The Petrodollar’s Influence on US Foreign Policy – Eccentric Economics

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There is a considerable chance you have heard that the US government invades countries and steals their oil, and the resource being a driving factor in our foreign policy. This is somewhat correct. Although it may be on a smaller and hushed scale, the government isn’t necessarily invading countries, stealing their oil and proceeding to ship barrels of it back home. One may counter that the US invades countries that are rich in oil, and then maintains an influential presence and places powerful US companies there to conduct the export of the valuable resource, and this is a fair assumption. However, the US government’s presence in the Middle East isn’t necessarily to appropriate oil, rather ensure the longevity of the petrodollar.

The petrodollar’s dawn dates back to the 1940s, particularly after WW2. At the Bretton Woods Conference in 1944, the US dollar was established as the world’s reserve currency. The biggest takeaway from the conference was that since the US held most of the world’s gold, it promised to redeem gold to countries in exchange for US dollars. In 1945, President Franklin D. Roosevelt met with the King of Saudi Arabia and formalized an alliance. This cemented a relationship between the dollar and oil, though its marriage would not be knitted until decades later.

Excessive spending in the 1960s on various government programs and the Federal Reserve’s manipulation caused excess dollars to circulate the international economic environment, predictably decreasing its value. This made other countries exchange their dollars for gold at a faster rate, most notably Britain in the early 1970s.

To stop the drain, Nixon removed the US dollar from the gold standard and defaulted on its promise to redeem gold for dollars, which in turn informally ended the Bretton Woods agreement. Since the dollar was no longer redeemable in gold nor backed by any substance of value, countries had no incentive to continue utilizing the dollar as the world reserve currency. The Organization of the Petroleum Exporting Countries (OPEC) began discussing accepting payments other than the US dollar, including gold. After removing the US dollar from the gold standard and inciting a shock and widespread inflation, coupled with another shock induced by OPEC’s embargo on nations supporting Israel, the US needed a resolution that would attract countries to keep the dollar as their reserve.

With Saudi Arabia being one of the most prominent and powerful members of OPEC, they and the US strengthened their economic alliance in an agreement known as the United States-Saudi Arabian Joint Commission on Economic Cooperation. With Saudi Arabian influence, OPEC agreed to use US dollars for oil contracts, and would then recycle the US dollars back to the US. In exchange, the US promised to keep the House of Saud in power to ensure the US dollar would be utilized for oil trade. This agreement officially gave birth to the petrodollar.

Concisely, an important factor of the US dollar’s value is its dependency on oil trade and the currency being exchanged between exporting and importing nations. It should be noted, even if the US isn’t involved in trade between paticular nations, they use US dollars to purchase the oil. This creates an artificial demand for the US dollar. It is a medium of exchange backed by virtually nothing, with its value being derived from its exchange utility and, of course, debt.

The US dollar is a global currency, and the vast majority of international transactions are priced in US dollars. Therefore, oil-exporting countries receive revenue in US dollars. Due to its widespread use, the national income of many oil-exporting nations is dependent upon the value of the dollar. With the historic market volatility of oil prices, countries that are dependent on the exportation of oil peg their currency to the US dollar, and do this in the instance the value of the dollar falls, making all of their goods and services in their economies fall to prevent damaging inflation or deflation.

In due time, oil-exporting nations began branching out to ensure their economies did not depend solely on oil and thus experience the dreaded Dutch disease. These nations began to recycle their US dollars through sovereign wealth funds, which are invested into non-oil-related ventures essentially making them less dependent on oil. To the alarm of the US, 70% of the 700 billion investable reserve funds are untraceable. If it is invested in US treasury bonds, a mass withdrawal could destabilize the dollar. Most countries won’t attempt this, however, since the US is one of OPEC’s biggest customers.

However, countries that refuse to use or attempt to discard the petrodollar for international trade make trade agreements with one another, using their preferred currencies instead of the petrodollar. Some of examples of these countries are Russia, Iran and Venezuela. A notable nation that faced repercussions and military actions for its attempt to use gold instead of US dollars was Libya.

Conclusively, the US dollar relies heavily, but not exclusively, on its use as a medium of international exchange, and it is vital nations play along and continue to utilize it. The history of the petrodollar offers a convincing explanation of why the US is consistently involved in Middle Eastern affairs. It must continue to satisfy Saudi Arabian interests to ensure they continue to use the US dollar, and install governments and regimes in nations that will employ the petrodollar to ensure the currency’s longevity.

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Logan Davies

Logan Davies is a Regional Manager in the Banking Services industry, and the director of the non-profit organization, Voluntaryism in Action. He graduated from Middle Georgia State University with a degree in Business Administration. He is the father of a loving son, an avid outdoorsman, firearm enthusiast, and unwavering supporter of liberty.

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