Petrodollar

Petrodollar
Type	commercial
Start	1974
Interest of	US/Federal Reserve
Subpage(s)	•Petrodollar/Recycling
Denomination of the majority of the worlds oil in U.S. dollars has been the backbone of U.S. dollar hegemony since the U.S. unilaterally terminated the rights of foreign central banks to convert dollars to gold in 1971.

Petrodollar may be simply defined as oil revenues denominated in U.S. dollars.

Consequently to buy oil, dollars are needed. On a large scale exchanging local currency for dollars is too costly. The prefered way for countries to get dollars is therefore to export goods and services for dollars - or to get a loan from banks who hold enough dollar denominated assets, ie. the IMF or other big western banks.

On the other hand the term "revenues" includes surpluses on such a scale that the oil producing countries could buy up a large proportion of Western assets. The term Petrodollar refers also to the management of these revenues. Walter Levy, speaker at the Bilderberg Conference 1973 made clear that "Serious problems would be caused by unprecedented foreign exchange accumulations of countries such as Saudi Arabia and Abu Dhabi." These OPEC countries were advised on how to invest their surpluses by Western investment bankers and subsequently signed contracts with the U.S. on military bases, large arms deals, military training and cooperation on governmental and economic levels. Their dependency on U.S. specialists remains unchanged to the present day.

Overview

In 1947, by the Bretton Woods agreements, the dollar became the world's reserve currency. To establish trust in the dollar the exchange rate to gold was fixed at 35$/ounce. However, the U.S.Federal Reserve increased the money supply by 340% from 1947 to 1971. At the same time its gold reserves decreased. Since 1969 foreign countries began to exchange dollars for gold.

In 1971, after exessive spending on the Vietnam War the U.S. unilateraly terminated the rights of foreign central banks to convert dollars to gold. The end of the Bretton Woods system is marked by a depreciation of the dollar, a stockmaket crash and global recession. The U.S. went from oil export to import after its own production peaked in 1972.

In an effort to prop up the value of the dollar the Nixon administration negotiated a deal with Saudi Arabia that in exchange for arms and "protection" they would denominate all future oil sales in U.S. dollars. Less mentioned by the commercially-controlled media is the fact that part of the agreement was the recycling of the oil producing countries' surpluses into U.S. dept securities held at Western banks. At the same time the U.S. administration secretly lobbied OPEC through its puppet regime in Iran to increase prices.

Until 1975 the other OPEC countries agreed to similar deals.

In October 1973, the United States' open support of Israel in the Yom Kippur War triggered an oil embargo, a reaction Arab countries had discussed at least since Israel occupied Syrian and Egyptian territory in the Six-Day War in 1967. The shortfall corresponded to only 7.5% of global output. On January 1, 1974 however, the Persian Gulf countries doubled the price of oil (Hamilton 2011). Further increases followed.

The embargo was not the cause of raised prices (Barsky and Kilian 2001) but OPEC took the blame although an increase in the price of oil now corresponded to an increase in the global demand for dollars aswell as an increase in the demand for U.S.securities.

Recycling

Full article: Petrodollar/recycling

Petrodollar recycling is the handling of the oil producing countries' surpluses. These surpluses are commonly turned into either U.S. government securities (allowing the printing of more U.S. dollars which are in turn used to buy oil and other goods and services) or are spent in arms deals including payments for U.S. military bases in the Middle East.

"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 from Western commercial banks. The process of recycling is complete when those commercial banks and institutions obtain cash and investments from OECs."(Oweiss 1974)

The framework for this recycling scheme was layed down by an agreement between the U.S. Treasury and the Saudi Arabian Monetary Agency (SAMA), whose mission was "to establish a new relationship through the Federal Reserve Bank of New York with the [U.S.] Treasury borrowing operation. Under this arrangement, SAMA will purchase new US Treasury securities with maturities of at least one year".

It is noteworthy that under this agreement a higher oil price leads to a rising demand for U.S. dollars on a global scale without negatively affecting key parts of the U.S. economy.

Financial and Political implications

Since the volume of oil that should have been supplied in observance of standard microeconomic theory exceeded the volume actually supplied , Ibrahim Oweiss noted that "the difference [...] is in fact a subsidy granted, in real terms, to oil-importing nations such as the United States, Germany, France, and Japan."(Oweiss 1974) In other words, these close trading partners of the U.S. can buy oil with a fiat currency print at will.

Moreover, according to Oweiss, the "placement of petrodollar surpluses of 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 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 1980s 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.

Petrodollar Wars

"I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil." (Allan Greenspan (2007) The Age of Turbulence)

News outlets in mid-2000-2002 carried articles about Saddam's efforts to sell oil on markets exclusively in Euros. This may have been viewed as a push by Iraq to influence other OPEC states to challenge the reserve currency status in oil trading of the USD. This may have been an unacceptable outcome in the global economy with respect to the flow of petrodollars.

Since the beginning of 2003, Iran has required euro in payment of exports toward Asia and Europe. The government opened an Iranian Oil Bourse on the free trade zone on the island of Kish, for the express purpose of trading oil priced in other currencies, including euros.

Libya decided to challenge the petrodollar system and stop selling all their oil for dollars, shortly before it was attacked. Qaddafi initiated a movement to refuse the dollar and the euro, and called on Arab and African nations to use a new currency instead, the gold dinar. Qaddafi suggested establishing a united African continent, with its 200 million people using this single currency. … The initiative was viewed negatively by the USA and the European Union, with French president Nicolas Sarkozy calling Libya a threat to the financial security of mankind; but Gaddafi continued his push for the creation of a united Africa. Gaddafi’s proposal to introduce a gold dinar for Africa revived the notion of an Islamic gold dinar floated in 2003 by Malaysian Prime Minister Mahathir Mohamad, as well as by some Islamist movements. The notion, which contravenes IMF rules and is designed to bypass them, has had trouble getting started.

But today the countries stocking more and more gold rather than dollars include not just Libya and Iran, but also China, Russia, India and Brazil. In May 2014, China agreed to buy $400 billion of Russian-produced natural gas over 30-years, valued in domestic currencies, in what was touted as Gazprom’s biggest contract ever. In August, Russia signed a historic deal with Iran to purchase $20 billion of oil in rubles, bypassing Western sanctions against Iran while hastening the petrodollar’s decline. Aug 14 (Reuters) - President Vladimir Putin said on Thursday Russia should aim to sell its oil and gas for Roubles globally because the dollar monopoly in energy trade was damaging Russia's economy.

 

Related Documents

Title	Type	Publication date	Author(s)	Description
Document:What are the Real Targets of the E.U. Oil Embargo against Iran?	article	31 January 2012	Mahdi Darius Nazemroaya
Document:Will Iran Kill the Petrodollar?	article	25 January 2012	Marin Katusa	The possibility of Iran acquiring nuclear weapons is largely a smoke-screen used by the Western powers to obfuscate the real reasons for their escalating confrontation with Iran.
File:Of Money Part 1.pdf	essay	2008	Guido Preparata	Part 1 outlines the history of global monetary/financial systems since the end of WWI and their progressive domination by the United States Federal Reserve system. The essay explains any move by non-WTO countries to conduct trade in currencies other than Dollars, or construct non-Dollar trading blocks, have been so ruthlessly dealt with by the US and its NATO Allies.
Document:The Libyan War, American Power and the Decline of the Petrodollar System	paper	17 April 2011	Peter Dale Scott	A collection of insights that provide a more realistic explanation of the deep political background to the attacks on Libya.

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References

Further reading

• Spiro, David E. (1999). The hidden hand of American hegemony : petrodollar recycling and international markets. Ithaca, NY : Cornell University Press.
• "Petrodollar profusion", "The Economist", Apr 26th 2012
• William R. Clark (2005) Petrodollar Warfare: Oil, Iraq and the Future of the Dollar, New Society Publishers, ISBN: 978-0865715141

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