New Delhi, August 3, 2022: The Western media was recently awash with news of US president Joe Biden rebuking Saudi crown prince Mohammad bin Salman for his role in the murder of columnist Jamal Khashoggi back in 2018.
While Biden was officially in Jeddah to reboot America’s strained relations with its long-term partner Saudi Arabia, the dots are easy to connect. His visit came in the backdrop of a strange Saudi decision that promises to weaken the unfair clout that the US currency has been enjoying for decades in the form of the ‘petrodollar’.
In mid-March, the Saudi palace declared that it was soon going to sell crude oil to China in yuan instead of US dollars. The government in Riyadh said it was in talks with Beijing regarding how soon the changeover in currency can be carried out.
It might not seem like a big deal, but in the world of currency wars, it’s an epic development. The Saudi declaration came as a part of a worldwide move by a bunch of countries to exit the clutches of the US-run petrodollar system and usher in multi-polarity.
No, it’s Not About Khashoggi
Biden raking up the Khashoggi episode to rebuke Riyadh four long years after the mysterious murder is too well-timed to be a mere coincidence. Clearly, it came in the backdrop of the threat from Saudi Arabia – a long-time American crony – to kick out the petrodollar system.
Over the last two decades and especially in recent years, an increasing number of countries aired their intention to cut loose from the petrodollar system and trade crude oil in various currencies, gold, and cryptocurrencies.
India is the latest country to join the tide towards a multipolar world, while Iran, North Korea, Venezuela, and Syria have all been eyeing to build alternative payment systems that would completely bypass the need of the US dollar.
It is in the context of recent developments concerning the US dollar’s steadily weakening grip on the global oil economy that we should revisit the mid-1970s when the petrodollar was born under shadowy circumstances. Its secretive origins date back to the closing weeks of the Nixon presidency.
It was a major secretive mission that the lame-duck US president’s office was tasked to pull off before he was kicked out of the White House for his stand-out role in the 1972 Watergate scandal.
A Secret Deal in Jeddah
At the heart of the petrodollar system lies a game-changing deal discreetly struck between the US and Saudi Arabia in the summer of 1974. Details of the deal first emerged after four decades, in 2016, when the US treasury department laid the cards on the table in response to a Freedom of Information Act (FOIA) request from US-based Bloomberg News.
The news organization published the exposition in a May 31, 2016 article titled: The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret, recounting that in July 1974, US treasury secretary William Simon and his deputy Gerry Parsky were dispatched by Nixon and secretary of state Henry Kissinger to Jeddah on a quiet trip.
The American duo’s task was cut out. They had to formalize a major agreement with King Faisal Al Saud of Saudi Arabia – a deal that would go on to shape, reshape and deshape the world economy for the following decades.
“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,” reporter Andrea Wong wrote in the article.
The two parties that formally signed the US-Saudi deal were the American treasury department and the SAMA (Saudi Arabian Monetary Authority), the regressive kingdom’s central bank. The agreement brokered by Simon and Parsky paved the way for the US government to dominate the crude oil economy by misusing the greenback as a weapon.
The terms of the secretive deal were along these lines. The US pledged two commitments. One, it would start buying a guaranteed quantity of crude oil from the kingdom annually. Two, Washington would provide Riyadh permanent military aid and full-scale military protection against regional rivals – Israel, to be precise.
And what were Saudi Arabia’s commitments to the deal? One, it would sell its crude oil to countries around the world only in return for US dollars – the kingdom would accept no other currency as payment. Two, the Saudis would (perhaps reluctantly) invest more than half of those earnings into the US economy by buying up treasury bonds.
The Petrodollar is Born
This dollars-only oil trade arrangement – which completely ignored all global stakeholders and didn’t consult any international body such as the UN – is called the petrodollar system. The practice of the Saudis investing their oil sale earnings in the US economy and other foreign assets is called petrodollar recycling.
This petrodollar deal is also documented in detail in a 1988 book, Western Expansionism in the Persian Gulf, written by former Russian diplomat-turned-writer Viktor Leonovich Mikhin.
In his book, Mikhin disclosed a petrodollar-related pledge made to the US government by King Khalid Al Saud of Saudi Arabia. King Khalid replaced King Faisal (from the 1974 deal) as the Saudi leader following the latter’s assassination on March 25, 1975.
According to the pledge, Riyadh would invest at least 50% of its crude oil earnings in American treasury bonds. “By investing 50% of its active balance in US bonds paying 7.5% [interest] for a 25-year term, Saudi Arabia was helping out the US credit and finance system, which was constantly suffering from a deficit,” Mikhin revealed.
In exchange, the Russian diplomat exposed, the kingdom was told that it could use the interest earned to buy American weapons and defence material. Additionally, the US pledged to “provide the Saudi Arabians with military cover” against potential threats from enemies in its neighborhood.
OPEC Joins the Cartel
In the years that followed, all members of the OPEC (Organization of the Petroleum Exporting Countries) were pushed to join the petrodollar system. As a result, the US currency’s demand ballooned because governments around the world desperately sought dollar reserves to pay for crude oil purchases.
The deal was a masterstroke for imperialist America, which weaponized the greenback and used it to dominate world politics. In fact, it was not just the US, but the western world in general that gained big-time from the arbitrary petrodollar system.
The OPEC countries routinely began pumping the hefty petrodollars (earnings from crude oil sales) into treasury bonds, banks, investment ventures, and various other projects across the transatlantic world.
Let’s visualise the scenario. Scores of governments purchased dollars from the US and from the international forex markets to pay the Gulf kingdoms for oil purchases. After the money got sucked into the OPEC nations, they travelled to the western countries, only to be eventually reinvested in the western economies, helping them blossom.
The Infamous Nixon Shock
It is often speculated that the US desperately manufactured the petrodollar system in order to save its currency after the collapse of the 1944 Bretton Woods system, which had artificially pegged the greenback to gold.
On August 15, 1971, US president Richard Nixon shocked the whole world by declaring that the US would no longer redeem dollars for gold. The dollar-gold delink dismantled the Bretton Woods system, and just three years later, the US currency was reborn as the petrodollar following the US-Saudi secret deal in Jeddah.
As a side note, one can only speculate if Nixon was implicated in the Watergate scandal merely for that, or because he tore up the Bretton Woods system, or because he was actively pursuing the petrodollar project.
The doggedness with which the US-led West continuously tries to protect the petrodollar is best illustrated in how it treated former Iraqi president Saddam Hussein and former Libyan national leader Muammar Gadhafi.
The End of Saddam, Gadhafi
The petrodollar had a free, unchallenged reign from the mid-1970s until the turn of the millennium. In the 2000s, a rebellion against the petrodollar had started to simmer in the world’s oil-producing backyard – the Arab world. Saddam was the first one among the rebels to speak out, vowing to ditch the petrodollar system. He declared that Iraq would soon start selling its crude oil internationally only for Euros – the US dollar wouldn’t be accepted as payment.
The writing was on the wall as the American empire decided to go after Saddam, who was once a darling of the West. Iraq was soon slapped with debilitating economic sanctions before a US-led military coalition illegally invaded the country in 2003 and toppled Saddam on the pretext of his never-to-be-proven links with Al Qaeda terrorists and never-to-be-found stockpiles of WMDs.
In the mid-2000s, Libya’s Gadhafi did a Saddam, seeking to ditch the petrodollar compulsion. He floated grand plans of selling Libya’s oil for a new pan-African dinar, a gold-backed currency that he proposed to help launch.
In 2011, a year after the foreign-engineered Arab Spring protests saw rising anti-Gadhafi sentiments in Libya, NATO forces illegally stormed in and ousted him from power on the pretext of freeing Libya from the grip of an unpopular leader.
Of course, Saddam and Gadhafi were no saints, having committed war crimes and various atrocities at the peak of power. But while they were never taken to task by the West for those genuine crimes, they were demonised and knocked off for trying to free their countries from the petrodollar’s tight leash.
Today, as China, Russia, and a growing number of countries seek to flex their muscles in a more multipolar world no longer dominated alone by the US, the mid-1970s will remain a chilling reminder of the origins of the petrodollar system that once gave America its imperialist swagger.
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