Letters to the Editor

Petrodollar — nothing lasts forever

Monday, May 13, 2019

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Dear Editor,

The petrodollar is a system in which oil is sold in US dollars exclusively. In 1944, as a consequence of the Bretton Woods Conference, the US dollar, back by gold, became the world reserve currency — prior to that it was the British pound.

In 1971 US President Richard Nixon unilaterally cancelled the international convertibility of US dollars to gold. From 1972 to 1974 the US made a series of agreements with Saudi Arabia which led to them selling oil in US dollars only.

In 1975, because of Saudi Arabia's influence, the Organisation of Petroleum Exporting Countries (OPEC) agreed to sell oil exclusively in US dollars.

Oil is the world most traded and strategic commodity. The US dollar status as the premier world reserve currency is tied to the petrodollar.

The petrodollar allows the US Government to gain revenue by issuing bonds at lower interest rates than they would otherwise be able to do. Consequently, the US Government can run higher budget deficits than most other countries and still be considered the world most successful and powerful economy. This allows the US debt to be US$22.3 trillion, which is 105 per cent of its gross domestic product (GDP) and the US is still considered having a successful economy. The US is currently running a deficit of US$1.2 trillion annually and its is expected to increase.

Today oil is not only sold in US dollars — although over 90 per cent is still sold in US dollars. On December 8, 2008 Iran announced she had converted all oil payments exports to non-US dollar currencies. In 2014 Qatar agreed to sell China oil in Yuan. In 2015 China and the United Arab Emirates created a currency swap agreement. In 2016 India and Iran transacted oil sales in Indian Rupees. On March 26, 2018, China launched its oil futures priced in Yuan and the Chinese oil futures contract is growing at a significant pace.

The Iran nuclear deal is a threat to the petrodollar because it aggravated Saudi Arabia — the world's largest exporter of oil. On July 14, 2015, in Vienna, the Joint Comprehensive Plan of Action, better known as the Iran nuclear deal, was signed between Iran and the five permanent members of the United Nation Security Council (China, France, Russia, United Kingdom, United States, plus Germany) and the European Union. On January 16, 2016 the agreement was implemented. This deal infuriated Saudi Arabia. Saudi Arabia and Iran are rivals. On October 4, 2017 Saudi Arabia's king, Salman bin Abdulaziz Al Saud, visited Russia for the first time in history, presumably because they are not pleased with the Iran nuclear deal. On October 13, 2017 US President Donald Trump announced that the US will not make the certification provided for under US domestic law required to give effect to the Iran nuclear deal. On May 8, 2018 US announced withdrawal from the Iran nuclear deal.

On October 30, 2000 the UN granted Saddam Hussein permission to sell oil in Euro. In March 2003 his Government was overthrown by US soldiers and he was eventually killed.

Some people believe that in 2011 Muammar Gadhafi's plan to quit selling Libyan oil in US dollars — demanding payment instead in gold-backed “dinars” (a single African currency made from gold) — was the real reason US-supported militia killed him. It is probably more complex than that.

Venezuela has the world's largest oil reserve, but is not even in the top 10 oil exporters. If China and Russia help Venezuela to become the number one exporter of oil the petrodollar is dead. The US may well do everything to prevent that.

The US needs to back its dollar with gold or else it will be vulnerable to pressure from Saudi Arabia, Russia and China. Nothing lasts forever.

Brian Ellis Plummer

brianplummer@yahoo.com


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