Petrodollars: keeping the world spinning the way of the USD
Petrodollars may be defined as the U.S. dollar earned from the sale of oil, or they may be simply defined as oil revenues denominated in U.S. dollars. Petrodollars accrued to oil-exporting nations depend on the sale price of oil as well as the volume being sold abroad, which is in turn dependent on oil production. Sooner or later, the overall demand and supply of oil around the globe determines an actual price for oil, regardless of any administered pricing system. If you have never heard of the petrodollar system before, it will not surprise me. It is certainly not a topic that makes its way out of Washington and Wall Street circles too often. The mainstream media rarely, if ever, discusses its inner workings and how it has motivated, and even guided America’s foreign policy in the Middle East for the last several decades. The American experience of the seventies and the eighties is no more than an art application of microeconomic tools to the pricing of oil in the world markets.
Let’s delve in history to see how petrodollar was formulated and how crucial it is for today’s world.
The standard of living of all Americans can be traced the vast, oil rich deserts of Saudi Arabia. After the Arab crisis, with the help of oil embargoes OPEC basically tripled the price of oil to the western world and at that time America realised that they were vulnerable because, then, America was importing about 70% of all the oil that they consumed. In order to secure a reliable, foreign source of oil, US President Richard Nixon sent his Secretary of State and National Security Advisor Henry Kissinger to Saudi Arabia for a secret meeting. The result of this meeting was a powerful pact that still stands to this day: If Saudi Arabia, which at that time was and still is the largest producer of oil, will sell the oil in US Dollars, America will defend Saudi Arabia (from its neighbours and especially Israel) and make sure that the House of Sa’ud (Al Sa’ud) will remain in power. The Americans laid out their terms which were simple and two-fold:
1) The Saudis must agree to price all of their oil sales in US Dollars only. In other words, the Saudis were to refuse all other currencies except the USD as payment for their oil exports and;
2) The Saudis would be open to investing their surplus oil proceeds in U.S. debt securities.
As a direct result of this US-Saudi agreement all other oil-producing nations also adopted US Dollar as the de-facto medium of exchange. Demand for this system increased exponentially and soon it had a new name: the Petrodollar. President Richard M. Nixon and his globalist sidekick, Henry Kissinger had successfully bridged the gap between the failed Bretton Woods (dollars for gold) arrangement and the new petrodollar system. The global artificial demand for the US Dollar would not only remain intact, it would soar due to the increasing demand for oil around the world. From the perspective of an empire, this new “dollars for oil” system was much more preferred over the former “dollars for gold” system as its economic requirements were much less stringent. Without the constraints imposed by a rigid gold standard, the US monetary base could now be grown at exponential rates.
For a layman’s understanding the currency of any country is basically as strong as the demand for it, just like anything else in the basic rule of demand and supply. Why is the petrodollar so important? That’s because it causes the demand for US Dollar. This petrodollar system, or more simply known as an “oil for dollars” system, created an immediate artificial demand for U.S. dollars around the globe. And of course, as global oil demand increased, so did the demand for U.S. dollars. A lot of Americans do not realise that over 70% of all hundred dollar bills in the world are actually outside of the US – that is, there are more $100 bills in Russia than there are in America. This stockpile of US Dollars in countries around the world is because the oil is bought and sold using the greenback.
Let’s assume if oil starts trading in non-petrodollars such as gold or maybe a basket of currencies or if for example China and Russia starts trading oil in Yuan and Ruble rather than US Dollars then that demand isn’t there. This would have a massive impact on the life of an average American which is assumed to be more drastic than the Great Depression.
To date, anyone who has ever threatened the status of the Petrodollar has not fared well. Libyan strongman Muammar Qaddafi publicly pushed for a pan-African, gold-backed currency that he would trade for Libya’s oil. He was killed in a US-backed revolution in 2011 and just a few short years before Iraqi dictator Saddam Hussein advocated selling oil for Euros soon led to US invasion of Iraq under the guise of looking for Weapons of Mass Destruction. Interestingly enough, after the Americans invaded Iraq and took over the control of their government, the whole concept of selling oil in Euros never surfaced again.
Today, many countries resent the current petrodollar system and their leading spokesperson is none other than Russian President, Vladimir Putin. There is a new Cold War that is going on – the colder war. Like the cold war, the petrodollar age imposed predictability on the world. It would be absurd to lament its passing but just as unwise to ignore the consequences. We may discover soon enough that $50 oil comes with another type of price. The petrodollar is so crucial to the colder war. The only thing thing that is arguably, holding America right now at the top, is the petrodollar.
If the petrodollar dies, so does America’s super power status.
