BY: Merve Şebnem Oruç
Let’s remember, in 1973, Saudi King Faisal bin Abdulaziz had started an oil sanction on the U.S. and other Western countries for supporting Israel in the Yom Kippur War and had dragged with it OPEC countries and Egypt and Syria too. A major West-based oil crisis had arised, the increase in oil prices led to the collapse of the stock exchange as well as a big economic crisis. This move had made King Faisal a hero in the eyes of the Arab world, however following a series of meetings with the Richard Nixon administration’s Secretary of State Henry Kissinger, the Saudi dynasty would sign an agreement that would start the petrodollar system. The Yom Kippur War did not last long and ended in October 1973, the oil sanction was lifted in March 1974 and the petrodollar agreement was signed in June.Saudi Arabia and the U.S. were married with the agreement. The U.S. promised to protect the dynasty in exchange for the Saudis making oil sales solely in U.S. dollars. It would provide everything needed to the Saudis from weapons to cars and aircraft and the Saudis would deposit oil revenues into U.S. treasury bonds and keep them there. In 1975, OPEC countries also adopted the same system with pressure from Saudi Arabia. In other words, they too started to sell oil solely in U.S. dollars and deposit the revenues in U.S. bonds.
The petrodollar agreement was surprisingly lucrative for the Saudis. The Americans wanted neither money nor oil from them; they were only telling them in which currency unit they would make oil sales and in return, opening the doors of abundance and wealth. For the U.S. side, this agreement was extremely sly. The void that formed after Bretton Woods in which gold could be purchased in dollars alone had been closed with the petrodollar system. From now on the entire world would buy oil in dollars. However, this was not pleasing news for the rest of the world, particularly for the developing countries.
If you are not a country that produces oil and you have no other energy sources, you need to import oil from outside. As the countries that export oil started to accept payments in U.S. dollars only with the petrodollar system, to buy oil, you would first need to find dollars. To buy dollars, you would need to offer the U.S. a price that will please it. If the U.S. is not pleased with your offer, it will not give you dollars. If it is upset with you, it will not want anyone else to give you dollars either and prevent it from happening. But if you have something the U.S. really wants and you need oil but do not have the means to buy dollars, then you can use credit. This is where the IMF, World Bank and over-the-top interest rates, et cetera step in and you will be trapped deep in debt. One simple example is that the foreign debts of 100 countries only between the years 1973 and 1977 increased 150 percent – you guess the rest.
So why is this matter important today? As you are aware, in recent months, a bill came up on the agenda in the U.S. Senate stressing that Saudi Arabia had a role in the 9/11 attacks and paved the for it to be tried in the U.S. The Saudis showed intense reaction against this bill and threatened the U.S. with withdrawing their assets worth $750 billion. Most people thought, “The U.S. president will veto it anyway,” and did not dwell on the issue. Yes, U.S. President Barack Obama did veto the bill, yet the U.S. Congress still passed the Justice Against Sponsors of Terrorism Act (JASTA) law. As a matter of fact, recently a U.S. citizen already filed the first case and this is only the beginning.
JASTA is the last straw for Saudi Arabia after the U.S.’s invasion of Iraq, Syria policy and flirtation with Iran. In other words, the golden couple is going through a period of irreconcilable conflict headed toward divorce. However, their separation also means the collapse of the petrodollar system. Don’t say “it won’t happen.” Why is it happening and why is the U.S. doing this – this is the real question. Do not answer, “democracy” or “environmental pollution” either. Because it is not like Saud Arabia with which it was married for years used to be very democratic in the past has changed now. Meanwhile, the recent increasing global warming concerns of the U.S., which is the flagship of the growth of the oil industry, attracts attention, but we should not be naive enough to think that the reason for this is solely environmental sensitivity. What’s more is the world giant Rockefeller family, which led the formation of the oil industry, also announced in the previous months that it would withdraw from supporting fossil fuels and hydrocarbon sources. G7 countries said they would not provide state support for fossil fuels such as coal, oil and gas after 2025. To tell the truth, let’s not be surprised if one day fossil fuels are banned.
Due to their direct contribution to the current world order, like the Americans, the Saudis are also to blame. But what will happen if the petrodollar system ends, this is the real issue. Will the U.S. give up managing the global finance system? It doesn’t seem convincing to you either, does it? Then what will it be replaced with? Which model will it choose to continue the hegemony of the dollar? Will Bretton Woods 2 come? These are issues we need to consider while we discuss the injustice of the world order and they discuss its unsustainability. Who will revise the world order and how? If you are thinking about this but the Saudi-U.S. tension has not caught your attention until now, I would say pay attention to it at once.
*Merve Şebnem Oruç is a Turkish journalist and columnist.
(Published in Yeni Şafak Turkish newspaper on Sunday, Oct. 9, 2016)