09:17 GMT +322 April 2019
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    In this Saturday, Jan. 23, 2016, file photo, an oil pump stands as the Saudi Hawks Aerobatic Team of the Royal Saudi Air Force performs during the Bahrain International Airshow in Sakhir, Bahrain

    The Empire of the Petrodollar and the Price of Refusing It

    © AP Photo / Hasan Jamali, File
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    Ahead of the meeting of OPEC and non-OPEC oil producers scheduled for April 17 in Qatar in a bid to stabilize plummeting crude prices, let’s have a look at oil's financial heart, the petrodollar system, and the unfortunate position of those member states who tried to break free of it.

    OPEC members and key oil producers from outside the cartel are set to meet in Qatar’s capital Doha on April 17 in a bid to stabilize plummeting crude prices.

    The meeting is a "follow-up" to the talks between Qatar, Russia, Saudi Arabia and Venezuela held earlier in February, where they proposed an accord to freeze oil output at January levels, the first significant agreement between OPEC and non-OPEC producers in 15 years.

    The Qatari oil minister and current OPEC President, Mohammed Al Sada said in a statement that 15 countries accounting for some 73 percent of global oil output supported further action.

    Meanwhile, let’s have a look at the system which underlies the standardization of oil prices and the fate of those countries who once wished to abandon it.

    The Empire of the Petrodollar

    Soon after the collapse of the Bretton Woods gold standard in the early 1970s, when the US unilaterally abandoned the Gold Standard which pegged the value of the dollar to the price of gold, and all other currencies were pegged to the dollar, the US struck a deal with Saudi Arabia to standardize oil prices in dollar terms.

    Though no formal proof exists for the oft-repeated assertion, Turkish conservative daily newspaper Yeni Safak recalls that it was Richard Nixon's Secretary of State, Henry Kissinger, who made a secret visit to Saudi Arabia as early as 1972, to fix and set what became later called the "petrodollar system and petrodollar recycling."

    Kissinger may have sealed a deal whereby Saudi Arabia would formally and solely accept dollars for all its oil sales, and would exert its power over the Arab region to ensure other Gulf exporters did the same.

    Saudi Arabia would then make available and place "surplus liquidities," unspent dollars, in the US Federal Reserve system, starting with the Federal Reserve Bank of New York.

    ​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 needed to be "recycled.”

    These surplus dollars are spent on domestic consumption, lent abroad to meet the balance of payments of developing nations, or invested in US dollar denominated assets.

    This last point, is the most beneficial for the US dollar; as the petrodollars make their way back to the US, these recycled dollars are used to purchase US securities (such as Treasury bills), which creates liquidity in the financial markets, keeps interest rates low and promotes non-inflationary growth.

    These "petrodollars" going straight into the Federal Reserve system, backstop the US dollar, and enable the strategy of "controlled devaluation," needed to help service growing US debt by devaluing the money used to repay loans, to operate without running out of control and turning into an inflation rout.

    The Sad Fate of the Refuseniks

    Yeni Safak recalls the unfortunate position of those member states who once attempted to get out of the system.

    ​Back in November 2000, Baghdad insisted on and received UN approval to sell oil through the oil-for-food program for euros. Iraq had threatened to suspend all oil exports — about 5 percent of the world's total — if the body turned down the request.

    According to The Guardian’s report on the issue, “Saddam's Weapons of Mass Destruction was not really the issue — and neither was Saddam himself.”

    “The real issue is candidly described in a 2001 report on "energy security" — commissioned by then US Vice-President Dick Cheney — published by the Council on Foreign Relations and the James Baker Institute for Public Policy. It warned of an impending global energy crisis that would increase "US and global vulnerability to disruption," and leave the US facing "unprecedented energy price volatility."

    In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from the CIA.

    Back in 2009 then president of Libya Muammar Gaddafi was named the head of the 53-member body of the African Union.

    According to more than one observer, Gaddafi put forward a plan to quit selling Libyan oil in US dollars, demanding payment instead in gold-backed “dinars” (a single African currency made from gold).

    The regime, sitting on massive amounts of gold, estimated at close to 150 tons, was also pushing other African and Middle Eastern governments to follow suit.

    Right afterwards Gaddafi changed from “a model” and “important ally” to becoming the next target for regime change.

    Numerous reports suggest that in 2005-2006, the Tehran government developed a plan to begin competing with New York's NYMEX and London's IPE with respect to international oil trades — using a euro-denominated international oil-trading mechanism.

    The clear aim was to establish a firm foothold of the euro in the international oil trade.

    Now, as many more countries, including Russia, China, Saudi Arabia and others are talking of breaking free from the petrodollar system, their joint meetings become more and more intriguing.

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    oil producers, oil prices, petrodollar recycling system, OPEC
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