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To overcome the gridlock, the US sought to apply pressure on Saudi Arabia by openly discussing the military option of occupying Saudi Arabia. On 1 January 1975, Commentary magazine published
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one of the most famous articles in the history of American foreign policy.
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The article was written by Robert W. Tucker, head of the American Foreign Policy Institute
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and a member of the inner circle of the White House. The title was “Oil: The Issue of American Intervention” and it made explicit references to the military scenario the US was working on. The article served its purpose and convinced
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the Saudis to sign the deal. Despite a range of highs and lows, all administrations
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ever since President Carter have shown commitment to the ma ntra of a “strong dollar.” For 35
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years, from 1975 to 2010, the Petrodollar deal has remained intact, despite oil price
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increases and dollar volatility. The dollar has solidified its role as the leading reserve
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currency and the leading payments currency. By 2009, a new economic crisis eroded the
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stability of the Petrodollar deal. In September of the same year, world leaders gathered for
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the G20 Leaders’ Summit and President Obama proposed a plan to boost world growth based
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on a simple idea: Each major economic block or region would commit to move away from a
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sector it has over-relied and toward an area that offered growth potential.
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For China and Japan, this would mean moving from capital investment to consumption. Europe
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would move from exports to investment and the US itself would take on the task of increasing
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exports. The main obstacle in attaining a growth in
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export was that without being able to double the size of labour force or the productivity
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of labour (the main drivers of industrial production growth), the only viable option
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would be to cheapen the currency. By July 2011, just 18 months after the meeting,
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the dollar index stood at 80.48, which represented a decline of 8% and a new all-time low. A currency war had started which continues to survive until today.
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Relations between Saudi Arabia and the US have deteriorated sharply over the course
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of the Obama administration. There are a number of causes:
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* The Iran-US nuclear negotiations and the US acknowledgment of Iran as the leading regional
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power. * The release of a top-secret 28-page section
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of the 9/11 Commission Report that clearly reveals links between members of the Saudi
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royal family and the 9/11 hijackers. The Saudis have threatened to sell their US Treasury
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securities in response but they have so far failed to keep their word.
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* The US is now a net exporter of energy, and supposedly, has the largest oil reserves
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in the world
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In response to the weakening of the US dollar, several OPEC nations are allowing oil transactions
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to be carried out in other currencies:
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* In January 2016, India and Iran agreed to settle their oil sales in Indian rupees.
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* In 2014, Qatar agreed with China to be the first hub for clearing transactions in the
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Chinese yuan. * In December 2015, the United Arab Emirates
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(UAE) and China created a new currency swap agreement for the yuan.
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All the above strongly indicate that the Gulf States are taking measures to reduce their
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dependence and exposure to the US dollar. All of the conditions that gave rise to the
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Petrodollar agreement now stand in the exact opposite position of where they were in 1975.
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Neither the US nor Saudi Arabia have much leverage over the other.
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A new oil pricing mechanism is possible, and once identified and announced, it will signify
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the end of the US dollar as the leading currency. The oil price will pave the way and will certainly
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soon be followed by other goods and commodities. Will this be the start
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of a new era?