Dear Editor,
The petrodollar is a system where oil is sold in United States (US) dollars exclusively. In 1944, as a consequence of the Bretton Woods Conference, the US dollar, backed by gold, became the world reserve currency. Prior to that, it was the British Pound.
In 1971, US president Richard Nixon unilaterally cancelled the international convertibility of US dollars to gold. From 1972 to 1974, the US made a series of agreements with Saudi Arabia, which led to them selling oil in US dollars only.
In 1975, because of Saudi Arabia’s influence, the Organisation of Petroleum Exporting Countries (OPEC) agreed to sell oil exclusively in US dollars. Oil is the world’s most traded and strategic commodity. The US dollar status as the premier world reserve currency is tied to the petrodollar.
The petrodollar allows the US Government to gain revenue by issuing bonds at a lower interest rate than they would otherwise be able to do. Consequently, the US Government can run higher budget deficits than most other countries and still be considered the world’s most successful and powerful economy. This allows the US debt to be 22.3 trillion dollars, which is 105 % of its GDP, and the US is still considered as having a successful economy. The US is currently running a deficit of US $1.2 trillion annually and it is expected to increase.
Today, oil is not only sold in US dollars, although over 90% is still sold in US dollars. On December 8, 2008, Iran announced it had converted all of its oil payments from exports into non-US dollar currencies. In 2014 Quatar agreed to sell China oil in Yuan.
In 2015, China and the United Arab Emirates created a currency swap agreement. In 2016, India and Iran transacted oil sales in Indian Rupees.
On March 26, 2018, China launched its oil futures priced in yuan and the Chinese oil futures contract is growing at a significant pace.
The Iran nuclear deal is a threat to the petrodollar because it aggravated Saudi Arabia, the world’s largest exporter of oil. On July 14, 2015, in Vienna, the Joint Comprehensive Plan of Action, better known as the Iran nuclear deal, was signed between Iran, the 5 permanent members of the United Nations Security Council (China, France, Russia, United Kingdom, United States plus Germany), and the European Union.
On January 16, 2016, the agreement was implemented. This deal infuriated Saudi Arabia. Saudi Arabia and Iran are rivals. On October 4, 2017 Saudi Arabia’s king Salman bin Abdulaziz Al Saud visited Russia for the first time in history, presumably because they are not pleased with the Iran nuclear deal.
On October 13, 2017, US President Donald Trump announced that the US will not make the certification provided for under US domestic law, required to give effect to the Iran nuclear deal. On May 8, 2018, the US announced its withdrawal from the Iran nuclear deal.
On October 30, 2000, the United Nations granted Saddam Hussein permission to sell oil in Euro. In March 2003, his government was overthrown by US soldiers and he was eventually killed.
Some people believe that in 2011, Muammar Al Gadhafi’s plan to quit selling Libyan oil in U.S. dollars — demanding payment instead in gold-backed “dinars” (a single African currency made from gold) was the real reason US-supported militia killed him. It’s probably more complex than that.
Venezuela has the world’s largest oil reserve, but is not even in the top 10 oil exporters. If China and Russia help Venezuela to become the number one exporter of oil, the petrodollar is dead. The US will do everything in her power to prevent that.
The US needs to back its dollar with gold, or else it will be vulnerable to pressure from Saudi Arabia, Russia and China. Nothing lasts forever.
Yours truly,
Brian Ellis Plummer