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Petrodollar
Agreements 1973-75 that the OPEC Cartel may quadrupel its oil price, if in turn they sell only for dollars and - importantly - re-invest their petrodollars in "The West". The agreements included "military aid", cooperation and protection of the governments, especially the authoritarian and theocratic House of Saud. [1]
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.
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.
If the methods look more than a little like a perverse variation on the old mafi a ‘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 fi nance the purchase of the costly oil and other vital imports—at a vastly infl ated interest cost, of course.
