The Curse of the Petrodollar

By Peter S. Milios

In the 1970’s, Secretary of State Henry Kissinger and the Nixon administration made the deal of the century with the small kingdom of Saudi Arabia. The United States promised the Saudi kingdom to protect its oil fields with U.S. troops, defend it against the threat of Israel, and supply it with American weapons. What did the U.S. expect in return? Saudi oil exports would be purchased in only US dollars and any surplus funds would be used to buy US debt securities. By 1975, all OPEC oil producing nations would sell their oil exclusively in US dollars. In the decades to come this would be one of the least known, but most significant contributors to US economic growth. It has, however, also been the largest detriment to our foreign policy.

Kissinger and Nixon successfully replaced the failing Bretton Woods systems of dollars for gold with dollars for oil. The Petrodollar Empire would lead to a massive artificial demand for US dollars. In fact today, almost all global oil transactions are conducted in U.S. dollars.  As a result, the demand for U.S. dollars has increased and raised the standard of living in America as a result. In return, the United States began building a large military presence in the oil-producing countries of the Middle East.

The problem with the petrodollar system is it must be maintained. If oil production drops, or nations decided to use other currencies instead, the system would collapse. If the petrodollar lost its strength, the artificial demand for U.S. dollars and debt securities would plummet. Foreign nations would flood the U.S. market with dollars in exchange for the new currency. This would result in an immediate rise in interest rates by the Federal Reserve and hyperinflation would ensue. Oil prices would sky rocket, the American economy would be crippled, and massive layoffs would follow. This brief scenario suggests why it is within the United States government’s vested interest that the petrodollar remains unchallenged.

Protecting such interests became the goal of U.S. foreign policy in the 1970’s. Our focus pivoted away from Asia, and moved towards the Persian Gulf. The Yom Kippur War became the first official deployment of U.S. troops to the Middle East with the explicit intent of protecting America’s oil interests. In the subsequent presidential administrations, the United States began building military bases in every corner of the Middle East. American made weapons flooded into the region. As the creator of the petrodollar, the U.S. had to protect its interests in oil and ensure that nations did not nationalize their oil or sell in any other currency.

In the next few decades, oil would become the predominant driver of U.S. foreign policy. Any nation that threatened such a Petrodollar Empire would be declared public enemy number one. A few nations have tried, and they have been met with the same response. Venezuela, Saddam Hussein’s Iraq, and Iran have all threatened to nationalize their oil and sell in currencies other than the U.S. dollar at one point or another. America has invaded, destabilized, or implemented sanctions on any regime that threatens the petrodollar.

On the contrary, we have also blindly supported nations who abide by this system. Saudi Arabia’s loyalty to the petrodollar has been rewarded with large quantities of foreign aid, military assistance, and political support. Despite the obvious examples of Saudi extremism breeding the majority of terrorism we see today, they continue to be regarded as one of our closest allies. If the U.S. is to ever get serious about ending radical Islamic terrorism, it must end its support of Saudi Arabia. The brutal, undemocratic regime exports one of the most extreme fundamentalist varieties of Islam practiced anywhere in the world. It is guilty of war crimes in Yemen, human rights violations domestically, and destabilizes the region significantly. Saudi Arabia can, at any time, stop

The petrodollar has fueled the growth of the American economy extensively. We have been so successful, in fact, that we are now reliant on oil. Oil which, in the hands of unfaithful allies, can destabilize and threaten the safety and security of our citizens. Thus, we must gradually reduce our dependence on foreign oil in order to prevent such a shock. Investment in green technology will not only help to preserve our environment, but can save our foreign policy as well. By reducing our dependence on the petrodollar, we can establish a more sensible policy in the Middle East. This would defund the forces that breed extremism and terrorism in the region. It would reduce the need to sacrifice American lives in wars abroad, and lead to a more stable Middle East as a whole. It is time to reduce our dependence on oil and end the curse of the petrodollar.