Friday, June 3, 2016

Unravelling of the Petro-Dollar System?





Is the petro-dollar system unravelling? The petro-dollar system is based on the US dollar serving as the global currency reserve.

In the 1970s the US made efforts to ensure that the dollar would remain the exchange currency for OPEC transactions.

Demand for US dollars for OPEC transactions and investment of petrodollars in US Treasuries together promoted US financial hegemony and contributed to the growth and offshoring of the large transnational American and European banks.

This system is under assault as nations across the world are turning to local currencies to mediate international trade.

Bloomberg recently reported on how the US ensured that OPEC oil transactions would be conducted in dollars back in the 1970s.


Andrea Wong. The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret. Bloomberg May 30, 2016, http://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret
How a legendary bond trader from Salomon Brothers brokered a do-or-die deal that reshaped U.S.-Saudi relations for generations.
It was July 1974. A steady predawn drizzle had given way to overcast skies when William Simon, newly appointed U.S. Treasury secretary, and his deputy, Gerry Parsky, stepped onto an 8 a.m. flight from Andrews Air Force Base. On board, the mood was tense.
That year, the oil crisis had hit home. An embargo by OPEC’s Arab nations—payback for U.S. military aid to the Israelis during the Yom Kippur War—quadrupled oil prices. Inflation soared, the stock market crashed, and the U.S. economy was in a tailspin.
….The goal [of the trip]: neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth...
….But Simon, better than anyone else, understood the appeal of U.S. government debt and how to sell the Saudis on the idea that America was the safest place to park their petrodollars.
...The basic framework was strikingly simple. The U.S. would buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries and finance America’s spending.
…Exactly how much of America’s debt Saudi Arabia actually owns is something that matters more now than ever before.

…In April, Saudi Arabia warned it would start selling as much as $750 billion in Treasuries and other assets if Congress passes a bill allowing the kingdom to be held liable in U.S. courts for the Sept. 11 terrorist attacks, according to the New York Times....

The effects of a large sell-off in Treasuries are not clear, but such an event would undoubtedly contribute to the growing global economic crisis that is manifesting in over-production of commodities in a context of dampened trade and escalating international territorial and resource conflicts.

The global situation "rhymes" in many ways with the conditions that led up to World War I.

Here is an excerpt from my book (Crisis Communication, Ecological Sustainability and Liberal Democracy) looking at the relationship between petrodollars and militarization in the Middle East:

Petrodollars, Western Finance, and Weaponsdollars
The carbon complex contributed to the western financial hegemony that persists today. Western banks grew in power and international influence through the petrodollar system discussed in Chapter Two. Recall from that discussion that international sales were conducted in the global reserve currency, the US dollar. OPEC nations began accumulating great dollar-denominated wealth from their oil exports. Accordingly, petrodollars were defined in 1974 as “the excess foreign-exchange assets of the oil producing countries.”[i] Petrodollars were primarily cycled through European and US banks in (bank) credits and bond issues.[ii] Western banks’ capital reserves increased with their petrodollar deposits, enabling them to operate as private, state bankers through their lending to developing nations. Those developing nations faced rising oil prices and costlier US dollars (due to interest rate hikes) across the 1970s. The private banks essentially substituted for the IMF as the dominant source of lending, causing one central bank official to complain that "the private banking system took over the functions proper to an official institution possessed of the power to finance balance.”[iii]  
Howard Wachtel traces the integral connections across petrodollar surpluses, developing world debt and the expansion of western banks using US banks as an example: In 1965, only 11 US banks had overseas branches, whereas in 1975, 125 US banks had branches operating in 59 foreign countries. Less developed countries that imported oil saw their debt load increase from less than $40 billion to over $200 billion during this same period.[iv] As explained in Chapter Two, rising debt made the developing world vulnerable to neoliberal reforms in the 1980s. The western bank flows would soon be supplemented, and eventually eclipsed, by money market corporations, insurance companies, and by “shadow sector” financing/investment banks whose increased circulations contributed to the financialization of global commodity markets.[v]
According to political scientists Jonathan Nitzan and Shimshon Bichler, petrodollars also created “weaponsdollars” as oil exporting nations invested extensively in weapons to defend their national energy infrastructures and to ensure “security” in a context of rising Middle-East conflict.[vi] Nitzan and Bichler identify 25 firms constituting the primary defense-dependent contractors receiving the bulk of the weaponsdollars, but focus their analysis on the largest players for the 1966-1991 period, including Boeing, General Dynamics, General Electric, Grumman, Honeywell, Litton Industries, Lockheed, McDonnell Douglas, Martin Marietta, Northrop, Raytheon, Rockwell International, Texas Instrument, Textron, United Technologies and Westinghouse. Weaponsdollars increased US economic dependence upon militarization.
Petrodollars contributed to an international order dominated by powerful private energy corporations, national-security states, and western financial institutions. The carbon complex can deploy national armies to ensure its perpetuation, as dramatically illustrated by the US wars in Iraq.[vii] The US military is the single largest buyer of oil, consuming around 400,000 barrels a day of oil during peacetime, a quantity comparable to 2010 Greek national consumption, and consuming approximately 800,000 barrels a day at the height of the Iraq war.[viii] BP has for years been among, if not the top, supplier to the US government with contracts of more than $1.34 billion in 2014, many of which are to supply the US military in the Middle East.[ix]
The carbon complex remains wracked with the oppositional forces created by extractive logics that dispossess others’ rights and that exacerbate and/or generate inequalities leading to war and repressive policing. BP is in an integral player in the middle-industrial complex that unifies the US and UK and their allies against allegedly oppositional force, which can be illustrated by the brewing Cold War with the Shanghai Cooperation Organisation (SCO), founded in 1996, whose current members include China, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, and Russia.[x] Observer states include Afghanistan, India, Iran, Mongolia, and Pakistan, although India and Pakistan began accession in 2015.[xi] The Shanghai Cooperation Organisation aims to move beyond the dollar reserve. 
Russian president Dmitry Medvedev called for the use of national currencies in trade in 2009, rejecting the dollar as the US currency reserve.[xii] The same year, the SCO and the BRIC nations (Brazil, Russia, India and China) collectively promoted establishment of a “fairer world order” characterized by a “new global financial security system” and a “new super-national currency to handle mutual transactions.”[xiii] These calls represent an explicit disavowal of the establishment economic order founded at Bretton Woods and honed by neoliberal reforms. Yet, the multi-polar world promoted by the SCO and BRICS nations remains elusive as the US military projects power in Eastern Europe and Asia and as allied Japan sheds its post-World War II pacifist constitution in order to support US military actions, despite widespread popular domestic resistance.[xiv]



[i]           First mention in Willis Russell, Mary Gray Porter, and Lee Pederson, Among the New Words,” American Speech 49 (1974): 127, doi: 10.2307/3087995.
[ii]           Benjamin Cohen, “Balance-of-Payments Financing: Evolution of a Regime,” International Organization 36 (1982): 457, accessed May 26, 2009, doi: 10.1017/S0020818300019019.

[iii]          Ibid., 457-458.

[iv]          Howard M. Wachtel, “A Decade of International Debt,” Theory and Society 9 (1980): 504, accessed August 24, 2015, http://www.jstor.org/stable/656879.
[v]           Ing-Haw Cheng and Wei Xiong, “Financialization of Commodity Markets,” Annu. Rev. Financ. Econ. 6 (2014): 419-441, doi: 10.1146/annurev-financial-110613-034432.
[vi]          Nitzan and Bichler, “Bringing Capital Accumulation Back," 459.

[vii]         Antonia Juhasz, “Why the War in Iraq was Fought for Big Oil,” CNN, April 15, 2013, accessed April 16, 2013, http://www.cnn.com/2013/03/19/opinion/iraq-war-oil-juhasz/.

[viii]        John Vidal, “Surging Price of Oil Forces US Military to Seek Alternative Energy Sources,” The Guardian, October 28, 2010, accessed October 29, 2010, http://www.theguardian.com/environment/cif-green/2010/oct/28/oil-us-military-biofuels.

[ix]          US Allows Oil Giant BP Back into Gulf Four Years After Spill,” NBC News, March 14, 2015, accessed March 15, 2015, http://www.nbcnews.com/business/energy/u-s-allows-oil-giant-bp-back-gulf-four-years-n52726.

[x]           “Main Page,” Shanghai Cooperation Organisation, last modified 2015, accessed July 16, 2015, http://www.sectsco.org/EN123/index.asp.
[xi]          Lidia Kelly, Denis Pinchuk, and Darya Korsunskaya, "India, Pakistan to Join China, Russia in Security Group," Reuters, July 11, 2015, accessed September 22, 2015, http://in.reuters.com/article/2015/07/11/china-russia-india-pak-sco-idINKCN0PK20520150711.
[xii]         “Medvedev Calls for Use of National Currencies in Trade,” The Voice of Russia, June 16, 2009, accessed June 17, 2009, http://ruvr.ru/main.php?lng=eng&q=46798&cid=215&p=16.06.2009.
[xiii]        “SCO, BRIC Urge Fairer World Order,” Voice of Russia, June 17, 2009, accessed June18, 2009, http://ruvr.ru/main.php?lng=eng&q=46845&cid=206&p=17.06.2009.
[xiv]        Kiyoshi Takenaka and Linda Sieg, “Huge Protest in Tokyo Rails Against PM Abe's Security Bills,” Reuters, August 30, 2015, accessed September 8, 2015, http://www.reuters.com/article/2015/08/30/japan-politics-protest-idINKCN0QZ0BX20150830?irpc=932.

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