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1970: Saudi Arabia warns USA that further supply of Israel with weapons may lead to an oil embargo.

1971: After the embargo ("oil shock") Nixon threatens Saudi Arabia with military intervention.

Petrodollar

Agreements 1973-75 betweeen the OPEC Cartel members and USA offering weapons, infrastructure and military protection especially from Israel, if in turn they sell *only* for dollars and - importantly - reinvest their petrodollars in U.S. debt securities held in Western banks.

The petrodollar system provides at least three immediate benefits to the United States:

• It increases global demand for U.S. dollars
• It increases global demand for U.S. debt securities
• It gives the United States the ability to buy oil with a currency it can print at will

Secondary benefits include:

• Exploitation of lesser developed 'oil shocked' economies (IMF)
• Interest earning and increased leverage in the Eurodollar market
• Hot money for speculation and currency attacks

Key Citations

http://faculty.georgetown.edu/imo3/petrod/petro2.htm

Petrodollars: Problems and Prospects
by
Dr. Ibrahim M.Oweiss
Address before the Conference on The World Monetary Crisis
Arden House, Harriman Campus, Columbia University
March 1 - 3, 1974

First, the placement of petrodollar surpluses of the Arab oil exporting nations in the United States may be     
regarded politically as hostage capital. In the event of a major political conflict between the United 
States and an Arab oil-exporting nation, the former with all its military power can confiscate or freeze 
these assets or otherwise limit their use. It can impose special regulations or at least use regulations for 
a time, in order to attain certain political, economic, or other goals. It may be argued that such actions 
are un-American, since they are a direct violation of the sacred principles of capitalism and economic 
freedom. Nevertheless, the U.S. government resorted to such weapons twice in the l980s against Iranian and 
Libyan assets. It follows, therefore, that governments placing their petrodollar surpluses in the United  
States may lose part of their economic and political independence. Consequently, the more petrodollar 
surpluses are placed in the United States by a certain oil-exporting nation, the less independent such a 
nation becomes.

It is worth noting that the difference between the volume of oil actually supplied and the volume that 
should have been supplied in observance of standard microeconomic theory is in fact a subsidy granted, in 
real terms, to oil-importing nations such as the United States, Germany, France, and Japan.1

The process of petrodollar recycling makes it possible for commercial banks of industrialized nations, 
international lending institutions, and Arab banking consortia to provide financial assistance to 
less-developed countries (LDCs). Western Europe, Japan, and the United States buy oil from oil-exporting 
countries (OECs). LDCs pay for oil imports and other foreign goods and services with money borrowed front 
Western commercial banks. The process of recycling is complete when those commercial banks and institutions 
obtain cash and investments from OECs.

http://www.globalresearch.ca/the-real-reason-russia-is-demonized-and-sanctioned-the-american-petrodollar/5402592

in 1973 the Richard Nixon administration began negotiations with the government of Saudi Arabia to establish   
what came to be referred to as the petrodollar recycling system. Under the arrangement, the Saudis would  
only sell their oil in U.S. dollars, and would invest the majority of their excess oil profits into U.S. 
banks and Capital markets. The IMF would then use this money to facilitate loans to oil importers who were 
having difficulties covering the increase in oil prices. The payments and interest on these loans would of 
course be denominated in U.S. dollars. 

This agreement was formalised in the “The U.S.-Saudi Arabian Joint Commission on Economic Cooperation” put 
together by Nixon’s Secretary of State Henry Kissinger in 1974. The system was expanded to include the rest 
of OPEC by 1975. This was a major economic success for the U.S. As long as the world needs oil, and as long 
as oil is only sold in U.S. dollars, there will be a demand for dollars, and that demand is what gives the  
dollar its value.

The petrodollar is the only life support machine left for the U.S. and this is precisely why Washington goes   
after any country that tries to destroy it.

Engdahl, CoW, p.162ff

The dynamic created by the Anglo-American decoupling of the 
dollar from gold in August 1971, followed by the 400 per cent forced 
inflation of the price of oil, had created a catastrophe for the majority 
of the world’s population who lived in the developing sector.

Under the threat of losing access to further borrowings from the 
World Bank and the private banks of the industrial nations, these 
less-developed countries were forced to divert precious funds from 
industrial and agricultural development into simply reducing this 
balance-of-payments deficit. Their oil imports had to be paid, and 
paid in dollars, while the cost of their raw materials exports had fallen 
sharply in the global recession of 1974–75. 

This arrangement, needless to say, proved enormously valuable 
for the United States dollar and for the fi  nancial institutions of New 
York and the London Eurodollar markets. The world was forced to 
buy huge amounts of dollars more or less continuously, in order 
to purchase essential energy supplies. Even more extraordinary, 
this OPEC dollar-pricing agreement remained in force despite the 
subsequent enormous losses to OPEC as the dollar gyrated up and 
down through the next decade and more. 

One consequence of the directed recycling of these petrodollars 
into London and New York was the emergence of American banks 
as the giants of world banking, paralleling the emergence of their 
clients, the Seven Sisters oil multinationals, as the giants of world 
industry. The Anglo-American oil and banking combination so 
overwhelmed the scale of ordinary enterprise that their power and 
influence seemed invincible. 

[affect of 'oil shock' and petrodollar system on lesser developed countries]
If the methods look more than a little like a perverse variation on 
the old mafia ‘protection racket’ game, this is understandable. The 
same Anglo-American interests which manipulated political events 
to create a 400 per cent increase in the oil price then turned to the 
countries which were the victims of assault and ‘offered’ to lend them 
petrodollars to finance the purchase of the costly oil and other vital 
imports — at a vastly inflated interest cost, of course. 

http://ftmdaily.com/preparing-for-the-collapse-of-the-petrodollar-system/

the United States offered weapons and protection of their oil fields from 
neighboring nations, including Israel.

http://ftmdaily.com/preparing-for-the-collapse-of-the-petrodollar-part-2/

According to the agreement, the United States would offer military protection for Saudi Arabia’s oil fields. 
The U.S. also agreed to provide the Saudis with weapons, and perhaps most importantly, guaranteed protection 
from Israel.