The Petrodollar: A Primer
Black Gold Drives Geopolitics
After the United States abandoned the gold standard in 1971, the U.S. dollar crashed in value. Inflation, which had been modest in the 1960s, jumped to double-digits in the 1970s. This was exacerbated by the fact that Saudi Arabia, along with a handful of other petroleum-rich Arab nations, cut back on oil production. Without gold’s mooring, a currency tends to depreciate.
Since the greenback (dollar) was no longer tied to gold, trust in it evaporated. The U.S. was the world’s biggest economy, and everyone still used the dollar. Yet with a dollar under threat, American bureaucrats and politicians had to find a way to reinstill confidence in their currency.
In 1974, the United States and Saudi Arabia signed the Milestone Agreement, which ensured the dollar’s continued dominance. What emerged from this was a deal: Saudi Arabia would sell its oil only for dollars, in exchange for American military protection and weapons. Because of the Saudis’ influence on global petroleum markets, oil producers everywhere ended up trading for dollars.
The Petrodollar was born.
Today, the dollar remains the king of global currencies. Fifty-nine percent of foreign exchange reserves are U.S. dollars. Although the U.S.’s power has waned in recent years, the dollar continues to drive international trade. This is largely because without dollars, it is much more difficult to buy petroleum, a key commodity.
The U.S. also has military bases in 85 countries, ensuring that if any nation tries to escape American influence, that it is swiftly crushed. Such a fate befell Libya’s leader Muammar Gaddafi, who tried to develop a pan-Africa currency backed by gold. Viewing him as a threat to dollar supremacy, the U.S. and its NATO allies invaded Libya in 2011, and killed Gaddafi.
The dollar also propels global trade, allowing the United States to influence politics anywhere. The Federal Reserve’s figures suggest that the dollar accounts for 96 percent of trade in The Americas, 74 percent in the Asia-Pacific region, and 79 percent everywhere else. Through its conduits in The World Bank, the U.S. government controls the politics of developing nations by offering them Faustian loans — in U.S. dollars.
However, this is rapidly changing as the U.S. continues its secular decline. Since March of 2022, the Saudis have publicly called for oil to be traded in Chinese yuan, hinting that they might abandon the Petrodollar altogether. Instead of invading Saudi Arabia and nuking it off the map, President Biden has desperately pleaded with Saudi Prince Mohammed Bin Salman to continue pricing oil solely in dollars.
In the meantime, the BRICS alliance (Brazil, Russia, India, China, and South Africa) is mulling over the development of a new reserve currency to rival the U.S. dollar. The BRICS are even considering new members for its alliance, including the United Arab Emirates, Iran, and Saudi Arabia — all of whom are oil-rich states. Russia has already been forced to de-dollarize, due to U.S.-led sanctions. A gold-backed BRICS reserve currency could destroy the Petrodollar.
Although the end result, a multipolar world with gold-backed currency, will be good, the process of reaching it will be painful. As I have written before, I see war in the offing, although it will be limited in scale. More perniciously perhaps, as Western countries decline, they will clamp down on civil liberties to grasp onto their last vestiges of economic glory. This will culminate in a digital panopticon of tyranny, which mankind has never experienced before.
Central Bank Digital Currencies will prevent you from expressing unacceptable religious or political views. Digital ID will block you from accessing the internet. Your bank account will be locked if you spend too much on gasoline, and other ‘carbon-guzzling consumption.’ Buy an EV, eat the bugs, and live in the pod, peasant!
The future is uncertain, and it certainly is not friendly.
So, do you think BRICS will succeed in introducing a gold-backed currency? If so, when, and what do you thin it will do to the price of gold?