial markets. Its expansion or contraction sets off significant waves in those markets and further affects the real global economy. This means the impact of oil price movements extends far beyond the oil market itself, transmitting into the broader financial system and eventually into real-world economic activity.
Therefore, oil prices serve as an important signal indicator for observing the operation of the world economy. And the petrodollar is the crucial transmission mechanism that allows this signal to take effect, making it a vital clue for us to understand the dynamics of the global economy.
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