By M. Reza Behnam
The United States’ wars in the Persian Gulf region have largely been about securing control of the region’s energy resources and stabilizing the oil currency policies that have fueled America’s expansive economy since 1945.
The United States emerged from the World War II rich and powerful. It has reigned supreme over both the global energy market and the world’s financial system ever since, and America’s growth and prosperity became inextricably intertwined with the abundant and cheap oil of the Persian Gulf.
U.S. economic hegemony has been sustained by its military supremacy. The price the United States has paid for its addiction to low-cost energy has been perpetual, disastrous wars in the Middle East, the militarization of American society, and terrorism at its threshold.
Forty-four allied leaders met at Bretton Woods, N.H., in 1944 to create a modern, stable global economic system. They agreed to inaugurate an international gold-backed monetary standard reliant on the U.S. dollar — a logical decision at the time, since the United States had the largest gold reserves — at $35 per ounce of gold. With gold stores dwindling, President Richard Nixon ended the gold standard in 1971.
Political and economic uncertainty characterized the 1970s. Inflation soared as the government freely printed dollars to cover the costs of the Vietnam War and President Lyndon Johnson’s Great Society programs. The 1973 oil embargo by Arab nations that belonged to the Organization of Petroleum Exporting Countries — payback for U.S. military aid to Israel during the Yom Kippur War — quadrupled oil prices.
With the U.S. economy in a nosedive, the Nixon administration, anxious to maintain the global demand for dollars, persuaded the hostile Saudi government to finance America’s debt with its petroleum wealth. Nixon convinced the Saudis that it was in their best interest to price their oil only in U.S. dollars, and to invest their surplus oil profits in U.S. Treasury bills.
The Saudi government insisted its acquisitions remain a secret — an agreement that lasted until recently. For its part, the United States agreed to provide weapons and protection to the House of Saud. The agreement ended the oil embargo, neutralized crude oil as a weapon, and bound two disparate countries together for decades. By 1975, all OPEC countries had followed suit by pricing their oil in dollars.
The U.S.-Saudi economic arrangement came to be known as the petrodollar system. Because Saudi Arabia would accept only U.S. dollars as payment for its oil, all countries had to exchange their own currency for dollars before purchasing Saudi oil.
This increased international demand for dollars, making the dollar the world’s singular reserve currency and the preferred medium of exchange. To meet the increased global demand for dollars, the government simply fired up the printing presses.
The strength of the U.S. dollar, and the Saudi riyal pegged to it, are directly related to the oil and gas trade. For more than 40 years, global energy transactions and international trade have been conducted mainly in dollars, maintaining the United States’ status as an economic superpower. While other countries export products, America’s No. 1 export has been its dollars.
Saudi Arabia became a U.S. client state with the petrodollar bargain of 1974. This bargain helps clarify why Washington staunchly backs the autocratic government in Riyadh that represses half its population, that funds extremist Sunni groups worldwide, and that nurtured 15 of the 19 hijackers who carried out the terrorist attacks on Sept. 11, 2001.
It also unmasks Washington’s support for Saudi Arabia’s devastating bombing campaign in Yemen, their joint efforts to topple the Assad government in Syria, the billions in arms sales, and their obsession with Iran as a regional threat. Washington’s imprudent policies expose its determination to make sure the Saudi government remains committed to the petrodollar standard.
America’s wars in the Middle East have decidedly to do with eliminating challenges to the petrodollar system. Such a challenge was central to President George W. Bush’s decision to invade Iraq, a country with the world’s second-largest oil reserves, and overthrow Saddam Hussein.
Saddam’s fate was sealed when — encouraged by the French and eager to end crippling sanctions — he decided, in late 2000, to trade Iraqi oil in euros, the world’s second-largest reserve currency, and converted his $10 billion reserve fund at the United Nations to euros. Russia, Iran, Indonesia, Venezuela and several others expressed a similar interest.
Bush’s invasion of Iraq in March 2003 finished off the euro threat to the petrodollar. The invasion sent a clear warning to other countries considering an alternative oil transaction currency — they, too, could face regime change. A senior British official, commenting on the U.S. buildup to war, stated: “Everyone wants to go to Baghdad. Real men want to go to Tehran.”
The security of Iraq’s oil fields was a major priority of the Bush administration during the early days of the war. Although the U.S. military had detailed plans to protect the oil fields, Washington remained indifferent as looters ransacked and destroyed the National Museum in Baghdad in April 2003. In the infamous words of Defense Secretary Donald Rumsfeld, “stuff happens.”
Under U.S. occupation, Iraq’s oil exports were quickly converted back to dollars from euros, and Iraq’s oil contracts with other countries were canceled. Additionally, U.N. Security Council Resolution 1483, drafted by the Bush administration and passed in May 2003 with U.S. pressure, allowed the United States and Britain to control Iraq’s oil revenue.
The 2011 intervention in Libya and the overthrow of Muammar Qaddafi can be seen through the same prism. For decades, a number of African countries, led by Qaddafi, had been attempting to establish a pan-African currency based on Libya’s gold-backed dinar. Qaddafi’s goal was to provide the continent with an alternative currency, and to replace the dollar with the Libyan dinar in future oil sales.
E-mails from Hillary Clinton’s State Department reveal French President Nicolas Sarkozy’s fears about the threat Qaddafi’s pan-African currency posed to the established economic order. Sarkozy called Libya a threat to the financial security of the world, and adamantly pushed for military action in Libya.
Qaddafi’s life, along with his plan for a united African currency, ended when NATO forces, spearheaded by France and Britain and with U.S. cooperation, invaded Libya. It is worth noting that, within weeks and in the midst of fighting, the poorly organized anti-Qaddafi forces had created a Central Bank of Benghazi as the new monetary authority, replacing Libya’s state-owned bank. The invasion also solidified France’s primacy in the post-Qaddafi oil sector.
The 2002 failed coup attempt against President Hugo Chavez in Venezuela — reportedly with the assistance of the CIA — came shortly after the country considered switching to the euro for its oil sales. In 2007, Chavez instructed the state oil company to change its dollar investments to euros and other currencies.
Yet cracks appear to be emerging in America’s hegemony over the global financial system. The United States’ impolitic conduct in the Middle East reflects its angst over these developments.
The intensity of U.S. rancor toward Iran has increased as Tehran, along with Moscow, has led the effort to break free from the petrodollar monopoly. That Tehran has been pricing its oil in currencies other than the dollar and seeking to create a Middle East energy exchange market are viewed by Washington as provocative moves, and have placed Iran squarely on America’s target list.
Iran has been steadily shifting its foreign-held assets and reserve funds in its central bank out of dollars to euros since 2003. It stopped accepting U.S. dollars for oil in 2007.
Another circumvention of the dollar is the establishment of the Iranian Oil Bourse, also known as the Iran Crude Oil Exchange, opened in 2008. Its objective is to sell oil and gas in non-dollar currencies, primarily the euro, the Iranian rial, the Japanese yen and/or a basket of other major currencies. Onerous Western sanctions have pushed Tehran and Moscow to abjure dollar-denominated trade, favoring euros, rubles and rials instead.
In 2012, Iran — which supplies no less than 15 percent of China’s oil and natural gas — began conducting its energy deals with China in yuan. China dropped the dollar peg in 2005. India and Russia trade oil with China in rubles and yuan, and China and Japan have agreed to use their own currencies in their transactions.
South Korea has been slowly moving from dollars in its transactions, buying Iranian oil with the Korean won, and shifting its investments to other currencies.
As the world’s leading consumer of oil and natural gas, China has enough leverage over Saudi Arabia and the other Gulf oil producers to pay for its oil imports in yuan. Increased trade with China has intensified the pressure on Saudi Arabia to forsake the dollar. The United Arab Emirates has already agreed to use the yuan in its petroleum trade with China.
Saudi petrodollars have financed Washington’s military adventures and spending sprees. As a major holder of U.S. Treasury bills and one of the United States’ largest creditors, the kingdom wields a potent political weapon.
It attempted to use that weapon in 2016 when Riyadh threatened to sell as much as $750 billion in Treasuries and assets if Congress passed legislation allowing it to be held liable in U.S. courts for the Sept. 11, 2001, terrorist attacks.
The Saudis have traditionally seen the United States as their chief regional partner, but the unusual visit to Moscow in early October by Saudi King Salman reveals fissures in their 1974 iron-clad agreement, and an acknowledgement of the changing balance of power in the region.
America’s control over energy resources and international commerce has given it prodigious economic and political power, and enabled it to dominate other countries militarily. It has brought immense advantages, allowing Washington to borrow and spend with abandon.
Yet the world’s reliance on the dollar as the global reserve currency is beginning to erode. Demand for the dollar for global oil and gas transactions is lessening as countries have grown weary with America’s dominance of the world economy, and with its use of military force to punish currency dissenters. The momentum toward non-dollar trading could severely undermine the U.S. economy — one of the most debt-ridden in the world.
The industrialized world’s dependence on oil and gas from the Persian Gulf region is unlikely to change soon. However, the global community’s dependence on the U.S. dollar to transact international trade is gradually evolving. The house of cards built by the United States in the 1970s could easily collapse if the rest of the world together abandoned the dollar standard.
The resulting massive economic disruption to the U.S. and world economies is currently something most of the developed nations are not willing to live out.
The United States — with its economic imbalances and soaring deficits — has the most to gain by working cooperatively with the rest of the world to gradually reform the global monetary system. But that requires it to forego its imperious myths and trade its belligerent superpower role in favor of international mediation to achieve global economic stability and security.
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M. Reza Behnam, Ph.D., of Eugene is a political scientist specializing in the politics and governments of the Middle East and American foreign policy in the region.
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