Thursday, January 31, 2013


Updated 11/13/2016

The rise of the "petrodollar" is a little understood phenomena that plays a great role in the Middle East from the 1970s on, but also, in preventing the dollar from turning into worthless little bits of paper.

The PETRODOLLAR trading system requires all oil sales be transacted in US dollars,a system established in the early 1970s by Kissinger in an agreement with Saudi Arabia. It is believe that when Nixon took the dollar off the gold standard, he and Kissinger decided to tie the dollar to barrels of oil, instead.

By 1975, all of the oil-producing nations of OPEC had agreed to price their oil in dollars and to hold their surplus oil proceeds in U.S. government debt securities.
In exchange, oil producing countries would receive US weapons, military aid and other forms of protection. See this graph, with ''oil exporters'' in 4th position holding US debt:

Most of the Middle East has aligned itself  militarily with the US. -- see this map of US military bases in the Middle East (note how Iran is surrounded).

Countries wanting to purchase oil, have to purchase it in US dollars, either by exchanging a national currency at high bank charges, or by producing and exporting consumers items to the US. For example, Japan must convert its yen in US dollars to buy and import oil. Japan ships Hondas to the US, receives US dollars and uses that to buy oil.Thus, countries that don't want high exchange rate charges, are dependent on an export strategy to grow their economies. In addition, countries take their excess profits and invest in (buy up) US debt, thus every global oil transaction increases the demand for US dollars and the demand for US debt securities (bonds). This allows the US to print money to buy oil, at which point interest is occurred by the Federal Reserve, which increases US debt, which is purchased by other countries.

This allows the US to print money indefinitely without fear of having to pay debt or, to suffer hyper-inflation.

Some countries are not happy and want to transact oil transactions on their own or other currencies such as the Euro. China, Iran, Syria, N Korea  and Venezuela are among those countries. Saddam Hussein pegged the Iraqi dinar to the Euro just before the US 2003 invasion. Gaddafi of Libya planned a pan-African gold based currency, before his demise at the hands of a Western-supported insurgency.

Update: In November 2014, China signed an agreement with Qatar to begin direct currency swaps between the two nations using the Yuan. Update: February 2016:
Reuters has reported that Iran is requesting euros for all new and outstanding oil payments

To sum up:
The world today needs dollars to buy oil, global reserve currencies are mainly in dollars, and most countries peg their currency to the dollar and buy up US debt, therefore the US can print as many dollars as it wants. China however in 2012 has started to buy oil in its own currency. China wants to be Iran's number 1 oil client and pay with the Yuan currency. This is the type of move that may one day remove US monetary hegemony and its ties to the Middle East.Sanctions against Russia may be a shortsighted policy because it will force Russia to deal bilaterally with China and create their own petro financing system.


  1. Russia in 2016 became the leading oil exporter to China, partly because Russia accepts the Chinese yuan currency for its oil.
    If Saudi Arabia wants to recapture its rank number one, the country must reconsider its oil policies with the West from 1970 to accept other currencies for oil payments instead of just the dollar.
    If this happens, in a domino effect American dollar will lose its privileged place in international transactions.

    1. Agree with your statement about the domino effect of the American dollar, but there's another aspect to it. Many currencies of other countries are also backed by the American dollar.. if the dollar depreciates, so does their currency, so it would bring down much more than just the United States.