US Dollar Fiat Currency or Oil Backed Currency

What the powerful men grouped around the Bilderberg had evidently decided that May [1973] was to launch a colossal assault against industrial growth in the world, in order to tilt the balance of power back to the advantage of Anglo-American financial interests and the dollar. In order to do this, they determined to use their most prized weapon — control of the world's oil flows.

On September 24, 2000, Saddam Hussein emerged from a meeting of his government and proclaimed that Iraq would soon transition its oil export transactions to the euro currency.

Bilderberg policy was to trigger a global oil embargo in order to force a dramatic increase in world oil prices. Since 1945, world oil had by international custom been priced in dollars A sudden sharp increase in the world price of oil, therefore, meant an equally dramatic increase in world demand for US dollars to pay for that necessary oil.

Never in history had such a small circle of interests, centered in London and New York, controlled so much of the entire world's economic destiny. The Anglo-American financial establishment had resolved to use their oil power in a manner no one could have imagined possible. The very outrageousness of their scheme was to their advantage, they clearly reckoned.

— F. William Engdahl, A Century of War, 200461

At this point he makes an extraordinary claim: 'I am 100 percent sure that the Americans were behind the increase in the price of oil. The oil companies were in real trouble at that time, they had borrowed a lot of money and they needed a high oil price to save them.'

'He says he was convinced of this by the attitude of the Shah of Iran, who in one crucial day in 1974 moved from the Saudi view' ... 'to advocating higher prices.'

'King Faisal sent me to the Shah of Iran, who said: "Why are you againt the increase in the price of oil? That is what they want ? Ask Henry Kissinger — he is the one who wants a higher price." [emphasis added]

Yamani contends that proof of his long-held belief has recently emerged in the minutes of a secret meeting on a Swedish island, where UK and US officials determined to orchestrate a 400 per cent increase in the oil price.

— Observer (UK) interview with Sheikh Yaki Yamani (Saudi Arabian Oil Minister from 1962-1986) at the Royal Institute of International Affairs, January 14, 200162

As previously noted, the crucial shift to an oil-backed currency took place in the early 1970s when President Nixon closed the so-called gold window at the Federal Treasury. This removed the dollar's redemption value from a fixed amount of gold to a fiat currency that floated against other currencies. This was done so the federal government would have no restraints on printing new dollars, thereby able to pursue undisciplined fiscal policies to maintain the US' superpower status. The only limit was how many dollars the rest of the world would be willing to accept on the full faith and credit of the US government. The result was rapid inflation and a falling dollar.

Although rarely debated outside arcane discussions of the global political economy, it is easy to grasp that if oil can be purchased on the international markets only with US dollars, the demand and liquidity value will be solidified, given that oil is the essential natural resource for every industrialized nation. Oil trades are the basic enablers of a manufacturing infrastructure, the basis of global transportation, and the primary energy source for 40 percent of the industrial economy.

During the 1970s a two-pronged strategy was pursued by the US and UK banking elites to exploit the unique role of oil in an effort to maintain dollar hegemony. One component was the requirement that OPEC agree to price and conduct all of its oil transactions in the dollar only, and the second was to use these surplus petrodollars as the instrument to dramatically reverse the dollar's falling international value via high oil prices. The net effect solidified industrialized and developing nations under the sphere of the dollar. No longer backed by gold, the dollar became backed by black gold.

Throughout this time President Nixon was increasingly embroiled in what became known as the Watergate Scandal. Consequently he named Henry Kissinger both Secretary of State and head of the White House's National Security Council. In these highly empowered roles, Kissinger promptly pursued the monetary strategy as outlined in the Bilderberg plan. During 1973-1974 US Treasury Secretary William Simon began secret negotiations with the government of Saudi Arabia in an attempt to buttress global oil sales in dollars only, and thereby thwart discussions at that time of transitioning oil trades to a basket of currencies. Saudi Arabia, as the largest OPEC oil producer, was the natural choice. Neither Congress nor the CIA was informed of these agreements until Saudi Arabia had completed their purchases of $2.5 billion in US Treasury bills. By the time Congress was informed of this "add-on arrangement," it was a fait accompli.63

Engdahl contended that Kissinger, acting as Nixon's intelligence czar, was able to "misrepresent to each party [Israelis, Syrians and Egyptians] the critical elements of the other, ensuring the [October 1973 Yom Kippur] war and its subsequent Arab oil embargo." He reasoned that once the oil embargo began, "the Arab oil-producing nations were to be the scapegoat for the coming rage of the world, while the Anglo-American interests responsible stood quietly in the background."64

Regardless of whether subsequent events unfolded as envisioned by the Bilderberg group, it is obvious their prophetic "scenario" of oil prices escalating by 400 percent, along with dramatic increases in dollar liquidity, did in fact occur seven months later. By January 1974 the price of OPEC's benchmark oil stood at $11.65 per barrel (up from $3.01 in early 1973). Furthermore, it is also a matter of historical record that, during this time, the US had engaged in secret negotiations with the Saudi Arabia Monetary

Authority to establish a petrodollar recycling system via New York and London banks.

This brilliant, if somewhat nefarious, act of monetary jujitsu enormously benefited not only the US/UK banking interests, but also the Seven Sisters of the US/UK petroleum conglomerate (Exxon, Texaco, Mobil, Chevron, Gulf, British Petroleum, and Royal Dutch/Shell). These major oil interests had incurred tremendous debts from the capital requirements in their large, new oil platforms in the inhospitable areas of the North Sea and Prudhoe Bay, Alaska. However, following the 1974 oil price shocks, their profitability was secure. Engdahl candidly noted that "while Kissinger's 1973 oil shock had a devastating impact on world industrial growth, it had an enormous benefit for certain established interests — the major New York and London banks, and the Seven Sisters oil multinational of the United States and Britain."65

The unique monetary arrangement was formalized in June 1974 by Secretary of State Kissinger, establishing the US-Saudi Arabian Joint Commission on Economic Cooperation. The US Treasury and the New York Federal Reserve would "allow" the Saudi central bank to buy US Treasury bonds with Saudi petrodollars.66

Likewise, London banks would handle eurozone-based international oil transactions, loaning these revenues via Eurobonds to oil-importing countries. The debt and interest from these loans would then flow to the dollar-denominated payments to the IMF, thereby completing the recycling of surplus petrodollars to the Federal Reserve.

Until November 2000, no OPEC country violated the petrodollar oil price arrangement. As long as the dollar was the strongest international currency, there was little reason to consider other options. However, in the autumn of 2000, Saddam Hussein emerged from a meeting of his government and announced that Iraq would soon transition its oil-export transactions to the euro. Saddam Hussein referred to the US dollar as currency of the "enemy state."67 It is not clear if Saddam Hussein initiated the idea of transitioning to a petroeuro or if the EU approached him with this idea. Regardless, Iraq opened up a euro-based bank account with the leading French bank, BNP Paribas. Shortly thereafter, Iraqi oil proceeds went into a special UN account for the Oil for Food program and were then deposited in BNP Paribas.68

At the time of the transition, Iraq's UN Oil for Food account held $10 billion. A short news story detailing this development appeared on November 1, 2000, on the Radio Liberty website of the US State Department.69 CNN ran a very short article on its website on October 30, 2000, but after this one-day news cycle, the issue of Iraq's switch to a petroeuro essentially disappeared

Until November 2000, no OPEC country violated the petrodollar oil price arrangement. As long as the dollar was the strongest international currency, there was little reason to consider other options.

from all five of the corporate-owned US media outlets.70 (Note: These five conglomerates collectively control 90 percent of the information flow within the United States.)

Although this little-noted Iraqi move to defy the dollar in favor of the euro, in itself, did not have a huge impact, the ramifications regarding further OPEC momentum toward a petroeuro were quite profound. If invoicing oil in euros were to spread, especially against an already weak dollar, it could create a panic sell-off of dollars by foreign central banks and OPEC oil producers. In the months before the latest Iraq War, hints in this direction were heard from Russia, Iran, Indonesia, and even Venezuela. There are indicators that the Iraq War was a forceful way to deliver a message to OPEC and other oil producers: Do not transition from the petrodollar to a petroeuro system. Engdahl's conversation with a forthright London-based banker is rather enlightening:

Informed banking circles in the City of London and elsewhere in Europe privately confirm the significance of that little-noted Iraq move from petrodollar to petroeuro. 'The Iraq move was a declaration of war against the dollar,' one senior London banker told me recently. 'As soon as it was clear that Britain and the US had taken Iraq, a great sigh of relief was heard in London City banks. They said privately, "now we don't have to worry about that damn euro threat."'71

Petrodollar recycling works quite simply because oil is an essential commodity for every nation, and the petrodollar system demands the buildup of huge trade surpluses in order to accumulate dollar surpluses. This is the case for every country but the US, which controls the dollar and prints it at will or fiat. Because the majority of all international trade today is conducted in dollars, other countries must engage in active trade relations with the US to get the means of payment they cannot themselves issue. The entire global trade structure today has formed around this dynamic, from Russia to China, from Brazil to South Korea and Japan. Every nation aims to maximize dollar surpluses from their export trade because almost every nation needs to import oil.

This insures the dollar's liquidity value and helps explain why almost 70 percent of world trade is conducted in dollars, even though US exports are about one third of that total. The dollar is the currency that central banks accumulate as reserves, but whether it is China, Japan, Brazil, or Russia, they simply do not stack all these dollars in their vaults. Currencies have one advantage over gold. A central bank can use it to buy the state bonds of the issuer, the United States. Most countries around the world are forced to control trade deficits or face currency collapse.72

Such is not the case in the United States, whose number one export product is the dollar itself. This unique arrangement is largely due to the dollar's

World Reserve Currency role, which is underpinned by its petrodollar role. Every nation needs to obtain dollars to purchase oil, some more than others. This means their trade targets are countries that use the dollar, with the US consumer as the main target for export products of the nation seeking to build dollar reserves.

To keep this process going, the United States has agreed to be importer/ consumer of last resort because its entire monetary supremacy depends on dollar recycling. The central banks of Japan, China, South Korea, and numerous others all buy US Treasury securities with their dollars. That in turn allows the US to have a stable dollar, far lower interest rates, and a $500-$600 billion annual balance of payments deficit with the rest of the world. The Federal Reserve controls the dollar printing presses, and the world needs its dollars.

Another benefit in this process for the US is that when oil is priced in a monopoly currency, the nation that prints that currency greatly minimizes its exposure to "currency risk" for their oil/energy prices. In other words, as long as OPEC prices a barrel of oil in the $22-$28 range, US consumers have very steady oil prices regardless of whether the dollar is highly valued or highly devalued against other major currencies. Until the dollar's devaluation relative to the euro in 2002, OPEC's pricing band generally reflected the price of international oil trades, and the US enjoyed a stable "oil bill." Under the OPEC pricing band established in 2000, a US petrodollar would be worth between 1.5 and 1.9 gallons of sweet crude, when the price of the barrel of oil was between $22 and $28 respectively (42-gallon production barrel).

No other hard currency in the world guarantees access to the most valuable "commodity" on earth — oil and gas. (Note: I do not consider oil to be a mere commodity. As writer/commentator/veteran Stan Goff noted: "Oil is not a normal commodity. No other commodity has five US navy battle groups patrolling the sea lanes to secure it."73) Furthermore, no other hard currency possesses this unique "storage of wealth" that is realized as the monopoly currency for international oil purchases.

After August 1971 when the dollar lost its "gold backing" and became a floating currency, the following three years were periods of volatile dollar devaluation with escalating inflationary pressures. Subsequently, elite US and UK banking interests, in conjunction with Saudi Arabia, created an oil-backed dollar. By 1975 all of OPEC adopted a petrodollar recycling system in which the dollar transitioned from being — "as good as gold" — to being "as good as black gold." For better or worse, this also meant that the printing on US Federal Reserve notes could have been changed from "In God We Trust" to the more accurate descriptor "In OPEC We Trust," or most specifically, "In Saudi Arabia We Trust." Despite the lack of discussion in mainstream economic commentary regarding this unique geopolitical arrangement, in essence US dollar hegemony is strongly underpinned by petrodollar recycling.

The old rules for valuation of the US dollar and economic power were based on its flexible market, free flow of trade goods, high per-worker productivity, manufacturing output, trade surpluses, government oversight of accounting methodologies by the Securities and Exchange Commission (SEC), developed infrastructure, education system, and, of course, total cash flow and profitability. Superior US military power afforded some additional confidence in the dollar. While many of these factors remain present, over the last two decades the US has diluted many of the safe-harbor economic fundamentals. Since the mid-1970s the petrodollar created new rules for the dollar and essentially eliminated US currency risk for oil consumption.

The lack of currency risk is one of the reasons that taxes on oil and gas are much lower in the United States. The average world price for a gallon of gasoline in 2004 was about $5, nearly 60 percent higher than typical US prices.74 Higher petrol taxes in the EU and elsewhere provide a cushion for other countries' currency risks for imported oil and energy purchases. Without this, a particular country could experience wild swings in daily prices at the gas pump due to fluctuations in its domestic currency's valuation relative to the dollar on the international currency market. The US has traditionally been immune to oil price risk and has enjoyed relatively stable gasoline prices for this same reason. However, chapters 4 and 5 present evidence that the US dollar's immunity to currency risk regarding international oil pricing is diminishing. A stable oil bill is likely one of the reasons why the EU would prefer a euro-based oil transaction option. One interesting development in the US presidential campaign in the autumn of 2000 was a small spike in global oil prices. In order to ease prices, the Clinton/ Gore administration released 30 million barrels of oil from the US Strategic Petroleum Reserve, for which candidate Bush criticized candidate Gore.75

What most Americans failed to realize were the dramatic effects of higher gas (or petrol, as it is commonly known) prices in Europe. These high fuel prices in the autumn of 2000 occurred when the euro was at its historic low point compared to the US dollar, valued at about 82 cents, or 18 percent less than the dollar. The French, Germans, Spanish, Greeks, and related eurozone nations not only experienced an increase in fuel prices due to a dip in oil production, but also felt the brutal effects of currency risk due to the euro's relative low valuation.

The situation in Western Europe during September 2000 in many ways appeared reminiscent of the fuel crisis in the US of 1973-1974 and 1979.

The lack of currency risk is one of the reasons that taxes on oil and gas are much lower in the United States. The average world price for a gallon of gasoline in 2004 was about $5, nearly 60 percent higher than typical US prices.

Indeed, that autumn the entire European economy basically ground to a halt with near-violent protests due to high petrol prices. Considering the euro's susceptibility to currency risk regarding energy prices and its low relative valuation in 2000, an unwelcome crisis unfolded with soaring petrol prices within the EU.

The crisis lasted only a few days but was so acute that French fishermen blockaded the Channel ports because their fuel costs had doubled, even though their fuel was already tax-free. Schools were closed, hospitals were put on red alert, and supermarkets started rationing bread. Transportation came to a near standstill in much of Western Europe. The EU's currency risk for their imported oil was dramatic.

Thousands of truckers from across Germany clogged the streets around the capital's center Tuesday demanding relief from higher gas prices. And they got some when the government offered low-interest loans to some trucking companies.

The protest is the biggest so far in Germany, on the heels of demonstrations that halted traffic in France, Britain and Spain before easing in recent days. Elsewhere Tuesday, minor blockages continued in Spain, where markets ran out of fish, and Greek motorists fearing for shortages due to trucker strikes lined up for gas.76

At the time, the euro was beginning its widespread use, but its lower valuation relative to the US dollar that autumn appears to have not only adversely impacted oil prices in Western Europe, but also facilitated societal discord. Protests erupted in France where thousands of farmers drove their tractors into Paris as a sign of their displeasure at the rapid increase in fuel prices. This resulted in the deployment of French riot police. News reports of the economic fallout also included disruptions in the UK, Spain, and Greece.77 European governments likely sought strategies to mitigate further crises stemming from oil currency risk. In June 2001, both France and Russia proposed in the UN Security Council that the 1991 UN sanctions against Iraq be lifted, thereby allowing foreign investment to flow into Iraq in an effort to repair its deteriorating oil infrastructure. However, this proposal was predictably killed by the US and UK. In a situation similar to in present-day Iran, American companies were barred from investing in Iraq's vital oil industry. If Iraq had been determined to be disarmed, the UN sanctions would had been lifted, and oil-lease contracts awarded to France, Russia, China, and Italy would have been initiated.78

Of course, two years later a US military invasion toppled Saddam Hussein, and postwar oil contracts were strictly limited to the war's coalition partners, which in this case included several US oil companies, British Petroleum (BP), and the Worley Group, an Australian oil-engineering firm. Subsequent chapters elaborate on the significance of what Vice President Cheney's Energy Task Force termed "foreign suitors of Iraqi oil."79

Continue reading here: US Structural Imbalances Twin Deficits

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  • DEMSAS OSMAN
    How to save reserves fiat petrodollar?
    10 years ago
  • Liisa
    When was the us dollar established?
    11 years ago
  • maximilian
    Why did opec agree to using the american dollar?
    11 years ago