What Is The Petrodollar? Biggest Weapon Of US Imperialism

What is the petrodollar? What is dedollarization? Why do they matter to us? This special report demystifies the intrigue surrounding America's biggest 'weapon'.

What is the petrodollar system?

Nadim Siraj

February 3, 2024: ‘Dedollarization’ has been in the news for quite sometime now. It is an eye-opening financial movement led by countries such as India, Russia, and China. The core agenda of the movement is to phase out the US dollar as the global reserve currency.

Basically, dedollarization is an operation to end American hegemony and imperialism around the world. But bringing down Uncle Sam is not an easy task. That’s because the US dollar’s muscle power comes from an old secret deal that is still firmly in place. It’s called the petrodollar deal.

This special report recalls the chilling story of the secret petrodollar deal that gave the US dollar all its power. After watching this report, you can pick up a copy of a book. It’s called Secret Notes From Iran: Diary Of An Undercover Journalist. It is a ground report that has granular details of the secretive deal, and much more.

Secret Notes From Iran diary of an undercover journalist
Cover of the 2019 book, Secret Notes From Iran: Diary of an Undercover Journalist, authored by Nadim Siraj

Various countries today are trying to bypass the powerful American dollar; they’re trying to stop trading only in the US currency; and they’re trying to start using their own currencies for global trade. As a wave of dedollarization gets bigger on the horizon, the world’s most powerful country, the United States of America, is now worried about latching on to its No.1 status.

If more and more countries stop using the dollar for trade and also as a foreign exchange reserve, the US will start losing relevance and power in global geopolitics. India, Russia, and China are not alone in the dedollarization movement.

Many others have joined the war on the US currency, such as Iran, Venezuela, UAE, Turkiye, Brazil, and even Saudi Arabia – otherwise, a reputed US sidekick. More than a dozen countries have already cut loose from the dollar’s grip to various degrees. The revolt-list is growing.

But remember, just because dedollarization is underway doesn’t mean US hegemony will end soon. America’s economic domination is only on a very gradual decline. Remember that right now, about 90% of foreign exchange transactions are still done in dollars. And nearly 60% of all foreign currency reserves are still held in the US currency.

So, the question is, despite the wave of dedollarization, why is the dollar still so strong? To know the answer, let’s turn the clock back to 1974. That’s when the US government struck a secret deal with the Saudi Arabian kingdom to insulate the dollar – to make it bulletproof, to weaponise it.

Bretton Woods Conference

Before we get there, let’s first quickly look at how the US dollar rose to power. In 1944, as World War 2 ended, the US emerged as the strongest country on the planet. Capitalising on the rise of America, Washington cleverly used its new position to kick the British pound out as the world’s most wanted and most traded currency.

The US projected its dollar as the No.1 global reserve currency. The country hosted an international meeting called the Bretton Woods Conference at a hotel in New Hampshire. Over there, it ordered the representatives of all the major countries to accept the dollar as the global reserve. The dollar was pegged to gold at that time.

The whole world quietly accepted it as the primary currency for international trade. No-one wanted to upset the new power.

But by the end of the 1960s, the dollar was beginning to lose its credibility. US banks had been carelessly overproducing the currency, often for unproductive purposes. As a result, there was too much wasteful dollars circulating in the world, and there wasn’t enough gold to back it up.

Birth of the petrodollar

For a while, it seemed Washington simply lost the plot. Many thought the US was about to surrender to the world and declare the collapse of the dollar. That’s precisely when the Americans took out their trump card. In the nick of time, they came up with a clever plan that saved the dollar from an inglorious death. Basically, the petrodollar system was created.

Let’s dive into the exciting times of the mid-1970s when the petrodollar was born. The secret origin of the petrodollar goes back to the final weeks of Richard Nixon’s presidency. Nixon was informally assigned by the powerful corporate elite running the US economy at that time to work out this high-stakes deal. It happened right before he was kicked out of the White House for his dubious role in the Watergate scandal.

So, what is the petrodollar deal? It is a game-changing agreement that was secretly struck between the US and Saudi Arabia in the summer of 1974. Details of the contract emerged much later. In 2016, the US treasury department confessed about the deal’s existence in response to a Freedom of Information Act request from Bloomberg News.

The story of the deal goes like this. In July 1974, US treasury secretary William Simon and his deputy Gerry Parsky were sent by Nixon and US secretary of state Henry Kissinger to Jeddah, Saudi Arabia. Their task was cut out: to formalise an agreement with King Faisal Al Saud of Saudi Arabia.

Officially, the two-week trip was projected as a diplomatic tour with stopovers in Europe and West Asia (called Middle East in the West). The schedule was packed with boring dinners and typically diplomatic meetings to ensure the press didn’t suspect anything. The hidden mission took place when the two US diplomats stopped over in Jeddah. It was kept in strict confidence.

William Simon and Gerry Parsky spent four quiet days in the Saudi city, discussing the details of the deal. After the talks, they secretly signed a US-Saudi government-level agreement. The two signatory parties were the US treasury department and SAMA, or the Saudi Arabian Monetary Authority. SAMA was the Saudi central bank at that time.

The agreement cleared the road for the US to take total control of the crude oil industry. The deal turned the dollar into a powerful economic weapon for decades to follow.

Heads I win, tails you lose

The terms of the petrodollar deal were like this: The US made two commitments. One, it would start buying a guaranteed quantity of crude oil from Saudi Arabia every year. Two, the US military would give the Gulf country perpetual military and intelligence cover against regional threats – read: Israel.

What were Saudi Arabia’s commitments? One, it would sell its crude oil to countries around the world only in exchange for US dollars. The kingdom would accept no other currency as payment.

Two, the Saudis would invest half of their oil profits into the US economy and other Western economies. This unusual arrangement completely ignored global stakeholders. The US didn’t consult international bodies such as the United Nations.

Much later, the world came to know about the one-sided deal as the petrodollar system. As Saudi Arabia started investing half of its crude oil profits in the Western economies, the practice got the name petrodollar recycling.

The origin of the petrodollar deal is documented in a rare book called Western Expansionism in the Persian Gulf. It was written in 1988 by former Russian diplomat Viktor Leonovich Mikhin. In the book, Mikhin disclosed a petrodollar-related pledge made to the US government by King Khalid Al Saud of Saudi Arabia.

Western Expansionism in the Persian Gulf - Viktor Leonovich Mikhin
Cover of the 1988 book, Western Expansionism in the Persian Gulf, authored by Viktor Leonovich Mikhin

Now, King Khalid succeeded King Faisal as the Saudi ruler after Faisal was assassinated on March 25, 1975. Faisal was the one who had signed the petrodollar deal with US representatives in Jeddah earlier on, in July 1974. Well, you can speculate whether Faisal’s murder had something to do with his role in the secret deal.

According to the Saudi pledge as disclosed by Mikhin in his book, the kingdom would invest 50% of its crude oil profits in buying US treasury bonds. Mikhin wrote, “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.” The kingdom was told by the US to use the interest earned from the investments to buy expensive American weapons and defence equipment.

OPEC joins in

Soon after the Saudi-US deal was sealed in 1974, the petrodollar system was expanded to cover many other oil-producing nations. All the members of the OPEC – the Organisation of Petroleum Exporting Countries – were pushed by the US to join the cartel.

As a result, the US currency’s demand across the world ballooned overnight. Why? That’s because governments all over the world now desperately needed to stockpile dollars. Why? To be able to pay oil producers such as Saudi Arabia the money required for buying oil. It is a case of sheer blackmail that never makes it to the news headlines.

The deal was a cunning masterstroke by imperialist America. The US captured the oil trade, weaponised its currency, and started using it to dominate world politics. In fact, it is not just the US. The entire Western world gained from the undemocratic petrodollar system.

It is undemocratic because the deal places countries without crude oil reserves at the mercy of the US and at the mercy of a tiny bunch of oil producers. For countries without oil reserves, their own currencies are of no use when it comes to importing oil, since dollar is the only currency that can buy the fossil fuel.

There was a time when the OPEC countries blackmailed the entire world by shooting up oil prices to beyond $130 dollars a barrel. They are basically siphoning money out of poor countries by artificially keeping oil prices high. Dozens of poor governments are forced to pay whatever is demanded by oil exporters, especially by the Gulf kingdoms.

The poor countries desperately need oil to run their transport, industries, and economies. Therefore, they are forced to pay big bucks for oil imports.

Pick up the book, Secret Notes From Iran: Diary Of An Undercover Journalist. Firebrand writer and political scientists Noam Chomsky talks about the petrodollar system in that book, which contains many other shocking stories from the Gulf region.

The petrodollar blackmail

Let’s visualise what is happening as a result of the petrodollar system. Dozens of countries are purchasing dollars from the US and from the international foreign exchange market. Why? So that they can pay the OPEC nations for buying crude oil. After the oil money gets sucked into the OPEC countries, half of it travels to Western countries, where it gets reinvested in their local economies.

How does the oil money land up in the West? Saudi Arabia and other oil producers buy US treasury bonds and make various investments in the Western world – that’s how the money flows to the West.

Result? Western countries are receiving the oil money like a never-ending gift. So, their economies are perpetually booming. The US and a few other Western countries are constantly becoming more and more affluent. And the oil-importing countries are perpetually becoming poorer and poorer, since they are struggling to buy exorbitant oil.

The game is rigged. The table is tilted in America’s favour. Countries that desperately need dollars to buy oil are being forced to agree with America’s whims and fancies. And countries that refuse to align with the US on various issues and narratives are getting cut off from the supply of dollars, and therefore, from access to oil.

Expectedly, America uses all its powers trying to protect the sacrosanct petrodollar system. Governments that want to come out of it are branded as evil and get brutally punished. There are two shining examples from recent times: the invasions of Iraq and Libya. Remember how Western forces got Saddam Hussein and Muammar Gaddafi killed and made a show of it?

The Saddam-Gaddafi revolt

The petrodollar system’s honeymoon period lasted till the end of 2000. Soon after that, a rebellion broke out in the epicentre of crude oil – the Arab world. Iraq’s president Saddam Hussein was the first prominent leader to speak out against the dollar’s hegemony. He told the world that Iraq would no longer be part of the petrodollar system. He declared Baghdad would sell its oil only for euros, not for dollars – the US currency won’t be accepted as payment.

The American empire was furious. It immediately decided to go after Saddam. Remember that much earlier, Saddam was a darling of the West. But when he decided to go against the petrodollar system, he became a villain overnight.

Iraq was slapped with stringent economic sanctions that crippled the country’s economy and social fabric. Then in 2003, a military coalition, led by the US, invaded the country and demolished it. US and British politicians made false claims, saying Saddam was working with terrorists and stockpiling weapons of mass destruction (WMDs). The invaders removed Saddam from power and got him hanged in 2006.

What was hardly reported after Saddam’s murder was that US-captured Iraq again started to sell its oil only for dollars. The petrodollar system survived.

The malign-and-punish story was repeated in Libya a few years later. Around the time Saddam was murdered, Libya’s leader Gaddafi did a Saddam. He declared that Libya was exiting the petrodollar cartel. He floated a plan to sell Libya’s crude oil only in exchange for a new African currency.

Gaddafi named the proposed African currency ‘gold dinar’. He proposed to launch it as Africa’s very own currency, so that the continent no longer needed to rely on the dollar for trade, business, and diplomacy.

Expectedly, in 2010, anti-government protests in the name of Arab Spring broke out in Libya. A year later, NATO forces backed by the US invaded the country, and removed Gaddafi from power. He was hounded down and killed in 2011. Libya’s dream to get freedom from the petrodollar system was over. It was a repeat of Iraq. America’s message to the world was loud and clear – mess with the petrodollar at your own peril.

There’s no denying that Saddam and Gaddafi themselves were not neat and honest people. They committed war crimes at the peak of their power. But those crimes were happily ignored by the US. The two leaders were targeted only when they went against the petrodollar system. For the same approach, countries such as Iran, Syria, China, North Korea, Venezuela, and Russia are routinely defamed and targeted by the US.

Many experts feel the US dollar will someday be replaced by the Chinese yuan or any other currency as the global reserve. Already, the Saudi ruling family has decided to trade with China in yuan. It’s a major blow for the petrodollar system because Saudi Arabia is where it was born, back in 1974.

But even though the dollar’s future is not rosy, a total collapse is still far away. That’s because in the coming decades, the US will probably go on an all-out attack trying to save the petrodollar system. The petrodollar is the DNA of the modern American empire. It’s the holy grail of US imperialism. The popular press won’t tell you this because they are clueless about it. If you are keen to know which way the dollar will go, the clue lies in whether the petrodollar survives the storm. The storm of dedollarization.

If you want to know more about the petrodollar and other secrets of the oil kingdoms, we recommend you to grab a copy of Secret Notes From Iran: Diary Of An Undercover Journalist.

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