The petrodollar, The Dollar’s Link to Oil

The petrodollar is the basis of our money in the US ever since we switched from the gold standard.

Previously we discussed what money is and how it works and the consistency in the value of gold compared to other items of value we use such as energy and food.   We’ve clearly shown that items we use every day have a consistency in value when compared to each other.

The standard way we exchange one thing of value for another is called money and the manipulation of that system literally steals the value of the labors of workers.  This is accomplished by printing more dollars that are used for payment of labor and dumping them into the financial system.

Following World War 2 the United States still had its industry intact unlike most other nations.  There was a demand for American made items and since our money was on the gold standard many other nations tied the value of their currency to the value of ours. 

Bretton Woods Agreement

The arrangement between the United States and other nations became known as the Bretton Woods Agreement and was one of the steps taken to help rebuild the economies of European nations after the war.

Prior to the war many nations transferred a lot of their gold to the United States to protect it from being captured by the Axis powers.  The United States promised they wouldn’t print excessive amounts of money based upon the set value of gold but soon broke that promise. 

When money is tied to gold, governments can only legally print so much money based upon the value of their gold reserves.  The Federal Reserve to this day refuses to allow any audits of its system.

The United States government expanded rapidly following World War 2, due to the Cold War against the Soviet Union and an increased world demand for American made products. 

During the mid-1960 under the Johnson administration the Federal Government expanded welfare spending significantly as part of their War on Poverty.  The government expansion of domestic programs became known as the Great Society.

Government spending expanded beyond the level of income it had in tax revenue.  To cover the additional costs, the United States government simply started to print more dollars.   Nations including Brittan, France and Germany believed the printing of more money than they had in gold was an economic danger. 

Collapse of the Bretton Woods System

By 1971, the money supply increased by 10%.  In May 1971, West Germany became the first to leave the Bretton Woods system because they were unwilling to devalue their currency compared to the U.S Dollar. 

If they had revalued their currency their economy could have suffered greatly.  Within the next few months, this move strengthened the West German economy.  At the same time, the value of the dollar dropped 7.5% against the Deutsche Mark.  

Other nations who became aware of the increased printing of money by the United States began to demand redemption of their dollars for gold.  In 1971, Nixon ordered the suspension of the conversion of the dollar into gold to stop them.  One reason for this was because there was much more money in print than gold to back it which could have led to a collapse of the dollar. 

Rise of the Petrodollar

Since other nations had learned of the scheme of simply printing money, there had to be another way to value the dollar other than gold.  To try to keep the dollar from dropping significantly further, Nixon offered oil producing nation’s military protection in exchange for their agreement to only sell their oil in the U.S dollar.  OPEC, which is the alliance of oil producing nations agreed and this was the birth of the petrodollar system.

The only way for another nation to obtain U.S. dollars to buy oil is to manufacture physical goods that could be sold to the United States.  This alone gives the U.S. a significant economic advantage and influence over other nations.  If a nation doesn’t follow where we want them to, we stop buying their goods at the price they want which virtually locks them out of buying energy.

Some interesting points of current events seem to play into this equation as well.  These issues are often dismissed as conspiracy but their connections shouldn’t be ignored when trying to get a better understanding of the petrodollar system. 

The Petrodollar’s influence on politics

In November of 2000, Iraq started selling its oil in euros which was a direct attack on the American dollar.  Many believe this to be the real reason that Iraq was invaded in 2003.  Immediately following the invasion and the U.S. gaining control of the oil fields, the sale of oil was switched back to the dollar. 

Another area in which we see this same scenario repeated is in Libya.  Gaddafi was working with many African nations to develop a gold based currency and only allow the sale of oil in that currency.  There were two conferences on this, in 1986 and 2000 organized by Gaddafi and many African nations supported the idea.

A few months prior to military intervention in support of the rebels in Libya, Gaddafi once again called for African nations to switch to a gold based currency.  Virtually every economist who has written on the link between the dollar and oil says that any shift from selling oil using the dollar would cause the dollar to virtually collapse in value.  This would result in a dramatic economic shift throughout the world. 

The next time we notice a significant price increase on items we use such as energy and food, remember it isn’t as much of an increase as it is the devaluing of the dollars we all use.  The more there is of something, the less value it has and since the federal government never has enough, the simply print and borrow what they think they need.