Not Oil, But Dollars vs. Euros

Why is George Bush so hell bent on war with Iraq? Why does his administration reject every positive Iraqi move? It all makes sense when you consider the economic implications for the USA of not going to war with Iraq. The war in Iraq is actually the US and Europe going head to head on economic leadership of the world.

America’s Bush administration has been caught in outright lies, gross exaggerations and incredible inaccuracies as it trotted out its litany of paper thin excuses for making war on Iraq. Along with its two supporters, Britain and Australia, it has shifted its ground and reversed its position with a barefaced contempt for its audience. It has manipulated information, deceived by commission and omission and frantically “bought” UN votes with billion dollar bribes.

Faced with the failure of gaining UN Security Council support for invading Iraq, the USA has threatened to invade without authorisation. It would act in breach of the UN’s very constitution to allegedly enforced UN resolutions.

It is plain bizarre. Where does this desperation for war come from?

There are many things driving President Bush and his administration to invade Iraq, unseat Saddam Hussein and take over the country. But the biggest one is hidden and very, very simple. It is about the currency used to trade oil and consequently, who will dominate the world economically, in the foreseeable future — the USA or the European Union.

Iraq is a European Union beachhead in that confrontation. America had a monopoly on the oil trade, with the US dollar being the fiat currency, but Iraq broke ranks in 1999, started to trade oil in the EU’s euros, and profited. If America invades Iraq and takes over, it will hurl the EU and its euro back into the sea and make America’s position as the dominant economic power in the world all but impregnable.

It is the biggest grab for world power in modern times. America’s allies in the invasion, Britain and Australia, are betting America will win and that they will get some trickle-down benefits for jumping on to the US bandwagon. France and Germany are the spearhead of the European force — Russia would like to go European but possibly can still be bought off. Presumably, China would like to see the Europeans build a share of international trade currency ownership at this point while it continues to grow its international trading presence to the point where it, too, can share the leadership rewards.


Oddly, little or nothing is appearing in the general media about this issue, although key people are becoming aware of it — note the recent slide in the value of the US dollar. Are traders afraid of war? They are more likely to be afraid there will not be war.

But despite the silence in the general media, a major world discussion is developing around this issue, particularly on the internet. Among the many articles: Henry Liu, in the ‘Asia Times’ last June, it has been a hot topic on the Feasta forum, an Irish-based group exploring sustainable economics, and W. Clark’s “The Real Reasons for the Upcoming War with Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth” has been published by the ‘Sierra Times’, ‘’, and ‘’.

This debate is not about whether America would suffer from losing the US dollar monopoly on oil trading — that is a given — rather it is about exactly how hard the USA would be hit. The smart money seems to be saying the impact would be in the range from severe to catastrophic. The USA could collapse economically.


The key to it all is the fiat currency for trading oil. Under an OPEC agreement, all oil has been traded in US dollars since 1971 (after the dropping of the gold standard) which makes the US dollar the de facto major international trading currency. If other nations have to hoard dollars to buy oil, then they want to use that hoard for other trading too. This fact gives America a huge trading advantage and helps make it the dominant economy in the world.

As an economic bloc, the European Union is the only challenger to the USA’s economic position, and it created the euro to challenge the dollar in international markets. However, the EU is not yet united behind the euro — there is a lot of jingoistic national politics involved, not least in Britain — and in any case, so long as nations throughout the world must hoard dollars to buy oil, the euro can make only very limited inroads into the dollar’s dominance.

In 1999, Iraq, with the world’s second largest oil reserves, switched to trading its oil in euros. American analysts fell about laughing; Iraq had just made a mistake that was going to beggar the nation. But two years on, alarm bells were sounding; the euro was rising against the dollar, Iraq had given itself a huge economic free kick by switching.

Iran started thinking about switching too; Venezuela, the 4th largest oil producer, began looking at it and has been cutting out the dollar by bartering oil with several nations including America’s bete noir, Cuba. Russia is seeking to ramp up oil production with Europe (trading in euros) an obvious market.

The greenback’s grip on oil trading and consequently on world trade in general, was under serious threat. If America did not stamp on this immediately, this economic brushfire could rapidly be fanned into a wildfire capable of consuming the US’s economy and its dominance of world trade.


Imagine this: you are deep in debt but every day you write cheques for millions of dollars you don’t have — another luxury car, a holiday home at the beach, the world trip of a lifetime.

Your cheques should be worthless but they keep buying stuff because those cheques you write never reach the bank! You have an agreement with the owners of one thing everyone wants, call it petrol/gas, that they will accept only your cheques as payment. This means everyone must hoard your cheques so they can buy petrol/gas. Since they have to keep a stock of your cheques, they use them to buy other stuff too. You write a cheque to buy a TV, the TV shop owner swaps your cheque for petrol/gas, that seller buys some vegetables at the fruit shop, the fruiterer passes it on to buy bread, the baker buys some flour with it, and on it goes, round and round — but never back to the bank.

You have a debt on your books, but so long as your cheque never reaches the bank, you don’t have to pay. In effect, you have received your TV free.

This is the position the USA has enjoyed for 30 years — it has been getting a free world trade ride for all that time. It has been receiving a huge subsidy from everyone else in the world. As it debt has been growing, it has printed more money (written more cheques) to keep trading. No wonder it is an economic powerhouse!

Then one day, one petrol seller says he is going to accept another person’s cheques, a couple of others think that might be a good idea. If this spreads, people are going to stop hoarding your cheques and they will come flying home to the bank. Since you don’t have enough in the bank to cover all the cheques, very nasty stuff is going to hit the fan!

But you are big, tough and very aggressive. You don’t scare the other guy who can write cheques, he’s pretty big too, but given a ‘legitimate’ excuse, you can beat the tripes out of the lone gas seller and scare him and his mates into submission.

And that, in a nutshell, is what the USA is doing right now with Iraq.


America is so eager to attack Iraq now because of the speed with which the euro fire could spread. If Iran, Venezuela and Russia join Iraq and sell large quantities of oil for euros, the euro would have the leverage it needs to become a powerful force in general international trade. Other nations would have to start swapping some of their dollars for euros.

The dollars the USA has printed, the ‘cheques’ it has written, would start to fly home, stripping away the illusion of value behind them. The USA’s real economic condition is about as bad as it could be; it is the most debt-ridden nation on earth, owing about US$12,000 for every single one of it’s 280 million men, women and children. It is worse than the position of Indonesia when it imploded economically a few years ago, or more recently, that of Argentina.

Even if OPEC did not switch to euros wholesale (and that would make a very nice non-oil profit for the OPEC countries, including minimising the various contrived debts America has forced on some of them), the US’s difficulties would build. Even if only a small part of the oil trade went euro, that would do two things immediately:

* Increase the attractiveness to EU members of joining the ‘eurozone’, which in turn would make the euro stronger and make it more attractive to oil nations as a trading currency and to other nations as a general trading currency.

* Start the US dollars flying home demanding value when there isn’t enough in the bank to cover them.

* The markets would over-react as usual and in no time, the US dollar’s value would be spiralling down.


America’s response to the euro threat was predictable. It has come out fighting.

It aims to achieve four primary things by going to war with Iraq:

* Safeguard the American economy by returning Iraq to trading oil in US dollars, so the greenback is once again the exclusive oil currency.

* Send a very clear message to any other oil producers just what will happen to them if they do not stay in the dollar circle. Iran has already received one message — remember how puzzled you were that in the midst of moderation and secularization, Iran was named as a member of the axis of evil?

* Place the second largest reserves of oil in the world under direct American control.

* Provide a secular, subject state where the US can maintain a huge force (perhaps with nominal elements from allies such as Britain and Australia) to dominate the Middle East and its vital oil. This would enable the US to avoid using what it sees as the unreliable Turkey, the politically impossible Israel and surely the next state in its sights, Saudi Arabia, the birthplace of al Qaeda and a hotbed of anti-American sentiment.

* Severe setback the European Union and its euro, the only trading bloc and currency strong enough to attack the USA’s dominance of world trade through the dollar.

* Provide cover for the US to run a covert operation to overturn the democratically elected government of Venezuela and replace it with an America-friendly military supported junta — and put Venezuala’s oil into American hands.

Locking the world back into dollar oil trading would consolidate America’s current position and make it all but impregnable as the dominant world power — economically and militarily. A splintered Europe (the US is working hard to split Europe; Britain was easy, but other Europeans have offered support in terms of UN votes) and its euro would suffer a serious setback and might take decades to recover.

It is the boldest grab for absolute power the world has seen in modern times. America is hardly likely to allow the possible slaughter of a few hundred thousand Iraqis stand between it and world domination. President Bush did promise to protect the American way of life. This is what he meant.


Obviously, the US could not simply invade Iraq, so it began casting around for a ‘legitimate’ reason to attack. That search has been one of increasing desperation as each rationalization has crumbled. First Iraq was a threat because of alleged links to al Qaeda; then it was proposed Iraq might supply al Qaeda with weapons; then Iraq’s military threat to its neighbours was raised; then the need to deliver Iraqis from Saddam Hussein’s horrendously inhumane rule; finally there is the question of compliance with UN weapons inspection.

The USA’s justifications for invading Iraq are looking less impressive by the day. The US’s statements that it would invade Iraq unilaterally without UN support and in defiance of the UN make a total nonsense of any American claim that it is concerned about the world body’s strength and standing.

The UN weapons inspectors have come up with minimal infringements of the UN weapons limitations — the final one being low tech rockets which exceed the range allowed by about 20 percent. But there is no sign of the so-called weapons of mass destruction (WMD) the US has so confidently asserted are to be found. Colin Powell named a certain north Iraqi village as a threat. It was not. He later admitted it was the wrong village.

‘Newsweek’ (24/2) has reported that while Bush officials have been trumpeting the fact that key Iraqi defector, Lt. Gen. Hussein Kamel, told the US in 1995 that Iraq had manufactured tonnes of nerve gas and anthrax (Colin Powell’s 5 February presentation to the UN was just one example) they neglected to mention that Kamel had also told the US that these weapons had been destroyed. Parts of the US and particularly the British secret ‘evidence’ have been shown to come from a student’s masters thesis.

America’s expressed concern about the Iraqi people’s human rights and the country’s lack of democracy are simply not supported by the USA’s history of intervention in other states nor by its current actions. Think Guatemala, the Congo, Chile and Nicaragua as examples of a much larger pool of US actions to tear down legitimate, democratically elected governments and replace them with war, disruption, starvation, poverty, corruption, dictatorships, torture, rape and murder for its own economic ends. The most recent, Afghanistan, is not looking good; in fact that reinstalled a murderous group of warlords which America had earlier installed, then deposed, in favour of the now hated Taliban.

Saddam Hussein was just as repressive, corrupt and murderous 15 years ago when he used chemical weapons, supplied by the US, against the Kurds. The current US Secretary for Defence, Donald Rumsfeld, so vehement against Iraq now, was on hand personally to turn aside condemnation of Iraq and blame Iran. At that time, of course, the US thought Saddam Hussein was their man — they were using him against the perceived threat of Iran’s Islamic fundamentalism.

Right now, as ‘The Independent’ writer, Robert Fisk, has noted, the US’s efforts to buy Algeria’s UN vote includes promises of re-arming the military which has a decade long history of repression, torture, rape and murder Saddam Hussein himself would envy. It is estimated 200,000 people have died, and countless others been left maimed by the activities of these monsters. What price the US’s humanitarian concerns for Iraqis? (Of course, the French are also wooing Algeria, their former north African territory, for all they are worth, but at least they are not pretending to be driven by humanitarian concerns.)

Indonesia is another nation with a vote and influence as the largest Muslim nation in the world. Its repressive, murderous military is regaining strength on the back of the US’s so-called anti-terror campaign and is receiving promises of open and covert support — including intelligence sharing.


While the world’s attention is focused on Iraq, America is both openly and covertly supporting the “coup of the rich” in Venezuela, which grabbed power briefly in April last year before being intimidated by massive public displays of support by the poor for democratically-elected President Chavez Frias. The coup leaders continue to use their control of the private media, much of industry and the ear of the American Government and its oily intimates to cause disruption and disturbance.

Venezuela’s state-owned oil resources would make rich pickings for American oil companies and provide the US with an important oil source in its own backyard.

Many writers have noted the contradiction between America’s alleged desire to establish democracy in Iraq while at the same time, actively undermining the democratically-elected government in Venezuela. Above the line, America rushed to recognise the coup last April; more recently, President Bush has called for “early elections”, ignoring the fact that President Chavez Frias has won three elections and two referendums and, in any case, early elections would be unconstitutional.

One element of the USA’s covert action against Venezuela is the behaviour of American transnational businesses, which have locked out employees in support of “national strike” action. Imagine them doing that in the USA! There is no question that a covert operation is in process to overturn the legitimate Venezuelan government. Uruguayan congressman, Jose Nayardi, made it public when he revealed that the Bush administration had asked for Uruguay’s support for Venezuelan white collar executives and trade union activists “to break down levels of intransigence within the Chavez Frias administration”. The process, he noted, was a shocking reminder of the CIA’s 1973 intervention in Chile which saw General Pinochet lead his military coup to take over President Allende’s democratically elected government in a bloodbath.

President Chavez Frias is desperately clinging to government, but with the might of the USA aligned with his opponents, how long can he last?


Some have claimed that an American invasion of Iraq would cost so many billions of dollars that oil returns would never justify such an action. But when the invasion is placed in the context of the protection of the entire US economy for now and into the future, the balance of the argument changes.

Further, there are three other vital factors:

First, America will be asking others to help pay for the war because it is protecting their interests. Japan and Saudi Arabia made serious contributions to the cost of the 1991 Gulf war.

Second — in reality, war will cost the USA very little — or at least, very little over and above normal expenditure. This war is already paid for! All the munitions and equipment have been bought and paid for. The USA would have to spend hardly a cent on new hardware to prosecute this war — the expenditure will come later when munitions and equipment have to be replaced after the war. But munitions, hardware and so on are being replaced all the time — contracts are out. Some contracts will simply be brought forward and some others will be ramped up a bit, but spread over a few years, the cost will not be great. And what is the real extra cost of an army at war compared with maintaining the standing army around the world, running exercises and so on? It is there, but it is a relatively small sum.

Third — lots of the extra costs involved in the war are dollars spent outside America, not least in the purchase of fuel. Guess how America will pay for these? By printing dollars it is going to war to protect. The same happens when production begins to replace hardware. components, minerals, etc. are bought in with dollars that go overseas and exploit America’s trading advantage.

The cost of war is not nearly as big as it is made out to be. The cost of not going to war would be horrendous for the USA — unless there were another way of protecting the greenback’s world trade dominance.


Why are Australia and Britain supporting America in its transparent Iraqi war ploy?

Australia, of course, has significant US dollar reserves and trades widely in dollars and extensively with America. A fall in the US dollar would reduce Australia’s debt, perhaps, but would do nothing for the Australian dollar’s value against other currencies. John Howard, the Prime Minister, has long cherished the dream of a free trade agreement with the USA in the hope that Australia can jump on the back of the free ride America gets in trade through the dollar’s position as the major trading medium. That would look much less attractive if the euro took over a significant part of the oil trade.

Britain has yet to adopt the euro. If the US takes over Iraq and blocks the euro’s incursion into oil trading, Tony Blair will have given his French and German counterparts a bloody nose, and gained more room to manouevre on the issue — perhaps years more room. Britain would be in a position to demand a better deal from its EU partners for entering the “eurozone” if the new currency could not make the huge value gains guaranteed by a significant role in world oil trading. It might even be in a position to withdraw from Europe and link with America against continental Europe.

On the other hand, if the US cannot maintain the oil trade dollar monopoly, the euro will rapidly go from strength to strength, and Britain could be left begging to be allowed into the club.


Some of the reasons for opposition to the American plan are obvious — America is already the strongest nation on earth and dominates world trade through its dollar. If it had control of the Iraqi oil and a base for its forces in the Middle East, it would not add to, but would multiply its power.

The oil-producing nations, particularly the Arab ones, can see the writing on the wall and are quaking in their boots.

France and Germany are the EU leaders with the vision of a resurgent, united Europe taking its rightful place in the world and using its euro currency as a world trading reserve currency and thus gaining some of the free ride the United States enjoys now. They are the ones who initiated the euro oil trade with Iraq.

Russia is in deep economic trouble and knows it will get worse the day America starts exploiting its take-over of Afghanistan by running a pipeline southwards via Afghanistan from the giant southern Caspian oil fields. Currently, that oil is piped northwards — where Russia has control.

Russia is in the process of ramping up oil production with the possibility of trading some of it for euros and selling some to the US itself. Russia already has enough problems with the fact that oil is traded in US dollars; if the US has control of Iraqi oil, it could distort the market to Russia’s enormous disadvantage. In addition, Russia has interests in Iraqi oil; an American take over could see them lost. Already on its knees, Russia could be beggared before a mile of the Afghanistan pipeline is laid.


The scenario clarifies the seriousness of America’s position and explains its frantic drive for war. It also suggests that solutions other than war are possible.

Could America agree to share the trading goodies by allowing Europe to have a negotiated part of it? Not very likely, but it is just possible Europe can stare down the USA and force such an outcome. Time will tell. What about Europe taking the statesmanlike, humanitarian and long view, and withdrawing, leaving the oil to the US, with appropriate safeguards for ordinary Iraqis and democracy in Venezuela?

Europe might then be forced to adopt a smarter approach — perhaps accelerating the development of alternative energy technologies which would reduce the EU’s reliance on oil for energy and produce goods it could trade for euros — shifting the world trade balance.

Debunking the Dumping-the-Dollar Conspiracy

By Dean Baker

For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq’s decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran’s threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country’s nuclear program.

The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday, as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.

But they really shouldn’t be concerned. Fisk’s theory would make a good plot for a Hollywood movie, but it doesn’t make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States.

With the United States’ ascendancy as the pre-eminent economic power after World War II, the dollar became the world’s reserve currency: Most countries held dollars in reserve in the event that they suddenly needed an asset other than their own currency to pay for imports, or to support their own currency. Much international trade, including trade not involving the United States, was carried through in dollars. In addition, most internationally traded commodities became priced in dollars on exchanges. However, the dollar was never universally used to carry through trade (even trade in oil), and the pricing of commodities in dollars is primarily just a convention.

Any market — a stock market, a wheat market, or the oil market — requires a unit of measure. The importance of the U.S. economy made the dollar the obvious choice for most markets. But there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market. It’s simply an accounting issue.

Suppose that prices in the oil market were quoted in yen or bushels of wheat. Currently, oil is priced at about $70 a barrel. A dollar today is worth about 90 yen. A bushel of wheat sells for about $3.50. If oil were priced in yen, then the current price of a barrel of oil in yen would 6,300 yen. If oil were priced in wheat, then the price of a barrel of oil would be 20 bushels. If oil were priced in either yen or wheat it would have no direct consequence for the dollar. If the dollar were still the preferred asset among oil sellers, then they would ask for the dollar equivalents of the yen or wheat price of oil. The calculation would take a billionth of a second on modern computers, and business would proceed exactly as it does today.

It does matter slightly that the trade typically takes place in dollars. This means that those wishing to buy oil must acquire dollars to buy the oil, which increases the demand for dollars in world financial markets. However, the impact of the oil trade is likely to be a very small factor affecting the value of the dollar. Even today, not all oil is sold for dollars. Oil producers are free to construct whatever terms they wish for selling their oil, and many often agree to payment in other currencies. There is absolutely nothing to prevent Saudi Arabia, Venezuela, or any other oil producer — whether a member of OPEC or not — from signing contracts selling their oil for whatever currency is convenient for them to acquire.

Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.


Have you ever wondered why the US is such a close ally of Saudi Arabia?

Why Saudi Arabia is an Ally

Have you ever wondered why the US is such a close ally of Saudi Arabia that American presidents bow to the king and hold the Saudi Crown Prince’s hand.  This isn’t just because the Saudi are the low-cast swing producer of oil, with the potential to influence oil prices.

It’s also because the Saudis have historically had the power to enable the US to remain the global reserve currency and finance the US debt, even when the state of US finances would suggest it is undeserving of such a position.

Breton Woods: Setting up a “Rigged” System

In 1944 at Breton Woods. The British advised the US to setup a neutral financial system (using a unit of account known as the “Bancor“) to be used for international trade.  Each of the major economies would have a share of the Bancor in proportion to the size of its economy.

The American’s rejected the British proposal, instead favoring a global reserve currency in which the US maintained a dominant and exclusive share.

The British Warning

The British advised the US that this would benefit the US in the short term but would later cause distortions in the market as American exports would become more expensive.

The British warning proved to be accurate.  Although the entrance of China into the WTO has also been a significant factor, the structure of the dollar as the sole reserve currency has led to the exporting of supply chains — one of Trump’s chief complaints.  The Council of Foreign Relations has cited one of its own articles arguing that the US should voluntarily relinquish the global reserve currency, but that is unlikely to happen as long as the policy benefits elites.

Breaking our own “Rigged” System

After a series of budget deficits forced the US to abandon the gold standard, the US risked losing its dominant status.

In 1971, after large deficits caused by the military industrial complex, wars in Korea and Vietnam, and LBJ’s “Great Society” spending , Nixon was forced to abandon the Gold Standard.

Nixon said this was a temporary measure to thwart speculators, but in reality, American’s allies had lost faith in the US’s fiscal discipline.

After rigging the financial system so that America benefited from exclusivity as the reserve currency, America’s allies thought the US was failing to live up to its commitments in its own rigged game.

France calls America’s Bluff

France decided to call the US bluff by converting the paper dollars to gold at the official rate of $35 per ounce.  They loaded up a naval vessel with the paper dollars that the US had paid them and sent it to New Jersey.  They they requested that the US convert their dollars to gold at the advertised rate.  Since the market was pricing gold at a significantly higher price than the US’s official rate, the French were signaling in a very visible way that the US was effectively bankrupt, based on the gold standard they themselves designed.  Because the British and Germans also intended to follow the French, on Aug 15, 1971 Nixon announced that he was going to thwart speculators by “temporarily” suspending the dollar’s backing with gold.

The Saudi Alliance: Avoiding Fiscal Discipline

The US then faced a challenge of maintaining its power without having to restore fiscal discipline.  They did this by devising the petrodollar system in which

  1. Saudi Arabia agreed to price oil exclusively in USD and convince their friends in OPEC to follow suit.  This generated demand for US dollars because every country that wanted oil had to obtain dollars to purchase it.  It also generated demand for US Treasury bills to hold as foreign reserves.
  2. They agreed to take to profits from those dollars and secretly purchase US Treasury bonds, thereby financing US debt.
  3. They also agreed to purchase US military equipment, thereby funding the military industrial complex and, at the time, purchasing surplus weapons manufactured for the Vietnam War.



Mark Carney has proposed reviving the concept of the Bancor.  Carney is formerly Governor of the Bank of Canada and later Governor of the Bank of England.

Zhou Xiaochuan, the governor of the People’s Bank of China has also endorsed Keyne’s Bancor approach.

Columbia University professor Jeffery Sachs calls for multiple reserve currencies.

The Council of Foreign Relations says that proposals for alternative global reserve currencies are unlikely as long as the US has a veto at the IMF.

Has the Petrodollar Had Its Day?

Electronic copy available at:
USAEE Working Paper Series

Has the Petrodollar Had Its Day?

Dr Mamdouh G. Salameh
International Oil Economist
World Bank Consultant
UNIDO Technical Expert
Visiting Professor of Energy Economics at ESCP
Europe University, London

Oil Market Consultancy Service
Spring Croft
Sturt Avenue
Surrey GU27 3SJ
United Kingdom
Tel: (01428) – 644137

Electronic copy available at:
Has the Petrodollar Had Its Day?
Dr Mamdouh G Salameh*
The petrodollar came into existence in 1973 in the wake of the collapse of the
international gold standard which was created in the aftermath of World War II under
the Bretton Woods agreements. These agreements also established the US dollar as
the reserve currency of the world. The Nixon Administration understood that the
collapse of the gold standard system would cause a decline in the global demand for
the US dollar. Maintaining demand for the US dollar was vital for the United States’
economy. So the United States under Nixon struck a deal in 1973 with Saudi Arabia.
Under the terms of the deal, the Saudis would agree to price all of their oil exports in
US dollars exclusively and be open to investing their surplus oil proceeds in US debt
securities. In return, the United States offered weapons and protection of Saudi
oilfields from neighbouring countries including Israel. For the Americans, the
petrodollar increases demand for the dollar and also for US debt securities and
allows the US to buy oil with a currency it can print at will. In 1975, all of the OPEC
nations agreed to follow suit. Maintaining the petrodollar is America’s primary goal.
Everything else is secondary. However, as the US dollar continued to lose
purchasing power, several oil-producing nations began to question the wisdom of
accepting increasingly devalued petrodollar for their oil exports. Several countries
have attempted to move away from the petrodollar, or already moved away.
Examples include Iraq under Saddam Hussein, Iran, Syria and Venezuela.
Additionally, other nations are choosing to use their own currencies for oil like China,
Russia and India. This paper will deal with the actions, incentives, and related
consequences that the United States has created through its attempts to maintain
global hegemony through the petrodollar. It will examine the latest challenges facing
the petrodollar and how the petrodollar system influences the United States’ foreign
policy. The paper will conclude that the petrodollar has had its day and that it will be
a matter of time before it becomes redundant with huge repercussions for the US
economy and the global economy.
Key Words: Petrodollar, Yuan, Reserve Currency, Inflation, Federal Reserve.
The petrodollar came into existence in 1973 in the wake of the collapse of the
international gold standard which was created in the aftermath of World War II under
the Bretton Woods agreements. These agreements also established the US dollar as
the reserve currency of the world. Former president Richard Nixon and his then
foreign secretary Henry Kissinger understood that the collapse of the gold standard
system would cause a decline in the global demand for the US dollar.
Electronic copy available at:
Maintaining that “artificial dollar demand” was vital for the United States’ economy.
So the United States under Nixon struck a deal in 1973 with Saudi Arabia under
which every barrel of oil purchased from the Saudis would be denominated in US
dollars only. Any country that sought to purchase oil from Saudi Arabia would be
required to first exchange its own national currency for dollars. Under the terms of
the deal, the Saudis would agree to price all of their oil exports in US dollars
exclusively and be open to investing their surplus oil proceeds in US debt securities.
In exchange, the United States offered weapons and protection of Saudi oilfields
from neighbouring countries including Israel.
For the Americans, the petrodollar increases demand for the dollar and also for US
debt securities and allows the US to buy oil with a currency it can print at will.
Maintaining the petrodollar is America’s primary goal. Everything else is secondary.
Without it, the US dollar would collapse. 1
In 1975, all of the OPEC nations agreed to follow suit. However, as the US dollar
continued to lose purchasing power, several oil-producing nations began to question
the wisdom of accepting increasingly worthless paper currency for their own oil
exports. Today, several countries have attempted to move away from the petrodollar,
or already moved away. Examples include Iraq under Saddam Hussein, Iran, Syria
and Venezuela. Additionally, other nations are choosing to use their own currencies
for oil like China, Russia and India. The petrodollar created an immediate demand
for US dollar around the globe thus enhancing its artificial value. And of course, as
global oil demand increased, so did the demand for the dollar. As more countries
continue to move away from the petrodollar, massive inflationary pressures could be
expected to strike the US economy. 2
What is Petrodollar?
The Petrodollar is the money that oil-exporting nations receive from selling their oil in
US dollar-denominated currency which is deposited into Western banks. The term
was first coined by Egyptian-born American economist, Professor Ibrahim M Oweiss
of Georgetown University in a pioneering work on petrodollar surpluses in 1974. 3
Under the Bretton Woods agreements, the US Dollar was pegged at a fixed rate to
gold. This made the US dollar completely convertible into gold at a fixed rate of $35
per ounce within the global economic community. This international convertibility into
gold allayed concerns about the fixed rate regime and created a sense of financial
security among nations in pegging their currencies’ value to the dollar. After all, the
Bretton Woods arrangements provided an escape hatch: if a particular nation no
longer felt comfortable with the dollar, they could easily convert their dollars holdings
into gold. This arrangement helped restore a much-needed stability in the financial
system. But it also created a strong global demand for US dollars as the preferred
medium of exchange (see Figure 1).
And along with this growing demand for US Dollars came the need for a
larger supply of dollars. This begs the question: Are there any obvious benefits from
creating more dollars? And if so, who benefits?
The United States government benefits from a global demand for US dollars. How?
It’s because a global demand for dollars gives the Federal government a
“permission” to print more. Is it a coincidence that printing dollars is the US
government’s preferred method of dealing with its economic problems?
Figure 1

Source: Courtesy of Jerry Robinson, FTM
One has to remember that Washington only has four basic ways to solve its
economic problems: (1) Increase revenue by raising taxes; (2) Cut spending by
reducing benefits; (3) Borrow money through the issuance of government bonds and
(4) Print money.
Raising taxes and making meaningful spending cuts can be political suicide.
Borrowing money is a politically convenient option, but you can only borrow so much.
That leaves the final option of printing money. Printing money requires no immediate
sacrifice and no spending cuts. However, printing more money than is needed can
lead to inflation. Therefore, if a country can somehow generate a global demand for
its currency, it will have a “permission” to print more money. Understanding this
“permission” concept will be important as we continue.
Finally, the primary beneficiary of an increased global demand for the US Dollar is
America’s central bank, the Federal Reserve.
The U.S. Dollar is issued and loaned to the United States government by the Federal
Reserve. Because the dollars are loaned to the US government by the Federal
Reserve, which is a private central banking cartel, the dollars must be paid back.
And not only must the dollars be paid back to the Federal Reserve. They must be
paid back with interest. And who sets the interest rate targets on the loaned dollars?
It’s the Federal Reserve, of course.
To put it simply, the Federal Reserve has a clear vested interest in maintaining a
stable and growing global demand for US Dollars because they create them and
then earn profit from them with interest rates which they set themselves.
In summary, the American consumer, the Federal government, and the Federal
Reserve all benefit to varying degrees from a global demand for US Dollars. There is
an old saying that goes, “He who holds the gold makes the rules.” This statement
has never been truer than in the case of America in the post–World War II era. By
the end of the war, nearly 80% of the world’s gold was sitting in US vaults, and the
U.S. Dollar had officially become the world’s undisputed reserve currency. 4
As a result of the Bretton Woods arrangements, the dollar was considered to be “as
safe as gold.”
A study of the United States economy in the post-World War II era demonstrates that
this was a time of dramatic economic growth and expansion. By the late 1960’s,
however, the American economy was under major pressure. Deficit spending in
Washington was uncontrollable as former US President Lyndon B. Johnson began to
realize his dream of the “Great Society.” Meanwhile, an expensive and unpopular
war in Vietnam funded by record deficit spending led some nations to question the
economic underpinnings of America. Vietnam, the Great Society, and deficit
Spending undermined the gold standard.
After all, the entire global economic order had become dependent upon a sound US
economy. Countries like Japan, Germany, and France, while fully on the mend from
the devastation of World War II, were still largely dependent upon a financially stable
American economy to maintain their economic growth.
By 1971, as America’s trade deficits increased and its domestic spending soared, the
perceived economic stability of the United States was being publicly challenged by
many nations around the globe. Foreign nations could sense the severe economic
difficulties mounting in Washington as the United States was under financial
pressure at home and abroad. According to most estimates, the Vietnam War had a
price tag in excess of $200 billion. This mounting debt, plus other debts incurred
through a series of poor fiscal and monetary policies, was highly problematic given
America’s global monetary role. 5
But it was not America’s financial issues that most concerned the international
economic community. Instead, it was the growing imbalance of US gold reserves to
debt levels that was most alarming.
The United States had accumulated large amounts of new debts but did not have the
money to pay for them. Making matters worse, US gold reserves were at all-time
lows as nation after nation began requesting gold in exchange for their dollar
holdings. It was almost as if foreign nations could see the writing on the wall for the
end of the Bretton Woods arrangements.
As 1971 progressed, so did foreign demand for US gold. Foreign central banks
began cashing in their excess dollars in exchange for the safety of gold. As nations
lined up to exchange their dollar holdings for Washington’s gold, the United States
realized that the game was over. Clearly, America had never intended to be the
globe’s gold warehouse. Instead, the convertibility of the dollar into gold was meant
to generate a global trust in US paper money. Simply knowing that the US dollar
could be converted into gold if necessary was good enough for some — but not for
everyone. The nations which began to doubt America’s ability to manage their own
finances decided to opt for the recognized safety of gold.
One would have expected that the large and growing demand by foreign nations for
gold instead of dollars would have given a strong signal to the United States to get
its fiscal house in order. Instead, America did exactly the opposite. As Washington
continued racking up enormous debts, foreign nations sped up their demand for
more US gold and fewer U.S. dollars. Washington was caught in its own trap and
was required to supply real money (gold) in return for the inflows of their paper
money (US dollars).
Soon the United States was bleeding gold. Washington knew that the system was no
longer viable, and certainly not sustainable. But what could they do to stem the
crisis? There were only two options. The first option would require that Washington
immediately reduce its massive spending and dramatically reduce its existing debts.
This option could possibly restore confidence in the long-term viability of the US
economy. The second option would be to increase the dollar price of gold to
accurately reflect the new economic realities. There was an inherent difficulty in both
of these options that made them unacceptable to the United States at the time. They
both required fiscal restraint and economic responsibility. Then, as now, there was
very little appetite for reducing consumption or changing the American way of life for
the sake of “sacrifice” or “responsibility.”
The Bretton Woods agreements created an international gold standard with the US
dollar as the ultimate beneficiary. But in an ironic twist of fate, the system that was
designed to bring stability to a war-torn global economy was threatening to plunge
world back into financial chaos.
On August 15, 1971, under the leadership of former President Nixon, Washington
chose to maintain its reckless consumption and debt patterns by detaching the US
Dollar from its convertibility into gold. By “closing the gold window,” Nixon destroyed
the final vestiges of the international gold standard. Nixon’s decision effectively
ended the practice of exchanging dollars for gold as directed under the Bretton
Woods agreements. It was in the year 1971, that the US dollar officially abandoned
the gold standard and was declared a purely “fiat” currency, a currency which
derives its value from its sponsoring government and is issued and accepted by
decree. 6
By “closing the gold window,” Washington had not only affected American economic
policy but also global economic policy. Under the international gold standard of
Bretton Woods, all currencies derived their value from the value of the dollar. And
the dollar derived its value from the fixed price of its gold reserves. But when the
dollar’s value was detached from gold, it became what economists call a “floating”
currency”. Put simply, a “floating” currency is a currency that is not fixed in value.
Like any commodity, the dollar could be affected by the market forces of supply and
demand. When the dollar became a “floating” currency, the rest of the world’s
currencies, which had been previously fixed to the dollar, suddenly became “floating”
currencies as well.
In this new era of floating currencies, the US Federal Reserve had finally freed itself
from the constraint of a gold standard. Now, the US dollar could be printed at will —
without the worry of not having enough gold reserves to back up new currency
production. And while this new-found monetary freedom would alleviate pressure on
America’s gold reserves, there were other concerns. One major concern that
Washington had was regarding a potential shift in global demand for the US
dollar. With the dollar no longer convertible into gold, would demand for the dollar by
foreign nations remain the same, or would it fall?
The second concern had to do with America’s extravagant spending habits. Under
the international gold standard of Bretton Woods, foreign nations gladly held US debt
securities, as they were denominated in gold-backed US dollars. Would foreign
nations still be eager to hold America’s debts despite the fact that these debts were
denominated by a heavily indebted paper currency? Once one understands this
“dollars for oil” arrangement, it becomes easier to get a better understanding of what
motivates America’s foreign policy.

Dollars for Oil Replace Dollars for Gold
Despite pressure from foreign nations to protect the dollar’s value by reining in
excessive government spending, Washington displayed little fiscal constraint and
continued to live far beyond its means. It had become obvious to all that America
lacked the basic fiscal discipline which could prevent the destruction of its own
Like previous governments before it, America had figured out how to “game” the
global reserve currency system for its own benefit, leaving foreign nations in an
economically vulnerable position. After America and its citizens have tasted the
sweet fruit of excessive living at the expense of other nations, they are not going to
change their way of life.
It is unfair, however, to say that the decision-makers in Washington were blind to the
deep economic issues confronting their country in the late 1960’s and early
1970’s.They were aware that the “dollars for gold” arrangement had become
completely unsustainable. But instead of seeking solutions to the global economic
imbalances that had been created by America’s excessive deficits, Washington’s
primary concern was how to gain an even greater stranglehold on the global
In order to ensure their economic hegemony, and thereby preserve an increasing
demand for the dollar, the Washington elites needed a plan. And in order for this
plan to succeed, it would require that the artificial dollar demand that had been lost in
the wake of the gold standard collapse be replaced through some other mechanism.
That plan came in the form of the petrodollar system.

Saudi Arabia to the Rescue
Saudi Arabia has a very long history of collaborating with the United States in
economic and geopolitical matters. The deal struck in 1973 between the United
States and Saudi Arabia to denominate all Saudi oil exports exclusively in US dollars
is but one case among many with the Saudis doing America’s bidding.
The most recent example of this collaboration is the steep decline in crude oil prices
since July 2014 with Saudi Arabia not only refusing to cut its production to bolster the
oil price but also exerting strong pressure on OPEC not to do so. Circumstantial
evidence suggests some political collusion between Saudi Arabia and the United
States behind the steep decline in the oil price since July 2014. 7
Saudi Arabia took advantage of the low oil prices to inflict damage on Iran’s
economy and weaken its influence in the Middle East in its proxy war with Iran over
its nuclear programme whilst the United States is taking advantage of the low oil
prices to weaken Russia’s economy and tighten the sanctions against Russia over
the Ukraine.
History repeats itself. Early in the 1980s, Sheikh Ahmad Zaki Yamani, the veteran,
former oil minister of Saudi Arabia, suddenly awoke to Saudi Arabia’s need for
market Share. He flooded the market with oil causing the oil price to collapse to
$10/barrel. It later transpired that the Saudi need for a market share was just a cover
for a CIA-Saudi conspiracy to hasten the demise of the former Soviet Union.
And now the Saudi oil minister Ali Al-Naimi is waking up to the same need. Al-Naimi
has followed in the exact footsteps of Yamani. He suddenly remembered at the
166th Meeting of the Conference of OPEC on the 27th of November 2014 the need
for Saudi market share. This is probably a cover for a new collusion between the
United States and Saudi Arabia to lower the oil prices in a new conspiracy against
Russia and Iran.
Whilst the key players have changed, the strategic objectives have remained the

The Primary Benefits of the Petrodollar for the United States
The petrodollar system has proven tremendously beneficial to the US economy. In
addition to creating a marketplace for affordable imported goods from countries who
need US dollars, there are more specific benefits. In essence, America receives a
double loan out of every global oil transaction.
The petrodollar system provides at least three immediate benefits to the United
States. It increases global demand for US dollars. It also increases global demand
for US debt securities and it gives the United States the ability to buy oil with a
currency it can print at will. Let’s briefly examine each one of these benefits.

One of the most brilliant
aspects of the petrodollar system was requesting that oil producing nations take their
excess oil profits and place them into US debt securities. This system would later
become known as “petrodollar recycling” as coined by Henry Kissinger. Through
their exclusive use of dollars for oil transactions, and then depositing their excess
profits into American debt securities, the petrodollar system is a “dream come true”
for a spendthrift government like the United States.
This has enabled the United States to maintain artificially low interest rates. The US
economy has become dependent upon these artificially low interest rates and,
therefore, has a vested interest in maintaining them through any means necessary.
The massive economic distortions and imbalances generated by the petrodollar
system will eventually self-correct when the artificial dollar and US debt demand is
removed. That day is coming.
Another major benefit of the petrodollar system has to do with the actual purchase of
oil itself. With oil priced in US dollars, America can literally print money to buy oil and
then have the oil producers hold the debt that was created by printing the money in
the first place. What other nation, besides America, can print money to buy oil?

Petrodollars & Petrodollar Surpluses
Since petrodollars and petrodollar surpluses are by definition denominated in US
dollars, then purchasing power is dependent on the US rate of inflation and the rate
at which the U.S. dollar is exchanged (whenever there is need for convertibility) by
other currencies in international money markets. It follows that whenever economic
or other factors affect the US dollar, petrodollars will be affected to the same
magnitude. The link, therefore, between the US dollar and petrodollar surpluses, in
particular, has significant economic, political, and other implications.
First, the placement of petrodollar surpluses of the Arab oil exporting nations in the
United States may be regarded politically as hostage capital. 8 In the event of a
major political conflict between the United States and an Arab oil-exporting nation,
the former with all its military might 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. The US
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.
Second, an oil-exporting country can have petrodollar surpluses only if its absorptive
capacity is less than its earnings from the sale of’ oil for any particular period of time.
It follows, therefore, that petrodollar surpluses depend on oil prices, volumes
exported, and the nation’s absorptive capacity.
Third, petrodollar surpluses do not represent real wealth but rather are a vehicle by
which the latter can be acquired. If kept in liquid form such as paper dollars, their
purchasing power will gradually be eroded by inflation and adverse foreign exchange
rates. Both are affected in the United States by a host of variables such money
supply, interest rates, marginal productivity and balance-of-payments deficit. Another
factor is US monetary and fiscal policy which in turn affects some of’ these variables.
Therefore, the purchasing power of petrodollar surpluses belonging, for example, to
Arab oil-exporting nations is determined by factors that are not in the control of these
countries. 9
Fourth, efficient allocation of petrodollars for internal investments could increase the
productive capacity of an oil-exporting nation and may work to its relative advantage.
However, dependency on imported consumer goods promotes the export of limited
oil resources that could have been otherwise used for internal capital development.
Fifth, the economic development of an oil-exporting nation is based on the
conversion of its oil resources into other assets such as wealth-creating projects,
diversification, education, technology, infrastructure, and other forms of real wealth,
that is, real capital stock. Obviously the conversion process can be carried on at
different rates. An optimum rate is achieved when oil is pumped at a level that can
maximize the conversion process. By pumping oil in excess of an optimum
production rate, the Arab Gulf oil-producing countries accumulated petrodollar
surpluses until 1981. After that the petrodollar surpluses have turned into deficits.
That was the time when Sheikh Ahmad Zaki Yamani flooded the global oil market
with oil causing the oil price to collapse to around $10/barrel. 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. 10
Allocation of Petrodollar Surpluses
The bulk of petrodollar surpluses is held either in US treasury bills and other shortterm instruments or in American and Western European banks. Petrodollar
surpluses have also been used to increase the official reserves of the oil-exporting
countries at both the International Monetary Fund and the International Bank for
Reconstruction and Development.
Petrodollar surpluses have been recycled by commercial banks in the United States
and other industrialized nations as well as by international institutions. By drawing
against petrodollar surpluses as deposits or certificates of deposits, banks were able
to expand their volume of lending. For bankers the most obvious clients were the
developing countries, mainly in Latin America, such as Mexico, Brazil, and
According to US Treasury information, petrodollar surpluses have turned into deficits
since 1982. There are three main reasons for this turn of events: increase in imports
by oil-exporting nations; reduction in the demand for oil, particularly from OPEC; and
the oil glut which led to a reduction in its price.

The Petrodollar Wars: Iraq & Libya
The world currently consumes 92 million barrels of oil per day (mbd) and this is
projected to rise to 97 mbd by 2020. And thanks to the petrodollar system, growing
global demand for oil leads to an increase in US dollar demand. This artificial
demand for US dollars has provided remarkable benefits for the US economy. It has
also required the Federal Reserve to keep the dollar in plentiful supply (see Figure
By perpetually expanding the US money supply, America’s standard of living
increases as well. The problem with this situation is that the only way that it can be
sustained is if the demand for the dollar and for US debt securities remains
consistently strong.
On September 11, 2001, America’s relations with the Middle East would be altered
forever. The tragic events of that day still live on in the memory of the world.
Interestingly, just five hours after American Airlines Flight 77 crashed into the
Pentagon, former US Secretary of Defence Donald Rumsfeld began ordering his
staff to develop plans for a strike on Iraq despite the fact that there was absolutely no
evidence linking the country, or its leader Saddam Hussein, to the 9/11 attacks. 11

Figure 2
Source: Courtesy of
On September 12, 2001, despite zero evidence against Iraq, Defence Secretary
Rumsfeld proposed to former president George W. Bush that Iraq should be “a
principal target of the first round in the war against terrorism.” Bush, along with his
other advisors, including Deputy Secretary of Defence Paul Wolfowitz, strongly
supported the idea that Iraq should be included in their attack plans.
In fact, Washington had already been preparing for an invasion of Iraq. The Los
Angeles Times reported that one year prior to the attacks of 9/11, the US began in
April 2000 constructing Al Adid, a billion-dollar military base in Qatar with a 15,000-
foot long runway. What was Washington’s stated justification for the new Al Adid
base, and other similar ones in the Gulf region? Preparedness for renewed action
against Iraq.12
It would later be revealed that an invasion of Iraq was at the top of the Bush
administration’s agenda only 10 days after his inauguration, which was a full eight
months before 9/11. 13
So why Iraq? Why the rush to war with a country that so obviously had no
connection with the events of 9/11? Did the U.S. have some other motivation for
seeking international support to invade Iraq?
On September 24, 2000, Saddam Hussein allegedly emerged from a meeting of his
cabinet and proclaimed that Iraq would soon switch its oil export transactions from
the petrodollar to the euro. By 2002, Saddam had fully converted to a petroeuro – in
essence, dumping the dollar. On March 19, 2003, George W. Bush announced the
commencement of a full scale invasion of Iraq.
Saddam’s bold threat to the petrodollar system had invited the full force and fury of
the US military onto his country. Or was America’s stated purpose to “liberate” the
Iraqi people from a brutal regime actually a clever guise for making an example of a
nation which dared threaten the existing petrodollar system? However, it would be
naïve to assume that this was the real reason for the invasion of Iraq in 2003. The
real reason was oil. 14 Even Alan Greenspan the former chairman of the Federal
Reserve Board for 17 years, concurs. 15
It should be noted that Iraq’s proven oil reserves are considered to be among the
largest in the world. Some experts believe that Iraq’s oilfields, many of which have
yet to be exploited, will catapult Iraq above Saudi Arabia in total proven oil reserves
in the coming years.
It is a matter of conjecture that the Middle East could have had a different shape
today had the petrodollar not come into existence. Being established on a
geopolitical infrastructure, the petrodollar has developed dimensions of security,
economics and development for the US and the major oil exporters in the Middle
The petrodollar has caused much ire for many nations due to the power it gave the
US. Interestingly, anyone who challenged the petrodollar did not fair well.
In Libya, US-backed rebels toppled Muammar Gaddafi who proposed a gold-backed
African currency that would be traded for African oil. Moreover, Russian president
Putin is under scrutiny for his push towards a Yuan-Ruble oil trading system. 16

Defending the Petrodollar System
Since the dawn of the oil age, the geopolitical strategies concocted by developed
nations have increasingly been centred on maintaining easy access to the world’s oil
supplies. Only the truly naive could deny the obvious powerful economic and political
incentives that are derived from access to cheap oil supplies. And while most nations
have a clear motivation to maintain easy access to the world’s cheapest oil supplies
out of sheer economic necessity, this is certainly not the sole concern for the United
States. The United States has an additional unique incentive regarding the world’s
oil, namely, ensuring that all oil around the globe, both current supplies and future
discoveries, remain priced in US dollars.
A simple examination of America’s foreign policy efforts in the wake of the ‘oil shock’
of 1973 and in the ensuing foundation of the petrodollar system in the mid-1970s,
makes it painstakingly clear to any casual political observer that a central goal of
Washington has been to control global oil supplies, specifically in the Middle East.
After the 1973 ‘oil shock’, former president Nixon warned US citizens “that American
military intervention to protect vital oil supplies” in the region, was a strong possibility.
This speech marked the first official and formal commitment to deploy US troops to
the Middle East for the explicit reason of protecting America’s oil interests.
On 23 January 1980, former US president Jimmy Carter proclaimed in his State of
the Union Address the “Carter Doctrine” which stated that the United States would
use military force if necessary to defend its national interests in the Persian Gulf. It
was a response to the Soviet Union’s intervention in Afghanistan in 1979 and was
intended to deter the Soviet Union from threatening oil supplies from the Middle
By January 1, 1983, the United States created the Central Command (CENTCOM)
with the stated mission of acting as a deterrent (primarily against the Soviets) and to
help maintain regional stability and the flow of oil from the Arab Gulf to the United
States and other western allies (see Figure 3). After all, maintaining a global order
dependent upon a “dollars for oil” system is no cheap task and requires careful
monitoring and oversight of the world’s oil supplies. Chief among the potential
concerns for the petrodollar
guardians are: threats of
restrictions on oil supplies
and, perhaps most importantly,
devising “permanent solutions” to
the problems presented
by nations who dare challenge
the current “dollars for oil”
Figure 3

Putin’s Revenge: Russia is Actually Abandoning the Petrodollar
Sanctions were imposed on Russia after its intrusion into the Ukraine in February
2014 and the ensuing annexation of the Crimea. Even before sanctions were
introduced, Russia was already in the process of reorienting its energy posture to
Asia in view of the growth in energy demand in that continent and the likely
stagnation or decline of demand in Europe over the next few decades. 17
Angered by the sanctions, the Russians began considering action against the United
States. They are actually making a move against the petrodollar. It appears that
they are quite serious about their de-dollarization strategy. The largest natural gas
producer on the planet, Gazprom, has signed agreements with some of their biggest
customers to switch payments for natural gas from US dollars to euros. And
Gazprom would have never done this without the full approval of the Russian
government which holds a majority stake in Gazprom. 18 When you are talking
about Gazprom, you are talking about a company that is absolutely massive. It is
one of the largest companies in the entire world and it makes up 8% of Russian GDP
all by itself. It holds 18% of the proven natural gas reserves of the entire world, and
it is also a very large oil producer. So for Gazprom to make a move like this is
extremely significant. 19
When Barack Obama decided to slap some meaningless economic sanctions on
Russia a while back, he probably figured that the world would forget about them
soon after. But the Russians do not forget, and they certainly do not forgive.
At this point the Russians are turning their back on the United States, and that
includes the US dollar. What Gazprom is now doing has the potential to really shake
up the global financial landscape.
Gazprom Neft had signed additional agreements with consumers on a possible
switch from dollars to euros for payments under contracts. Nine out of ten
consumers had agreed to switch to euros. 20
And Gazprom is not the only big company in Russia that is moving away from the
US dollar. According to Russia Today TV (RT), other large Russian corporations are
moving to other currencies as well.
Russia will start settling more contracts in Asian currencies, especially the Chinese
yuan in order to lessen its dependence on the dollar market, and because of
Western-led sanctions that could freeze funds at any moment. Diversifying trade
accounts from dollars to the Chinese yuan and other Asian currencies such as the
Hong Kong dollar and Singapore dollar has been a part of Russia’s pivot towards
Asian as tension with Europe and the US remain strained over Russia’s action in
And expanding the use of non-dollar currencies is one of the main things that major
Russian banks are working on right now. Russia’s large exposure to the dollar
subjects it to more market volatility in times of crisis. There is no reason why you
have to settle trade you do with Japan in dollars.
Meanwhile, Russians have been pulling money out of US banks at an
unprecedented pace. In March 2014, without waiting for the sanction spiral to kick in,
Russians yanked their money out of US banks. Deposits by Russians in US banks
suddenly plunged from $21.6 billion to $8.4 billion in one month. They’d learned their
lesson in Cyprus the hard way: get your money out while you still can before it gets
As Russia abandons the US dollar, that will hurt but if other nations start following
suit that could eventually cause a financial avalanche.
What we are witnessing right now is just a turning point. The effects won’t be felt
right away. But this is definitely another element in the “perfect storm” that is starting
to brew for the US economy.
Putin’s support of the BRICS Development Bank is significant. The New BRICS
Development Bank is up and running. It is backed by gold, silver and real
commodities unlike the US Federal Reserve System which is based on Fiat private
China and Russia are together moving to create a parallel financial system,
disentangled from the Western financial system. It includes creating entities such as
the Asian Development Bank. One of the principal tools in the hands of Washington
to control the global system has always been the International Monetary Fund (IMF).
Nations have to go to the IMF to ask for financial help when in difficulties, but
recently it was China – and not the IMF – which bailed out Venezuela and Argentina
and provided financial support to Russia when their currencies came under pressure.
The IMF and the World Bank were no longer at the centre of the global financial
order. They are being displaced by China. 22
European and American leaders thought that Russia would weaken because of
sanctions and the fall of the ruble against the US dollar, but China intervened and
stopped the collapse of the ruble. In short, China is operating as a backstop to a
financial system that is in the process of shifting dramatically away from Western

China Is Also Making A Move Against the US Dollar
There are indications that the Chinese are now accelerating their long-term plan to
dethrone the US dollar. The truth of the matter is that China does not plan to allow
the US financial system to dominate the world indefinitely. Right now, China is the
number one exporter on the globe and the largest crude oil importer in the world.
And soon it will have the largest economy in the world.
The Chinese would like to see global currency usage reflect this shift in global
economic power. At the moment, most global trade is conducted in US dollars and
more than 60% of all global foreign exchange reserves are held in US dollars. This
gives the United States an enormous built-in advantage but thanks to decades of
incredibly bad decisions, this advantage is starting to erode. And due to the recent
political infighting in Washington D.C., the Chinese sense vulnerability. China has
begun to publicly worry about the level of US debt. Chinese officials have publicly
threatened to stop buying any more US debt and have started to aggressively make
currency swap agreements with other major global powers and, furthermore, China
has been accumulating unprecedented amounts of gold. All of these moves are
setting up the moment in the future when China will completely pull the rug out from
under the US dollar.
Today, the US financial system is the core of the global financial system. Because
nearly everybody uses the US dollar to buy oil and to trade with one another, this
creates a tremendous demand for US dollars around the planet. So other nations
are generally happy to take US dollars in exchange for oil, cheap plastic gadgets and
other things that US consumers “need”.
Major exporting nations accumulate huge piles of dollars, but instead of just letting all
of that money sit there, they often invest large portions of their currency reserves into
US Treasury bonds which can easily be liquidated if needed.
So if the US financial system is the core of the global financial system, then US debt
is “the core of the core”. US Treasury bonds fuel the print-borrow-spend cycle that
the global economy depends upon. That is why a US debt default would be such a
big deal. A default would cause interest rates to skyrocket and the entire global
economic system to go haywire.
Unfortunately for the United States, the US debt spiral cannot go on indefinitely. US
debt is growing far more rapidly than GDP is, and therefore the debt is completely
and totally unsustainable.
The Chinese understand what is going on, and when the dust settles they plan to be
the last ones standing. In the aftermath of a US currency collapse, China anticipates
having the largest economy on the planet, more gold than anyone else, and a
respected international currency that the rest of the globe will be able to use to
conduct international trade.
And China is not just going to sit back and wait for all of this to happen. In fact, they
are already doing lots of things to get the ball moving. The following are signs that
China is making a move against the US dollar.
China has just entered into a very large currency swap agreement with the euro
zone that is considered a huge step toward establishing the yuan as a major world
currency. This agreement will result in a lot less US dollars being used in trade
between China and Europe.
China currently owns about 1.3 trillion dollars of US debt, and this enormous
exposure to US debt is starting to become a major political issue within China.
There have been media reports that China is looking to diversify its $3.66 trillion of
foreign exchange reserve into real estate investments in Europe.
Xinhua, the official news agency of China, called for a “de-Americanized world” ” and
also made the following statement about the political turmoil in Washington:
“Politicians in Washington have done nothing substantial but postponing once again
the final bankruptcy of global confidence in the US financial system“. The
commentary in the government-run media also declared that the debt deal “was no
more than prolonging the fuse of the US debt bomb one inch longer.”
China is the largest producer of gold in the world, and it has also been importing an
absolutely massive amount of gold from other nations. But instead of slowing down,
the Chinese appear to be accelerating their gold buying. In fact, China plans to buy
another 5,000 tons of gold. There are many who are convinced that China eventually
plans to back the yuan with gold and try to make it the number one alternative to the
US dollar. 23 This could have devastating effects on the US economy. Demand for
the US dollar and US debt would drop like a rock, and prices would soar. If the rest
of the world (led by China) starts to reject the US dollar, it would result in a massive
tsunami of currency coming back to the US and a very painful adjustment in US
standard of living. Today, most US currency is actually used outside of the United

Oil-rich Nations Are Selling off Their Petrodollar Assets
In the heady days of the commodity boom, oil-rich nations accumulated billions of
dollars which they invested in US debt and other securities. Now that oil prices have
dropped by half to just over $50 a barrel, Saudi Arabia and other oil-rich nations are
fast drawing down those “petrodollar” reserves.
If oil and other commodity prices remain depressed, the trend will cut demand for
everything from European government debt to US real estate as producing nations
seek to fill holes in their domestic budgets.
This is the first time in 20 years that OPEC nations will be sucking liquidity out of the
market rather than adding to it through investments. And for the first time, too, we
see the end of the petrodollar as a system for recirculating oil revenues to
Wall Street. It is sucking liquidity out from Wall Street, not putting it in. The fall in the
price of oil has suddenly created huge financial turbulence, which is endangering the
global financial system. 24
Saudi Arabia, the world’s largest oil producer, is a prime example of the swiftness
and magnitude of the selloff: its foreign exchange reserves fell by $20.2 billion in
February 2015 alone, the biggest monthly drop in at least 15 years according to data
from the Saudi Arabian Monetary Agency. That’s almost double the drop after the
financial crisis in early 2009 when oil prices plunged and Riyadh consumed $11.6
billion of its reserves in a single month. 25
The International Monetary Fund commodity index, a broad basket of natural
resources from iron ore and oil to bananas and copper, fell in January to its lowest
since mid-2009. Although the index has recovered a little since then, it still is down
more than 40% from a record high set in early 2011.
A concomitant drop in foreign reserves, revealed in data from national central banks
and the IMF, is affecting nations from oil producer Oman to copper-rich Chile.
Algeria, one of the world’s top natural gas exporters, saw its funds fall by $11.6
billion in January, the largest monthly drop in a quarter of century. At that rate, it will
empty the reserves in 15 months.26
OPEC members are expected to earn $380 billion selling their oil this year,
according to US estimates. That represents a $350 billion drop from 2014 — the
largest one-year decline in history.
“The shock for oil-rich countries is enormous,” Rabah Arezki, head of the
commodities research team at the IMF in Washington, said in an interview. Oil-rich
countries will sell more than $200 billion of assets this year to bridge the gap left
between high fiscal spending and low revenues.
The drawdown reverses a decade-long inflow into the coffers of commodity-rich
nations which helped to increase funds available for investment and boost asset
prices. Bond purchases have helped to keep interest rates low.
Are the Petrodollar’s Days Numbered?
Today, the geopolitical sands of the Middle East are rapidly shifting. The faltering
strategic regional position of Saudi Arabia, the rise of Iran (which is not part of the
petrodollar system), failed US interventions, Russia’s increasing power as an energy
giant and the emergence of the BRICS nations (which offer the potential of future
alternative economic/security arrangements) all affect the sustainability of the
petrodollar system.
One needs also to be aware of what Vladimir Putin is doing. Putin would like nothing
more than to sabotage the petrodollar, and he’s forging alliances across the world
that he hopes will help him achieve his goal. At the same time, one should also
watch the deteriorating relationship between the US and Saudi Arabia.
The Saudis are furious at what they perceive to be the US not holding up its end of
the petrodollar deal. They believe that as part of the US commitment to keep the
region safe for the Kingdom, the US should have attacked its regional rivals Syria
and Iran by now. And they may feel they are no longer obliged to uphold their part of
the deal, namely selling their oil only in US dollars. They’re already heavily involved
with China and could also tilt toward Russia. Oil traded in rubles or yuans could be
the future result.
The US is really not importing much Arab oil anymore. If that were the case, it’s
really hard to see why the Arabs would continue to price their oil in dollars, especially
that their biggest customers would be China, Japan and other Asia-Pacific countries
that have no particular reason to deal in dollars.
The petrodollar system breaking down, where oil is no longer paid for in dollars
internationally, essentially would be the death knell to the US dollar as the global
reserve currency. It means the US may not be able to borrow with great ease
anymore, and it means that the US Treasury market is set for an out-of-control
interest rate spiral.
As it is, the Arab oil-producing nations have more dollars than they know what to do
with. By one expert estimate, some $8–10 trillion in currency balances lie in Middle
Eastern hands, much of it in dollars. How long will they want to keep all those dollars
lying around especially when the Asia-Pacific region now accounts for one-third of
global oil consumption and the US only 20%? 27
Meanwhile, the world’s leading oil importer –China- is doing its part to undermine the
petrodollar. In recent years, China has been striking agreements with many of its
trade partners to do business using each other’s currencies. China and Russia,
China and Brazil, China and Australia, even China and its old/new enemy Japan —
they all have currency swaps and other arrangements in place to bypass the dollar.
Last November brought word the Shanghai Futures Exchange was thinking about
pricing its new crude oil futures contract in both yuan and dollars, with the aim of
making that contract the new Asian benchmark.
But while the Arabs fret about the value of their dollars and the Chinese move
actively to diversify away from the dollar it might be the Russians who will deliver the
final blow.
The chaos that one day will ensue from the United States’ 44-year experiment with
worldwide fiat money will require a return to money of real value. The US will know
that day is approaching when oil-producing countries demand gold, or its equivalent,
for their oil rather than dollars. 28
This is critically important, because once the dollar loses its coveted reserve status,
the consequences will be dire for Americans. At that moment, Washington will
become sufficiently desperate to enforce the radical measures that governments
throughout world history have always implemented when their currencies were under

Since 1980, America has devolved from being the world’s greatest creditor nation to
the world’s largest debtor nation. But thanks to the massive artificial demand for US
dollars and government debt made possible by the petrodollar system, America
could still continue its spending spree, reckless wars, and record deficits.
At one point in America’s history, the country’s largest export was a variety of
manufactured goods. Today, America’s largest export is the US dollar. And the dollar
costs the United States practically nothing to print. How long will it be before the
nations of the world figure out that the petrodollar game is over. This shift is being
accelerated by joint Chinese/Russian efforts to dethrone the US dollar as a reserve
currency and also as the currency for global trade and oil transactions. Even Saudi
Arabia now acknowledges the eventual end of the petrodollar probably by 2032.
They are planning to invest a total of $109 bn in solar energy with the aim of
becoming an exporter of solar electricity.
And while the US economy with its great power of innovation and inherent strengths,
could support a powerful currency, it certainly can’t support the very many trillions of
dollars circulating around the world.
It is probable that the Chinese yuan will emerge as the world’s reserve currency
within the next two decades backed by gold, currency swap agreements, real
purchasing power and Russian oil and natural gas reserves.
*Dr Mamdouh G. Salameh is an international oil economist, a consultant to the World
Bank in Washington DC on oil & energy and a technical expert of the United Nations
Industrial Development Organization (UNIDO) in Vienna. He is a member of both the
International Institute for Strategic Studies in London and the Royal Institute of
International Affairs. He is also a visiting professor of energy economics at the ESCP
Europe University in London.


1 James D Hamilton, “Historical Oil Shocks” Department of Economics.
University of California, San Diego. Revised: February 1, 2011.
2 “Petrodollar Profusion”, The Economist, April 26th, 2012.
3 Ibrahim M. Oweiss, “Petro-Money: Problems and Prospects,” in Inflation and
Monetary Crisis, ed. G. C. Wiegand (Washington, D.C.: Public Affairs Press,
1975), pp. 84-85.
4 Jerry Robinson, “Preparing for the Collapse of the Petrodollar System”, FTM
5 Ibid.,
6 Ibid.,
7 Mamdouh G Salameh, “Economic & Financial Crisis Management in the
Light of Dwindling Oil Prices” (a lecture given at the invitation of the National
Defence College in Muscat, Oman on the 21st of April, 2015).
8 Ibrahim M Oweiss, “Petrodollars: Problems & Prospects” (a paper given at
the Conference on ‘The World Monetary Crisis’, Colombia University, March 1-
3, 1974).
9 Ibid.,
10 Ibid.
11 Jerry Robinson, “The Petrodollar Wars : The Iraq Petrodollar Connection”,
12 Ibid.,
13 Ibid.,
14 Mamdouh G Salameh, “Over a Barrel”, Joseph D. Raidy Printing Press sal,
Beirut, Lebanon, June 2004, p. 191.
15 Alan Greenspan, “The Age of Turbulence”, published by Penguin Books, USA,
in 2007, p.463.
16 Nabegh Al Sabbagh, “Opinion: Oil and Economics at a Geopolitical
Crossroad”, posted in Breaking Energy on April 28, 2015.
17 Mamdouh G Salameh, “Turning the Gaze Towards Asia: Russia’s Grand
Strategy to Neutralize Western Sanction” (a USAEE Paper Series No: 14-
168, posted on 19 July 2014).
18 Michael Snyder ”Russia is Doing it – Russia is Actually Abandoning the
Dollar”, posted on 11 June, 2014 on
19 Preston James & Mike Harris, “ Putin’s Opportunity to Bust the US Petrodollar,
VT Veterans Today, 7 January 2015
20 A report by the ITAR-Tass News Agency.
21 Michael Snyder ”Russia is Doing it – Russia is Actually Abandoning the
22 Alastir Crook, “Expert: Oil Price Wars Fatally Wounded the Petrodollar”
(Interview with Zaman Today’s Daily (Turkish English-language Daily) on 15
February, 2015).
23 Addison Wiggin, “The US Energy Boom Will End the Dollar’s World
Reserve Status”, published in Daily Reckoning, was published in June 4, 2014.
24 Alastir Crook, “Expert: Oil Price Wars Fatally Wounded the Petrodollar”.
25 Javiar Blas, “Oil-Rich Nations Are Selling Off Their Petrodollar Assets at
Record Pace” Bloomberg, April 14, 2015.
26 Ibid.,
27 Nick Giambruno, “Ron Paul Says: Watch the Petrodollar System” Casey
28 Ibid.

A Short Biography
Dr Mamdouh G. Salameh is an international oil economist, a consultant for the
World Bank in Washington D.C. on oil and energy and also a technical expert
with the United Nations Industrial Development Organization (UNIDO) in
Vienna. He holds a PhD in Economics specializing in the economics &
geopolitics of oil and energy. Dr Salameh is also a visiting professor of energy
economics at the ESCP Europe University in London.
Dr Salameh has presented papers to numerous international energy
conferences on the economics and geopolitics of oil and energy and has been
frequently invited to lecture on these topics at universities around the world. He
has written three books on oil: “Is a Third Oil Crisis Inevitable?” (published in
London in April 1990), “ Jordan’s Energy Prospects & Needs to the Year
2010: The Economic Viability of Extracting Oil from Shale” (published in
London in October 1998) and “ Over a Barrel” (Published in the UK in June
2004) as well as numerous research papers published in international Oil and
Energy Journals. Dr Salameh has undertaken research assignments for the US
Department of Energy, the World Bank, the Institute of Energy Economics in
Japan, the Indian Government, OPEC, the Canadian Energy Research Institute,
Boston University working on the Encyclopedia of Energy and also the
Handbook of Energy and the government of Jordan among others. He regularly
appears on TV to discuss oil prices and other developments in the global oil
Dr Salameh is a member of many International Institutes and Associations
including the International Association for Energy Economics (IAEE) in the US,
the British Institute of Energy Economics, the International Energy Foundation in
Canada, the International Institute for Strategic Studies (IISS) in London, and
the Royal Institute of International Affairs (RIIA) in London. He is also an advisor
to the Oil Depletion Analysis Centre (ODAC), London.


Exclusive: Saudi Arabia threatens to ditch dollar oil trades to stop ‘NOPEC’ – sources


Saudi Arabia is threatening to sell its oil in currencies other than the dollar if Washington passes a bill exposing OPEC members to U.S. antitrust lawsuits, three sources familiar with Saudi energy policy said.

They said the option had been discussed internally by senior Saudi energy officials in recent months. Two of the sources said the plan had been discussed with OPEC members and one source briefed on Saudi oil policy said Riyadh had also communicated the threat to senior U.S. energy officials.

The chances of the U.S. bill known as NOPEC coming into force are slim and Saudi Arabia would be unlikely to follow through, but the fact Riyadh is considering such a drastic step is a sign of the kingdom’s annoyance about potential U.S. legal challenges to OPEC.

In the unlikely event Riyadh were to ditch the dollar, it would undermine the its status as the world’s main reserve currency, reduce Washington’s clout in global trade and weaken its ability to enforce sanctions on nation states.

The Saudis know they have the dollar as the nuclear option,” one of the sources familiar with the matter said.

“The Saudis say: let the Americans pass NOPEC and it would be the U.S. economy that would fall apart,” another source said.

Saudi Arabia’s energy ministry did not respond to a request for comment.

A U.S. state department official said: “as a general matter, we don’t comment on pending legislation.”

The U.S. Energy Department did not respond to a request for comment. Energy Secretary Rick Perry has said that NOPEC could lead to unintended consequences.


NOPEC, or the No Oil Producing and Exporting Cartels Act, was first introduced in 2000 and aims to remove sovereign immunity from U.S. antitrust law, paving the way for OPEC states to be sued for curbing output in a bid to raise oil prices.

While the bill has never made it into law despite numerous attempts, the legislation has gained momentum since U.S. President Donald Trump came to office. Trump said he backed NOPEC in a book published in 2011 before he was elected, though he not has not voiced support for NOPEC as president.

Trump has instead stressed the importance of U.S-Saudi relations, including sales of U.S. military equipment, even after the killing of journalist Jamal Khashoggi last year.

A move by Saudi Arabia to ditch the dollar would resonate well with big non-OPEC oil producers such as Russia as well as major consumers China and the European Union, which have been calling for moves to diversify global trade away from the dollar to dilute U.S. influence over the world economy.

Russia, which is subject to U.S. sanctions, has tried to sell oil in euros and China’s yuan but the proportion of its sales in those currencies is not significant.

Venezuela and Iran, which are also under U.S. sanctions, sell most of their oil in other currencies but they have done little to challenge the dollar’s hegemony in the oil market.

However, if a long-standing U.S. ally such as Saudi Arabia joined the club of non-dollar oil sellers it would be a far more significant move likely to gain traction within the industry.


Saudi Arabia controls a 10th of global oil production, roughly on par with its main rivals – the United States and Russia. Its oil firm Saudi Aramco holds the crown of the world’s biggest oil exporter with sales of $356 billion last year.

Depending on prices, oil is estimated to represent 2 percent to 3 percent of global gross domestic product. At the current price of $70 per barrel, the annual value of global oil output is $2.5 trillion.

Not all of those oil volumes are traded in the U.S. currency but at least 60 percent is traded via tankers and international pipelines with the majority of those deals done in dollars.

Trading in derivatives such as oil futures and options is mainly dollar denominated. The top two global energy exchanges, ICE and CME, traded a billion lots of oil derivatives in 2018 with a nominal value of about $5 trillion.

Just the prospect of NOPEC has already had implications for the Organization of Petroleum Exporting Countries. Qatar, one of the core Gulf OPEC members, quit the group in December because of the risk NOPEC could harm its U.S. expansion plans.

Two sources said that despite raising the dollar threat, Saudi Arabia did not believe it would need to follow through.

“I don’t think the NOPEC bill will pass but the Saudis have ‘what if’ scenarios,” one of the sources said.


In the event of such a drastic Saudi move, the impact would take some time to play out given the industry’s decades-old practices built around the U.S. dollar – from lending to exchange clearing.

Other potential threats raised in Saudi discussions about retaliation against NOPEC included liquidating the kingdom’s holdings in the United States, the sources said.

The kingdom has nearly $1 trillion invested in the United States and holds some $160 billion in U.S. Treasuries.

If it did carry out its threat, Riyadh would also have to ditch the Saudi riyal’s peg to the dollar, which has been exchanged at a fixed rate since 1986, the sources said.

The United States, the world’s largest oil consumer, relied heavily on Saudi and OPEC supplies for decades – while supporting Riyadh militarily against its arch-foe Iran.

But soaring shale oil production at home has made Washington less dependant on OPEC, allowing it to be more forceful in the way it deals with Saudi Arabia and other Middle Eastern nations.

Over the past year, Trump has regularly called on OPEC to pump more oil to lower global oil prices, and linked his demands to political support for Riyadh – something previous U.S. administrations have refrained from doing, at least publicly.

Reporting by Dmitry Zhdannikov and Alex Lawler in London and Rania El Gamal in Dubai; additional reporting by Timothy Gardner in Washington; editing by David Clarke

The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret

This 2016 Bloomberg article omits references to the significance of oil in supporting the dollar and US debt, but it does contain interesting detail about the secrecy of Saudi Arabia’s politically sensitive purchase of US Treasuries.

It also reports that the Saudis threat to sell their Treasuries if Congress allowed a bill to pass enabling Americans to sue Saudi Arabia over 911.


How a legendary bond trader from Salomon Brothers brokered a do-or-die deal that reshaped U.S.-Saudi relations for generations.

Failure was not an option.

It was July 1974. A steady predawn drizzle had given way to overcast skies when William Simon, newly appointed U.S. Treasury secretary, and his deputy, Gerry Parsky, stepped onto an 8 a.m. flight from Andrews Air Force Base. On board, the mood was tense. That year, the oil crisis had hit home. An embargo by OPEC’s Arab nations—payback for U.S. military aid to the Israelis during the Yom Kippur War—quadrupled oil prices. Inflation soared, the stock market crashed, and the U.S. economy was in a tailspin.

Officially, Simon’s two-week trip was billed as a tour of economic diplomacy across Europe and the Middle East, full of the customary meet-and-greets and evening banquets. But the real mission, kept in strict confidence within President Richard Nixon’s inner circle, would take place during a four-day layover in the coastal city of Jeddah, Saudi Arabia.

The goal: neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth. And according to Parsky, Nixon made clear there was simply no coming back empty-handed. Failure would not only jeopardize America’s financial health but could also give the Soviet Union an opening to make further inroads into the Arab world.

It “wasn’t a question of whether it could be done or it couldn’t be done,” said Parsky, 73, one of the few officials with Simon during the Saudi talks.

Henry Kissinger, William Simon, Nancy Kissinger
Treasury Secretary William Simon, left, sits with Nancy Kissinger and Secretary of State Henry Kissinger as they listen to former President Nixon talk to his staff prior to leaving the White House for the last time, August 9, 1974.
Source: AP Photo

At first blush, Simon, who had just done a stint as Nixon’s energy czar, seemed ill-suited for such delicate diplomacy. Before being tapped by Nixon, the chain-smoking New Jersey native ran the vaunted Treasuries desk at Salomon Brothers. To career bureaucrats, the brash Wall Street bond trader—who once compared himself to Genghis Khan—had a temper and an outsize ego that was painfully out of step in Washington. Just a week before setting foot in Saudi Arabia, Simon publicly lambasted the Shah of Iran, a close regional ally at the time, calling him a “nut.”

But Simon, better than anyone else, understood the appeal of U.S. government debt and how to sell the Saudis on the idea that America was the safest place to park their petrodollars. With that knowledge, the administration hatched an unprecedented do-or-die plan that would come to influence just about every aspect of U.S.-Saudi relations over the next four decades (Simon died in 2000 at the age of 72).

The basic framework was strikingly simple. The U.S. would buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries and finance America’s spending.

It took several discreet follow-up meetings to iron out all the details, Parsky said. But at the end of months of negotiations, there remained one small, yet crucial, catch: King Faisal bin Abdulaziz Al Saud demanded the country’s Treasury purchases stay “strictly secret,” according to a diplomatic cable obtained by Bloomberg from the National Archives database.

With a handful of Treasury and Federal Reserve officials, the secret was kept for more than four decades—until now. In response to a Freedom-of-Information-Act request submitted by Bloomberg News, the Treasury broke out Saudi Arabia’s holdings for the first time this month after “concluding that it was consistent with transparency and the law to disclose the data,” according to spokeswoman Whitney Smith. The $117 billion trove makes the kingdom one of America’s largest foreign creditors.

Yet in many ways, the information has raised more questions than it has answered. A former Treasury official, who specialized in central bank reserves and asked not to be identified, says the official figure vastly understates Saudi Arabia’s investments in U.S. government debt, which may be double or more.

The current tally represents just 20 percent of its $587 billion of foreign reserves, well below the two-thirds that central banks typically keep in dollar assets. Some analysts speculate the kingdom may be masking its U.S. debt holdings by accumulating Treasuries through offshore financial centers, which show up in the data of other countries.

US Fuel Crisis

Drivers line up for fuel at a U.S. gas station during the worldwide fuel shortages caused by the oil embargo imposed by OPEC, circa 1974.

Photographer: Pictorial Parade/Archive Photos/Getty Images

Exactly how much of America’s debt Saudi Arabia actually owns is something that matters more now than ever before.

While oil’s collapse has deepened concern that Saudi Arabia will need to liquidate its Treasuries to raise cash, a more troubling worry has also emerged: the specter of the kingdom using its outsize position in the world’s most important debt market as a political weapon, much as it did with oil in the 1970s.

In April, Saudi Arabia warned it would start selling as much as $750 billion in Treasuries and other assets if Congress passes a bill allowing the kingdom to be held liable in U.S. courts for the Sept. 11 terrorist attacks, according to the New York Times. The threat comes amid a renewed push by presidential candidates and legislators from both the Democratic and Republican parties to declassify a 28-page section of a 2004 U.S. government report that is believed to detail possible Saudi connections to the attacks. The bill, which passed the Senate on May 17, is now in the House of Representatives.

Saudi Arabia’s Finance Ministry declined to comment on the potential selling of Treasuries in response. The Saudi Arabian Monetary Agency didn’t immediately answer requests for details on the total size of its U.S. government debt holdings.

“Let’s not assume they’re bluffing” about threatening to retaliate, said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman. “The Saudis are under a lot of pressure. I’d say that we don’t do ourselves justice if we underestimate our liabilities” to big holders.

relates to The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret

President Nixon shakes hands with Saudi King Faisal in June, 1974, in Saudi Arabia.

Photographer: Dirck Halstead/Liaison via AP Photo

Saudi Arabia, which has long provided free health care, gasoline subsidies, and routine pay raises to its citizens with its petroleum wealth, already faces a brutal fiscal crisis.

In the past year alone, the monetary authority has burned through $111 billion of reserves to plug its biggest budget deficit in a quarter-century, pay for costly wars to defeat the Islamic State, and wage proxy campaigns against Iran. Though oil has stabilized at about $50 a barrel (from less than $30 earlier this year), it’s still far below the heady years of $100-a-barrel crude.

Saudi Arabia’s situation has become so acute the kingdom is now selling a piece of its crown jewel—state oil company Saudi Aramco.

What’s more, the commitment to the decades-old policy of “interdependence” between the U.S. and Saudi Arabia, which arose from Simon’s debt deal and ultimately bound together two nations that share few common values, is showing signs of fraying. America has taken tentative steps toward a rapprochement with Iran, highlighted by President Barack Obama’s landmark nuclear deal last year. The U.S. shale boom has also made America far less reliant on Saudi oil.

“Buying bonds and all that was a strategy to recycle petrodollars back into the U.S.,” said David Ottaway, a Middle East fellow at the Woodrow Wilson International Center in Washington. But politically, “it’s always been an ambiguous, constrained relationship.”

Yet back in 1974, forging that relationship (and the secrecy that it required) was a no-brainer, according to Parsky, who is now chairman of Aurora Capital Group, a private equity firm in Los Angeles. Many of America’s allies, including the U.K. and Japan, were also deeply dependent on Saudi oil and quietly vying to get the kingdom to reinvest money back into their own economies.

“Everyone—in the U.S., France, Britain, Japan—was trying to get their fingers in the Saudis’ pockets,” said Gordon S. Brown, an economic officer with the State Department at the U.S. embassy in Riyadh from 1976 to 1978.

For the Saudis, politics played a big role in their insistence that all Treasury investments remain anonymous.

Tensions still flared 10 months after the Yom Kippur War, and throughout the Arab world, there was plenty of animosity toward the U.S. for its support of Israel. According to diplomatic cables, King Faisal’s biggest fear was the perception Saudi oil money would, “directly or indirectly,” end up in the hands of its biggest enemy in the form of additional U.S. assistance.

Treasury officials solved the dilemma by letting the Saudis in through the back door. In the first of many special arrangements, the U.S. allowed Saudi Arabia to bypass the normal competitive bidding process for buying Treasuries by creating “add-ons.” Those sales, which were excluded from the official auction totals, hid all traces of Saudi Arabia’s presence in the U.S. government debt market.

“When I arrived at the embassy, I was told by people there that this is Treasury’s business,” Brown said. “It was all handled very privately.”

By 1977, Saudi Arabia had accumulated about 20 percent of all Treasuries held abroad, according to The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets by Columbia University’s David Spiro.

Another exception was carved out for Saudi Arabia when the Treasury started releasing monthly country-by-country breakdowns of U.S. debt ownership. Instead of disclosing Saudi Arabia’s holdings, the Treasury grouped them with 14 other nations, such as Kuwait, the United Arab Emirates and Nigeria, under the generic heading “oil exporters”—a practice that continued for 41 years.

Graphic: Treasuries Held by Oil Exporters

The system came with its share of headaches. After the Treasury’s add-on facility was opened to other central banks, erratic and unpublicized foreign demand threatened to push the U.S. over its debt limit on several occasions.

An internal memo, dated October 1976, detailed how the U.S. inadvertently raised far more than the $800 million it intended to borrow at auction. At the time, two unidentified central banks used add-ons to buy an additional $400 million of Treasuries each. In the end, one bank was awarded its portion a day late to keep the U.S. from exceeding the limit.

Most of these maneuvers and hiccups were swept under the rug, and top Treasury officials went to great lengths to preserve the status quo and protect their Middle East allies as scrutiny of America’s biggest creditors increased.

Over the years, the Treasury repeatedly turned to the International Investment and Trade in Services Survey Act of 1976—which shields individuals in countries where Treasuries are narrowly held—as its first line of defense.

The strategy continued even after the Government Accountability Office, in a 1979 investigation, found “no statistical or legal basis” for the blackout. The GAO didn’t have power to force the Treasury to turn over the data, but it concluded the U.S. “made special commitments of financial confidentiality to Saudi Arabia” and possibly other OPEC nations.

Simon, who had by then returned to Wall Street, acknowledged in congressional testimony that “regional reporting was the only way in which Saudi Arabia would agree” to invest using the add-on system.

“It was clear the Treasury people weren’t going to cooperate at all,” said Stephen McSpadden, a former counsel to the congressional subcommittee that pressed for the GAO inquiries. “I’d been at the subcommittee for 17 years, and I’d never seen anything like that.”

Today, Parsky says the secret arrangement with the Saudis should have been dismantled years ago and was surprised the Treasury kept it in place for so long. But even so, he has no regrets.

Doing the deal “was a positive for America.”

—With assistance from Sangwon Yoon.