The Petrodollar

The U.S. dollar, is currently the world reserve currency. It also happens to be a debt based, oil backed currency. U.S. foreign policy, and energy policy can only be fully understood in the context of the petrodollar.

In the aftermath of World War II, the global financial system was restructured at Bretton Woods. Uncle Sam held the biggest stick, so of course he wrote the rules. Under the Bretton Woods agreement, which was finalized in 1945, the U.S. dollar became the world reserve currency. International trade would henceforth be settled with Federal Reserve notes, which were to be backed by gold at $35 per ounce.

This agreement, however, did not take into account the inflationary effects of fractional reserve banking. As long as banks are allowed to loan out more money than they actually have, the money supply always grows. As the money supply grows, the value of that currency decreases.

In the years that followed, debt and inflation skyrocketed, the commitment to allow countries to withdraw their gold at $35 dollars an ounce became more and more problematic. The situation finally came to a head in 1971, when President Nixon ended the gold standard once and for all.

https://www.youtube.com/watch?v=iRzr1QU6K1o

I have directed the secretary of the treasury to take the action necessary to defend the dollar against the speculators. I directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets except in amounts and conditions determined in the interest of monetary stability, and in the best interest of the United States. Richard Nixon - August 15, 1971

In 1973 the Nixon administration began secret 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.

Documents released by the Congressional Research Service reveal that the negotiations with Saudi Arabia had an edge to them. While proposing new channels of economic and military cooperation, U.S. officials were openly discussing the feasibility of seizing Saudi oil fields by force. Carrot or the stick. This was a deal they couldn’t refuse.

In the United States, the oil shocks produced inflation, new concern about foreign investment from oil producing countries, and open speculation about the advisability and feasibility of militarily seizing oil fields in Saudi Arabia or other countries. In the wake of the embargo, both Saudi and U.S. officials worked to re-anchor the bilateral relationship on the basis of shared opposition to Communism, renewed military cooperation, and through economic initiatives that promoted the recycling of Saudi petrodollars to the United States via Saudi investment in infrastructure, industrial expansion, and U.S. securities.

The agreement was formalized in 1974 with “The U.S.-Saudi Arabian Joint Commission on Economic Cooperation”. By 1975 the petrodollar system was expanded to include the rest of OPEC, and the U.S. dollar became the only way to purchase oil on the global market.

Oil isn’t just a commodity, it’s a socio-economic chokepoint. With an economic paradigm that requires infinite growth, the demand for oil must increase as well. This demand for oil translates into demand for dollars. It is this demand that gives the dollar its value. The dollar is an oil backed currency.

With the dollar tied to oil, money became America’s primary export. Dollars go out, products and services come in, and inflation is distributed across the entire planet like a hidden tax.

Those who profit from this chokepoint know that their position must be guarded and maintained. If a large enough block of oil producing countries stop selling in dollars, or if fossil fuels alternatives ever gain traction, it would be game over. The dollar would plummet. The U.S. financial system would collapse. The luxurious standard of living that Americans have come to take for granted would be brought to a grinding halt.

The-powers-that-be have a clear incentive to keep the world hooked on fossil fuels, and crush any nation that challenges their monopoly. Examples must be made of upstarts. Sanctions, regime change, Uncle Sam’s big stick.

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