The Petrodollar versus Renewable Energy

There is a reason why all oil and oil-derivatives are denominated in the US dollar.  This has created artificial demand, making the US dollar the de facto global currency.  It has also tied most oil-exporting nations to US foreign policy since a fall in the dollar is a fall in their revenue.  Their bonds are in US dollars, and much of their transactions and reserves are kept in the US.  Many of these countries also peg their currency to the US dollar, so a drop in the dollar value leads to a reduction in the price of goods and services, giving them some protection from inflation and deflation, at the cost of sovereignty.  When the Federal Reserve makes a decision on interest rates, it effectively makes a decision for an entire group of economies, not just the American economy.  This is what makes the US a superpower, and props up its economy. 

At the end of World War II, the US held over half the world's official gold reserves, 574 million ounces.  Countries in Europe has moved their reserves to the US because of Nazi Germany.  They kept it there because of the rise of Communism.  The US agreed to redeem its currency for that gold it effectively held hostage.  This was the Bretton Woods agreement of 1944.  The US dollar became the reserve currency of the world, and the United States was officially a superpower. 

On the 14^th February 1945, President Franklin Delano Roosevelt initiated an alliance with Saudi Arabia, in a meeting with King ‘Abd al-‘Aziz ibn ‘Abd ar-Rahman as-Sa’ud.  The United States agreed to provide military support to the regime, legitimising the Wahhabi state, and built an airfield at Dhahran.  The petrodollar was born. 

Initially, Bretton Woods worked.  Because of the Marshall Plan, Japan and Europe rebuilt quickly, after the war.  The US dollar was in demand to buy American factory output, propping up the US economy and leading to a domestic boom.  The next two decades were less kind.  As Germany and Japan recovered, and started their own factory output, the US share of the world’s economy dropped from 35% to 27%, which is very significant.  The US economy had over-reached, assuming that the good times would last, and held a negative balance of payments.  There was also growing public debt  because of the Korean War, what would eventually be the Vietnam War, and military and other action all over the world to maintain the American sphere of influence.  There was also monetary inflation by the Federal Reserve, which caused the dollar to become overvalued in the 1960s. 

This created fissures with Europe, and the Atlantic Alliance was fraying.  In Europe, Bretton Woods was viewed as an asymmetric financial system where non-US citizens subsidised the American dream.  American economist, Barry Julian Eichengreen put it succinctly that “It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one.”  In February 1965, President Charles André Joseph Marie de Gaulle announced his intention to exchange France’s US dollar reserves for gold at the official exchange rate.  This would have lead to other countries doing the same.  By 1966, other central banks held US$14 billion, while the United States had only $13.2 billion in gold reserve.  Of those reserves, $3.2 billion was available to cover foreign holdings as the rest was covering domestic holdings.  The US was essentially broke. 

By 1971, the money supply had increased by 10%.  In May 1971, West Germany left the Bretton Woods system because they were unwilling to revalue the Deutsche mark.  This move strengthened its economy, while the dollar dropped 7.5% against the Deutsche mark.  Other nations began to demand redemption of their dollars for gold.  Switzerland redeemed US$50 million in July, France US$191 million in gold.  On the 05^th August 1971, Congress released a report recommending devaluation of the dollar.  On the 09^th August 1971, Switzerland left the Bretton Woods system.  The US dollar was in freefall.  The US had an unemployment rate of 6.1%, and an inflation rate of 5.84%.

On the afternoon of Friday, 13^th August 1971, President Richard Milhous Nixon, Federal Reserve Chairman Arthur Frank Burns, incoming Treasury Secretary John Bowden Connally Jr., and Undersecretary for International Monetary Affairs and future Federal Reserve Chairman Paul Adolph Volcker Jr., along with twelve other high-ranking White House and Treasury advisors met secretly at Camp David.  The outcome was what came to be known as the Nixon Shock. 

Nixon directed Connally to immediately suspend, with exceptions, the convertibility of the dollar into gold or other reserve assets.  The gold window was closed and foreign governments could no longer exchange their dollars for gold.  Nixon then issued Executive Order 11615, pursuant to the Economic Stabilization Act of 1970, imposing a 90-day freeze on wages and prices in order to counter inflation.  This was the first time the US government had enacted such wage and price controls since World War II.  He then imposed an import surcharge of 10% to protect American industry at the expense of foreign trade. 

As a result of all these action, the value of the US dollar plummeted against European currencies.  That helped the US economy recover, because this made its exports cheaper, and more competitive.  However, for oil-exporting countries, the falling US dollar was painful.  Futures contracts overpriced, revenue dropped, but the cost of import increased. 

In 1973, Nixon asked Congress for military aid to Israel in the Yom Kippur War.5  The newly-formed Organisation of the Petroleum Exporting Countries cartel halted oil exports to the United States and other Israeli allies, leading to the oil shock.  The OPEC oil embargo quadrupled the price of oil in six months, and prices remained high after the embargo ended. 

In 1979, the United States and Saudi Arabia negotiated the United States-Saudi Arabian Joint Commission on Economic Cooperation.  They agreed to exclusively use US dollars for oil contracts, and the US dollars would be recycled back to America through contracts with US companies, mainly from the oil and gas industry, and the military industrial complex.  They were a means for the Saudis to support the US economy, while the Americans prop up a despotic regime. 

In the current era, the petrodollar is used as a means to enforce American hegemony.  There is pressure to support the system because petrodollar recycles would lose the value of their holdings if the system drops.  When countries and heads of state have attempted to trade oil in other than the petrodollar, their countries were invaded, or a crisis emerged at home, supported by the US intelligence apparatus.  This was the fate of Swaddam Husayn ibn ‘Abd al-Majid at-Tikriti, of Mu’ammar Muhammad ibn Abu Minyar al-Qadzdzafi, and many others.  This ensured compliance. 

Countries such as Russia and China have been in discussion to conduct bilateral oil trade in their currency, and Shanghai Cooperative Organisation have begun to move in that direction.  The problem is that the petrodollar system is so prevalent that it is not something that cannot be done without short-term economic consequences that are unpalatable to governments.  For one, there is no real consensus on a suitable alternative currency.  For another, even countries like China has their renminbi pegged to the US dollar, and hold so much in US securities that this would be very expensive. 

Fortunately, or unfortunately, the world moves on.  Technology progresses, and societies advance.  The petrodollar system will eventually lose its allure simply because of climate change.  Due to the Paris Climate Accords, countries in Western Europe and East Asia have invested heavily in renewable energy, while the US has remained intransigent.  The Trump administration was even touting coal, which is long obsolete. 

As nations begin to limit greenhouse gas emissions to fight global warming, they have begun to shift to electric vehicles.  They are moving towards solar, wind, and other forms of renewable energy to generate that electricity more efficiently.  Because the US economy does not have a competitive advantage here, the petrodollar would lose its role as the reserve currency of the world, and that is the end of American hegemony. 

The United States of America is a large, wealthy nation.  They still have the resources and the mans to pivot, and move towards adoption of renewable energy in a big way.  They very well might do so as part of the Biden administration’s infrastructure package.  The US is not doing that because they suddenly care for the environment and the climate.  They will do that because they need to maintain their dollar hegemony through some means, or lose their empire, becoming another major economy in a multipolar world.