Petrodollar

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Concept.png Petrodollar Rdf-entity.pngRdf-icon.png
Petrodollar.jpg
Typecommercial
Start1974
Interest ofUS/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. [1]

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." [2][note 1] 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 governments' dependency on U.S. specialists remains unchanged to the present day.[4]

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 at a rate not maintainable.

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 Bretton Woods is marked by a devaluation of the dollar vs. gold, a stockmarket crash, global recession and the breakdown of the international dollar-pegged monetary system. The U.S. went from oil export to import after its own production peaked. OPEC began discussing the viability of pricing oil trades based on a basket of currencies.

In the face of these dramatic events which threatend American military and monetary supremacy (the two pillars of the empire) the Nixon administration began high-level talks with Saudi Arabia to unilaterally price international oil sales in dollars only - despite US assurances to its European and Japanese allies that such a unique monetary/geopolitical arrangement would not transpire. [5]

Less mentioned by the commercially-controlled media is the fact that part of the agreements was the recycling of the oil producing countries' surpluses into U.S. dept securities held at Western banks. Restrictions on cross-border capital flows or investments were lifted. [note 2]

Until 1975 the other OPEC countries agreed to similar deals.

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[7] 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)[1]

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".[8]

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

The end of the Bretton Woods system caused a depreciation of the dollar and increase in the dollar price of most internationally traded commodities due to inflationary pressure of up to 100% (Hamilton 2011). [9] Given declining production rates from U.S. fields, further increases in the price of oil would have been expected but did not materialize until the Yom Kippur war, Okt. 1973. [note 3]

To ensure sufficient global demand for the dollar, high oil prices are essential. [note 4] Since the volume of oil that should have been supplied in observance of standard microeconomic theory exceeded the volume actually supplied, Oweiss (1974)[1] 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." In other words, these close trading partners of the U.S. can buy oil with a fiat currency print at will. Consequently - after the Saudi government had bought the first $2.5 billion U.S. treasury bills in 1974 from its oil surplus funds - the U.S. administration secretly lobbied OPEC through its puppet regime in Iran to increase prices. [note 5]

Contrary, the effect on less-developed countries was devastating. In desparate need for oil they took out loans from Western banks, under which many (foreseeable) defaulted when the FED raised interest rates. The IMF who promoted these loans then went on to prescribe austerity measures and bailed out troubled Western banks. The resulting weakness of the LDC's economies would be further exploited by currency speculators. The absence of capital controls was a nessessary precondition for this form of "monetary terrorism".[6]

On the side of oil exporting nations "the placement of petrodollar surpluses [...] 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 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." (Oweiss 1974)[1][note 6]

The U.S. government resorted to such weapons twice in the 1980s against Iran and Libya. In 2006 when Iran began selling oil for Yen, Renminbi, Rubles and Euro its foreign assets were frozen - allegedly because of its nuclear program. [note 7]

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.[16][17] 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,[18][19] 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. [20] [21] 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. [22]

 

Related Documents

TitleTypePublication dateAuthor(s)Description
Document:What are the Real Targets of the E.U. Oil Embargo against Iran?article31 January 2012Mahdi Darius Nazemroaya
Document:Will Iran Kill the Petrodollar?article25 January 2012Marin KatusaThe 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.pdfessay2008Guido PreparataPart 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 Systempaper17 April 2011Peter Dale ScottA collection of insights that provide a more realistic explanation of the deep political background to the attacks on Libya.
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Footnotes

  1. ↑ This view is also expressed by the commercially-controlled media today when finding that countries like Saudi Arabia are the culprits responsible for global imbalances when running surpluses. Rejecting advice on how to handle surpluses may be interpreted as dwindling power of the dollar empire. See ie. [3]
  2. ↑ These restrictions were a key component of the Bretton Woods agreement. "The capital controls were necessary otherwise speculators could have had a field day by betting that a certain currency would go down by selling it off against the US dollar and thereby forcing it to go down purely from their speculative activity. Large financial firms with access to lots of US dollars could therefore force a foreign currency of a weaker country to collapse as they desired." [6] Exactely these currency attacks occured later when the petrodollar recycling scheme was in place.
  3. ↑ The official narrative is that the ensuing OPEC embargo is responsible for both recession and raising oil prices, but Barsky and Kilian (2001) [10] show that inflationary pressure is an equally likely explanation. The Yom Kippur war itself did not come as a surprise, nor did the embargo. Interestingly, warnings of King Faisal were blocked by U.S. officials and the commercially-controlled media.
  4. ↑ The official narrative goes a long way to deny this fact. Rowley et. al. (1989)[11] note that "the pivotal significance of high oil prices was abruptly uncovered in 1986, when Saudi Arabia flooded the oil market with additional supplies and caused the price of crude petroleum to drop below $10 per barrel. This action was recognized as so hazardous to the interests of the Armadollar- Petrodollar Coalition that some immediate political response was called for. Subsequently, the vice president [Bush] was sent to the Middle East with the task of openly asking Saudi Arabia to reconsider the action and reinstate lower levels for production."
  5. ↑ At first, the Saudi officials seemed not to grasp the idea. In 1969 the Saudi petroleum minister, Yamani, explained his policy toward the U.S. as follows: "For our part, we do not want the majors to lose their power and be forced to abandon their role as a buffer element between the producers and the consumers. We want the present setup to continue as long as possible and at all costs to avoid any disastrous clash of interests which would shake the foundations of the whole oil industry." (Barnet 1980, p. 61)[12] In retrospective he said: "The oil companies were in real trouble at that time, they had borrowed a lot of money and they needed a high oil price to save them." He was convinced of this by the attitude of the Shah of Iran, who in one crucial day in 1974 moved from the Saudi view to advocating higher prices.[13]
  6. ↑ According to Spiro (1999)[14] 70 percent of all Saudi assets in the United States were being held in a New York Fed account.
  7. ↑ The U.S. National Intelligence Estimate 2007 stated that Tehran had put a stop to weapons production in 2003 contradicting its assessment from 2005, however, the sanctions were not lifted.[15]

References

  1. ↑ a b c d Oweiss, Ibrahim M. (1974) Petrodollars: Problems and Prospects, Address before the Conference on The World Monetary Crisis Arden House, Harriman Campus, Columbia University http://faculty.georgetown.edu/imo3/petrod/petro2.htm
  2. ↑ Engdahl, F.W. (2004) A Century of War: Anglo-American Oil Politics and the New World Order. London: Pluto ISBN 0-7453-2309-X, p.143.
  3. ↑ Petrodollar profusion - Oil exporters are the main drivers of global imbalances, The Economist, Apr 26th 2012
  4. ↑ Christopher M. Blanchard (2014) Saudi Arabia: Background and U.S. Relations. Congressional Research Service 7-5700 http://www.crs.gov RL33533
  5. ↑ William R. Clark (2005) Petrodollar Warfare: Oil, Iraq and the Future of the Dollar, New Society Publishers, ISBN: 978-0865715141
  6. ↑ a b http://www.robinupton.com/people/WizardsOfMoney/ WIZARDS OF MONEY - 5. Monetary Terrorism
  7. ↑ http://www.robinupton.com/people/WizardsOfMoney/ WIZARDS OF MONEY - 1. How Money is Created
  8. ↑ Letter of Jack F. Bennett (assistant secretary of the U.S. Treasury) to Henry Kissinger, February 1975. ‘Subject: Special Arrangements for Purchase of U.S. Government Securities by the Saudi Arabian Government.’ International Currency Review. Vol. 20, no. 6, January 1991.
  9. ↑ James D. Hamilton (2011) Historical Oil Shocks. Department of Economics, University of California, San Diego, December 22, 2010, Revised: February 1, 2011
  10. ↑ Barsky, R. B. and Kilian, L. (2001) Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative. in B.S. Bernanke and K. Rogoff (eds.) NBER Macroeconomics Annual 2001. Cambridge, MA: MIT Press.
  11. ↑ Rowley, Robin and Bichler, Shimshon and Nitzan, Jonathan. (1989) The Armadollar-Petrodollar Coalition and the Middle East. Working Papers (Part 3). Department of Economics. McGill University. Montreal. Vol. 89. No. 10. pp. 1-54. http://bnarchives.yorku.ca/134/01/890101RBN_ADPD_Coalition_and_the_ME.pdf
  12. ↑ Barnet, R. J . (1980) The Lean Years. Politics in the Age of Scarcity (New York: Simon and Schuster).
  13. ↑ Observer (UK) interview with Sheikh Yaki Yamani (Saudi Arabian Oil Minister from 1962–1986) at the Royal Institute of International Affairs, January 14, 2001
  14. ↑ Spiro, David E. (1999). The hidden hand of American hegemony: petrodollar recycling and international markets. Ithaca, NY : Cornell University Press.
  15. ↑ http://en.ria.ru/world/20071208/91488137.html Iran stops accepting U.S. dollars for oil, RIA Novosti
  16. ↑ Foreign Exchange: Saddam Turns His Back on Greenbacks
  17. ↑ Radio Free Europe - Iraq: Baghdad Moves To Euro
  18. ↑ Kish Oil Exchange Planned, Iran Daily, January 24, 2006
  19. ↑ A frenzied Persian new year, March 22, 2006, Asia Times
  20. ↑ The Libyan War, American Power and the_Decline of the_Petrodollar System
  21. ↑ The Wars That Really Are About The Oil - spectator 30 August 2014
  22. ↑ Putin: 'The petrodollar must die' - WND 15 August 2014

Further reading

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

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