By Money & Finance
After World War II, a new international monetary system called Bretton Woods was created.
Bretton Woods established three main things:
(1) the U.S. dollar was to be an international reserve currency,
(2) the U.S. dollar would be backed by gold at a price of $35 per ounce, and
(3) any country could exchange dollars for gold.
Countries running trade surpluses with the US sought to exchange their dollars for gold, and this rapidly shrunk US gold reserves.
This then led to the so called Nixon shock - President Richard Nixon effectively ending the Bretton Woods system in 1971.
The world economy entered a new era: the US Dollar became the global reserve currency.
The US made no effort to rein in deficit spending, in fact quite the opposite.
Therefore, the US needed to continue to find ways to sell government debt (i.e. to find buyers of US Treasury Securities) without driving up interest rates.
That is, the US needed more buyers for its debt.
But by 1974, the enormous flood of dollars from the US into top-oil-exporter Saudi Arabia suggested a solution.
That year, Nixon sent new US Treasury secretary William Simon to Saudi Arabia with a mission...
The task: neutralize crude oil as an economic weapon against the US and find a way to persuade a relatively hostile kingdom to finance America's widening deficit with its newfound petrodollar wealth.
The basic framework was simple: the US 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 US Treasuries and therefore finance America's spending.
A win-win: the Saudis would receive protection from geopolitical enemies, and the US would get a new place to unload large amounts of government debt.
This became known as "petrodollar recycling".
By spending on oil, the US was creating new demand for US debt and US dollars.
Moreover, since Saudi Arabia dominated the OPEC - the Organisation of the Petroleum Exporting Countries - this dollar deal was extended to OPEC overall, which meant that the dollar became the preferred currency for oil purchases worldwide.
And so the petrodollar era began.
This petrodollar system has had massive implications for US foreign policy, which has essentially involved imposing 'freedom' on any major oil-exporting state that moves towards ending its reliance on dollars.
In 2000, Saddam Hussein, then-president of Iraq, announced that Iraq was moving to sell its oil in Euros instead of dollars.
Following a particular catalyst event in 2001, the US invaded Iraq, deposed Saddam Hussein, and converted Iraqi oil sales back to the US dollar.
Of course, this exact pattern was repeated with Gaddafi when he attempted to create a unified African currency backed by Libyan gold reserves to sell African oil.
Shortly after his announcement, rebels armed by the US Government and allies overthrew the dictator and his regime.
After his death, the idea that African oil would be sold on something other than the dollar quickly died out.
Other regimes that have called for abandoning the petrodollar include Iran and Venezuela.
The US has called for regime change in both of these countries...
Although they have tried to keep it under wraps, Saudi Arabia is believed to be one of America's largest foreign creditors.
Undoubtedly, Saudi holdings of US debt and other assets are significant.
All else being equal, the US should be growing less dependent on foreign holders of debt, certainly in terms of Saudi and OPEC-held debt, since the global role of OPEC and the Saudis has been diminishing in terms of global market share.
But all else isn't equal, and the US has been piling on ever-larger amounts of debt in recent years.
In 2019, for example, the annual deficit topped one trillion.
This immense growth in debt obviously makes the US regime more sensitive to changes in demand for US debt, and ever more reliant on foreign demand for both US debt and US dollars.
In order to avoid a crisis, the US must ensure that interest rates remain low and that foreigners want to acquire both US dollars and US debt.
Were petrodollars and petrodollar recycling to disappear, it would have a twofold effect on US government finances:
First of all, a sizable decline in petrodollar recycling would put significant upward pressure on interest rates.
The result would be a budget crisis for the US government, as it would have to devote ever-larger amounts of the federal budget to payments on the debt.
(The other option would be to have the US central bank monetize the debt by purchasing ever-larger amounts of it to make up for a lack of foreign demand. But this would lead to growing price inflation.)
Furthermore, if participants began to exit the petrodollar system (and, say, sell oil in euros instead) demand for dollars would drop, exacerbating any scenarios in which the central bank is monetizing the debt.
This would also generally contribute to greater price inflation, as fewer dollars will be sucked out of the US by foreign holders.
The result could be ongoing declines in government spending on services, and growing price inflation.
The US regime's ability to finance its debt would decline significantly, and the US would need to pull back on military commitments, pensions, and more.
Either that, or keep spending at the same rate and face an inflationary spiral.
Or...how about another option?
Anyone fancy a Great Reset?
Huge Debt Got Us Hooked on Petrodollars — and on Saudi Arabia
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Here’s a metric Americans should start paying attention to: barrels per day.
The U.S. is expected to pass Russia as the world’s No. 1 oil producer by 2023, according to a report from the International Energy Agency (IEA). Total U.S. supply will increase by 3.7 million barrels per day, which is enough to account for almost 60% of global growth.
What is the U.S. doing right? It used the 2014 crash in oil prices as a call to action. Producers developed more efficient methods of extracting shale oil from deposits like the Permian Basin in West Texas and New Mexico (think Friday Night Lights territory).
What is everyone else doing wrong? The IEA says investment outside of the U.S. has mostly been embarrassing, specifically pointing a finger at OPEC for low output. And with demand for oil still on the rise (h/t China and India), a supply squeeze could be on the horizon.
By Guest Nicole
Last week hundreds of activists took over a major toll highway in the state of Mexico and allowed drivers to pass through free of charge. Farmworkers and agricultural producers took over municipal offices in the state of Chihuahua and in one occasion forced the municipal workers to evacuate. These are just two examples of the mass actions – which include demonstrations of tens of thousands – rising up all throughout Mexico causing the closure of gas stations, municipal buildings and highways.
Since January 1, thousands of Mexicans – adolescents, workers from all sectors, union leaders and farmers – have taken to the streets to protest the 20 percent hike in gasoline prices. The price hike comes at a time when 45 percent of the population is living in poverty. As a TeleSur reporter described it, the 20 percent price hike means that it would take the equivalent of 12 days of a minimum wage salary to fill a tank of gas. Much of the population makes even less than the minimum wage, making this price a hike an outrageous violation of the rights of the people.
The government’s repression against the uprising has been fierce. At least six people have been killed, and hundreds more wounded and arrested. Despite these attacks, the struggle continues.
Since Mexican President Enrique Peña Nieto took office in 2012, his neoliberal policies and initiatives have caused a downward spiral in the quality of life for many Mexicans, especially the poorest. Under Peña Nieto, the number of people living in poverty increased by 2 million, unemployment and state repression, as witnessed in the cases of Ayotzinapa and the teacher protests early in 2016, have reached new extremes. While the Mexican people are suffering, Peña Nieto has insisted on pushing through neoliberal policies that benefit the capitalists while furthering the people’s suffering and poverty.
The 20 percent price hike on gasoline is just his latest attack. In December 2015, Peña Nieto announced that PEMEX, the national petroleum company, would be privatized in order to allow for other gasolines companies to compete in the market. What this meant was that the government would remove the fixed price on gasoline and would instead be sold at market rate to the people.
The privatization of Mexico’s oil industry has been in gestation for many years. The U.S. government has played a key role in pushing American puppet Peña Nieto and the Mexican oligarchy in this direction. With PEMEX being deregulated and privatized, its reserves are up for grabs.
The large U.S oil companies are waiting for their chance to gain control of these reserves and some companies have already begun to. It is a process that will greatly benefit these major corporations given that Mexico has one of the largest oil natural gas reserves in Latin America. This is just an attempt by capitalists to take hold of the resources that they had not yet been able to seize.
The price hike has already had a terrible effect on the Mexican people. It is predicted that it will soon have devastating effects on the cost of food and employment.
We stand in solidarity with the Mexican people who are protesting against the Mexican oligarchy and greedy American oil tycoons. We stand with them as they fight for the energy resources that belong to them. We support their right to demonstrate their outrage and demand that the government make better decisions regarding their livelihood.
No deal has been reached in Doha after twelve hours of marathon oil talks. The world's major oil players were trying to negotiate a production freeze in a bid to halt tumbling prices. RT's Paula Slier has been following the talks in the capital of Qatar.