Birth of petrodollar 1974-1975
Birth of “petrodollar” and “petrodollar recycling”, 1974-1975
Attention soon focused on the oil-exporting countries. After the US quadrupled its grain export prices shortly after the 1971 gold suspension, the oil-exporting countries quadrupled their oil prices. US diplomats had let Saudi Arabia and other Arab countries know that they could charge as much as they wanted for their oil, but that the US would treat it as an act of war not to keep their oil proceeds in US dollar assets.
The 1973 oil crisis further fixed the value of the dollar as a result of this oil shock, bringing Saudi Arabia and the OPEC countries to make a secret agreement with Washington, the main architect being President Nixon’s legendary Secretary of State Mr. Henry Kissinger. This agreement provided that in exchange for Washington’s political and military protection, the OPEC countries would be required to sell oil only in dollars.
The petrodollar was thus born, being a replacement for the gold-linked standard that existed prior to Nixon. Once this system was supported by OPEC members, the global demand for US petrodollars hit an all-time high.
Petrodollars became the basis for America domination over the global financial system which resulted in other countries being forced to buy dollars in order to get oil on the international market.
This way the largest geopolitical-economic change since WWII was arguably implemented in 1973 with the agreement OPEC, Saudi Arabia and the United States to sell oil exclusively in dollars. Saudi Arabia should preferably invest the surplus of oil business in US debt securities and bond market.
By 1975 all OPEC countries were trading oil in US dollars, which later became the standard for the oil producing nations. Trading oil for US dollar restored the demand for dollar in foreign exchange market.
Petrodollar recycling is the phenomenon where oil exporting nations earn more money than they could possibly invest in their own economy and the surplus they shall invest in US debt securities. The term “petrodollar recycling” is coined by Henry Kissinger.
Fast forward to the end of the 1980s the situation of the finance markets began to “explode” with the transition to a digital reality regulated by Wall Street and big financial investors. Central banks could create money simply by transferring money to banks digitally. This phenomenon brought about an enormous divergence between real assets and the values of currencies and stock markets and especially derivatives markets where the values are now on the “astronomical” levels.
The petrodollar recycling system thereby elevated the US dollar to the world’s reserve currency and brought massive advantages to the US. Worldwide, any buyer and importer of Arab oil would first need to buy and hold dollars, ensuring strong global demand for the US currency. Secondly, the surplus or unspent dollars that each state would accumulate in its national treasury would need to be “recycled.”