BRIAN ELLIS PLUMMER
THE PETRODOLLAR is a system where oil is sold in US dollars exclusively. In 1944, as a consequence of the Bretton Woods Conference, the US dollar, backed by gold, became the world reserve currency. Prior to that it was the British pound.
In 1971, then US president Richard Nixon unilaterally cancelled the international convertibility of US dollars to gold. From 1972 to 1974, the US made a series of agreements with Saudi Arabia which led to them selling oil in US dollars only. In 1975, because of Saudi Arabia’s influence, the Organisation of Petroleum Exporting Countries agreed to sell oil exclusively in US dollars.
Oil is the world’s most traded and strategic commodity. The US dollar status as the premier world reserve currency is tied to the petrodollar.
The petrodollars allows the US Government to gain revenue by issuing bonds at lower interest rates than it would otherwise be able to do. Consequently, the US Government can run higher budget deficits than most other countries and still be considered the world’s most successful and powerful economy.
This allows the US debt to be US$22.3 trillion, which is 105 per cent of its G.P. and the US is still considered having a successful economy. It is currently running a deficit of US$1.2 trillion annually and it is expected to increase.
Today oil is not only sold in US dollars, although over 90 per cent still is.
On December 8, 2008, Iran announced it had converted all of its oil payment exports to non-US dollar currencies. In 2014 Qatar agreed to sell China oil in yuan. In 2015 China and the United Arab Emirates created a currency swap agreement. In 2016 India and Iran transacted oil sales in Indian rupees. On March 26, 2018, China launched its oil futures price in yuan and the Chinese oil futures contract is growing at a significant pace.
The Iran nuclear deal is a threat to the petrodollars because it aggravated Saudi Arabia, the world’s largest exporter of oil. On July 14, 2015, in Vienna, the Joint Comprehensive Plan of Action, better know as the Iran nuclear deal, was signed between Iran, the five permanent members of the United Nations Security Council (China, France, Russia, UK, and US – plus Germany) and the European Union. On January 16, 2016, the agreement was implemented.
This deal infuriated Saudi Arabia. The Saudis and Iran are rivals. On October 4, 2017, Saudi Arabia’s King Salman bin Abdulaziz Al Saud visited Russia for the first time in history, presumably because it was not pleased with the Iran nuclear deal.
On October 13, 2017, US President Donald Trump announced the US will not recertify the agreement, as provided for under US domestic law, to give effect to the Iran nuclear deal. On May 8, 2018, he announced the US withdrawal from the Iran nuclear deal.
On October 30, 2000, the UN granted Saddam Hussein permission to sell oil in euros. In March 2003 his government was overthrown by US soldiers and he was eventually killed.
Some people believe that Muammar Al Gaddafi’s plan in 2011 to quit selling Libyan oil in US dollars – demanding payment instead in gold-backed “dinars” (a single African currency made from gold) – was the real reason US-supported militia killed him. It’s probably more complex than that.
Venezuela has the world largest oil reserves but is not even in the top ten oil exporters. If China and Russia help Venezuela to become the number one exporter of oil, the petrodollars is dead. The US will do everything in her power to prevent that.
The US needs to back its dollar with gold or else it will be vulnerable to pressure from Saudi Arabia, Russia and China. Nothing lasts forever.