The Petrodollar: The Multi-Trillion Dollar Conversation

As 2016 draws to a close, the fate of the petrodollar is unknown as U.S.-Saudi relations come into question. The Bretton Woods conference in 1944 resulted in a consensus...

As 2016 draws to a close, the fate of the petrodollar is unknown as U.S.-Saudi relations come into question. The Bretton Woods conference in 1944 resulted in a consensus that the U.S. dollar be gold-backed and regarded as the global reserve currency. By 1970, the results of Bretton Woods had vanished as foreign nations became skeptical amidst rising United States’ debts. However, in 1974 an agreement between Saudi Arabia and the United States set the stage for the petrodollar. The agreement was for Saudi oil exports to be priced in U.S. dollars in exchange for U.S. military support, weapons, and protection from Israeli attacks. The Saudi royal family promptly agreed to the arrangement and, by doing so, started a wave of oil being priced in U.S. currency in exchange for U.S. benefits. By 1975, all oil-producing OPEC nations had hopped on board, sending the U.S. dollar to an all-time high. This artificial demand sent the U.S. economy soaring, and it continues today but with the petrodollar as its foundation. As the petrodollar system comes into question by Saudi Arabia, the value of the U.S. dollar and economy are at stake.

The world uses north of 97 million barrels of oil each day (IEA). Price nearly all of that exchange in U.S. dollars and America reaps in the benefits of artificial demand. So what could possibly get in Uncle Sam’s way? Dial back to the original Saudi-U.S. agreement, remember how this entire system is dependent on U.S. military aid for Middle-East countries? As political and militaristic unrest strikes Middle-Eastern countries the U.S. finds itself in an increasingly difficult challenge. How can the U.S. protect each of these countries if they want to attack each other? Furthermore, how can the U.S. do this while keeping the petrodollar alive and well (Robinson 15-20; Grass; Dorell)? One of its most frightening lessons came in October of 1973 when the Nixon administration provided $2.2 billion in aid to Middle-Eastern ally Israel. The next day, Saudi Arabia and other Arab oil-producing nations raised a complete embargo on oil exports to the U.S. This caused devastating impacts to U.S. markets, infrastructure, and production (Perkins 82-4; Wong). Today, The U.S. has and continues to support Israel amidst its agreements with Saudi Arabia. This has put a poor taste in the Saudis’ mouths as they see this as directly going against the agreement that has been around for decades. Considering the U.S. just signed over $38 billion in aid to Israel over the next ten years; the U.S. certainly doesn’t help the tensioned relationship (Dorell). Why should they help the troubled relationship though? The U.S. is against nearly everything the Saudi regime does and believes, from human rights neglect to guerilla warfare. They have turned a blind-eye to Saudi atrocities for years and for no other reason than to protect the almighty petrodollar. Strong evidence even points to Saudi Arabia being primarily responsible for the horrific events that ensued on September 11th 2001 (Robinson 40). When will the U.S. put aside money to stand up for what it believes in and, furthermore to protect its own?

As 2016 draws to a close, Saudi Arabia is facing financial troubles as domestic spending has been at an all-time high while oil prices remain lackluster. The original Saudi-U.S. agreements seem to be dwindling in efficacy as each year passes and many analysts believe that new deals and conversations will be in the near future. The Saudis are looking to expand from an oil-dependent nation to a diverse multi-functional economy and as such will continue to divest from U.S. securities over the coming years. Claudio Grass and Alasdir Macleod believe that China seems eager to buy a stake in Aramco should the House of Saud decide to take part or all of the company public. This could have interesting economic effects as the yuan establishes increased prevalence in the global currency exchange. Andrea Wong, Claudio Grass, and Oren Dorell all believe that the down oil market coupled with Saudi Arabia’s intent actions may lead to a tumbling in the petrodollar and U.S. economy but assuming that the House of Saud does not divest their U.S. securities all-at-once, they expect the petrodollar to stick around for some time. However, a multitude of factors can sway the fate of the petrodollar drastically and just as history has shown, this will have to be evaluated on a day-by-day basis. The Saudi-U.S. relationship remains drawn out on a tightrope in a long, dynamic balancing act.

References:
Dorell, Oren. “U.S. $38B Military Aid Package to Israel Sends a Message.” USA Today. Gannett, 14 Sept. 2016. Web. 10 Oct. 2016.
Grass, Claudio. “End of an Era: The Rise and Fall of the Petrodollar System – Gold And Liberty.” Gold And Liberty. N.p., 12 July 2016. Web. 10 Oct. 2016.
IEA. “Oil Market Report.” International Energy Agency. N.p., 1 Oct. 2016. Web. 10 Oct. 2016.
Macleod, Alasdair. “Why The Petrodollar Is Facing Its End.” OilPrice.com. Zerohedge, 03 May 2016. Web. 10 Oct. 2016.
Perkins, John. Confessions of an Economic Hit Man. San Francisco: Berrett-Koehler, 2004. Print.
Robinson, Jerry. “Preparing for the Collapse of the Petrodollar System.” Follow The Money Daily. N.p., 2013. Print.
Wong, Andrea. “U.S. Discloses Saudi Holdings of Treasuries for First Time.” Bloomberg.com. Bloomberg, 16 May 2015. Web. 10 Oct. 2016.

Student Author: Matthew May
I am a Senior Computer Networking & Cybersecurity student at Champlain College in Burlington, VT.

Faculty Advisor: Rob Williams, Ph.D., Champlain College
Image Courtesy of: The Free Thought Project

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