Petrodollar Agreement 1973

14 Déc Petrodollar Agreement 1973

One of the brightest aspects of the petrodollar system was the requirement that oil-producing countries cash in their excess oil profits and place them in U.S. bonds in Western banks. This system later became known as « petrodollar recycling, » as it was shaped by Henry Kissinger. Through their exclusive use of dollars for oil transactions and the deposit of their excess profits in U.S. bonds, the petrodollar system has become a « dream come true » for a thrifty government like the United States. But while this does not happen overnight, a drying up of recycled petrodollars could allow U.S. capital markets to sell some cash, which will increase the cost of credit (due to higher interest rates) for governments, businesses and consumers due to the shortage of financial resources. Two years later, another system called the petrodollar system was created to maintain global demand for U.S. dollars.

In 1973, an agreement was reached between Saudi Arabia and the United States, in which every barrel of oil purchased by the Saudis would be denominated in U.S. dollars. Under the new agreement, each country that wanted to buy oil from Saudi Arabia would first have to exchange its own national currency for U.S. dollars. In exchange for Saudi Arabia`s willingness to designate its oil sales exclusively in U.S. dollars, the United States offered protected weapons and oil deposits to neighboring nations, including Israel. Over the years, several scholars have believed that the war in Iraq was waged to resell the hegemony of the dollar, following Saddam Hussein`s attempts to move away from petrodollar in the oil trade and to sell Iraqi oil in exchange for other currencies or raw materials. [56] [57] [58] In the previous graph, we can see one very important thing: the United States was the largest producer at the beginning of the petrodollar, although it chose, for political reasons, to be the largest importer of OPEC oil. Under the agreement, the United States would offer military protection to Saudi Arabia`s oil fields.

The United States has also agreed to provide arms to the Saudis, and perhaps most importantly, guaranteed protection against Israel. Petrodollars are U.S. dollars paid to an oil-exporting country for the sale of the commodity. Simply put, the petrodollar system is an exchange of oil for us dollars between countries that buy oil and those that produce it. The petrodollar system also creates reserves of U.S. dollars for oil-producing countries that must be « recycled. » These surplus dollars are spent on domestic consumption, lent abroad to cover the balance of payments of developing countries, or invested in U.S. dollar-denominated assets. This last point is the most advantageous for the U.S. dollar, because petrodollars are finding their way back to the United States.

These recycled dollars are used to purchase U.S. securities (such as Treasuries), which create liquidity in financial markets, keep interest rates low and promote non-inflationary growth. In addition, OPEC countries can avoid conversion risks and invest in safe U.S. investments. Before concluding, we need to address a politically sensitive issue that will further clarify the true effects of the petro-petrodollar system.