by Ryan McMaken, Activist Post:
The Iranian regime and the Saudi Arabian regime are longtime enemies, with both vying for control of the Persian Gulf region. Part of the conflict stems from religious differences — differences between Shia and Sunni muslim groups. But much of the conflict stems from mundane desires to establish regional dominance.
For more than forty years, however, Saudi Arabia has had one important ace in the hole in terms of its battle with Iran: the US’s continued support for the Saudi regime.
But why should the US continue to so robustly support this dictatorial regime? Certainly, these close relations can’t be due to any American support for democracy and human rights. The Saudi regime is one of the world’s most illiberal and anti-democratic regimes. Its ruling class has repeatedly been connected to Islamist terrorist groups, with Foreign Policy magazine last year calling Saudi Arabia “the beating heart of Wahhabism — the harsh, absolutist religious creed that helped seed the worldviews of al Qaeda and the Islamic State.”
Saudis Behind the Petrodollar
The answer lies in the fact the Saudi state is at the center of US efforts to maintain the dollar as the world’s reserve currency, and to ensure global demand for US debt. The origins of this system go back decades.
By 1974, the US dollar was in a precarious position. In 1971, thanks to profligate spending on both war and domestic welfare programs, the US could no longer maintain a set global price for gold in line with the Bretton Woods system established in 1944. The value of the dollar in relation to gold fell as the supply of dollars increased as a byproduct of growing deficit spending. Foreign governments and investors began to lose faith in the dollar, and both Switzerland and France demanded gold in exchange for dollars as stipulated by Bretton Woods. If this continued, though, US gold holdings would soon be depleted. Moreover, the dollar was losing value against other currencies. In May of 1971, Germany left the Bretton Woods system and the dollar fell against the Deustsche Mark.
In response to these developments, Nixon announced the US would abandon the Bretton Woods system. The dollar began to float against other currencies.
Not surprisingly, devaluing the dollar did not restore confidence in the dollar. Moreover, the US had made no effort to rein in deficit spending. So the US needed to continue to find ways to sell government debt without driving up interest rates. That is, the US needed more buyers for its debt. Motivation for a fix grew even more after 1973 when the first oil shock further exacerbated the deficit-fueled price inflation Americans were enduring.
But by 1974, the enormous flood of dollars from the US into top-oil-exporter Saudi Arabia suggested a solution.
That year, Nixon sent new US Treasury Secretary William Simon to Saudi Arabia with a mission. As recounted by Andrea Wong at Bloomberg the goal was to
neutralize crude oil as an economic weapon [against the US] and find a way to persuade a hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth. …
The basic framework was strikingly simple. The U.S. would buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries and finance America’s spending.
From a public finance point of view, this appeared to be win-win. The Saudis would receive protection from geopolitical enemies, and the US would get a new place to unload large amounts of government debt. Moreover, the Saudis could park their dollars in relatively safe and reliable investments in the United States. This became known as “petrodollar recycling.” By spending on oil, the US — and other oil importers, who were now required to use dollars — was creating new demand for US debt and US dollars.
This dollar agreement wasn’t limited to Saudi Arabia either. Since Saudi Arabia dominated the Organization of the Petroleum Exporting Countries (OPEC), the dollar deal was extended to OPEC overall which meant the dollar became the preferred currency for oil purchases worldwide.
This scheme assured the dollar’s place as a currency of immense global importance. This was especially important during the 1970s and early 1980s. After all, up until the early 1980s, OPEC enjoyed 50-percent market share in the oil trade. Thanks to the second oil shock, however, much of the world began searching for a wide variety of ways to decrease dependency on oil. By the mid 1980s, OPEC’s share had decreased to less than one-third.
Today, Saudi Arabia ranks behind both Russia and the United States in terms of oil production. As of 2019, OPEC’s share remains around 30 percent. This has lessened the role of the petrodollar compared to the heady days of the 1970s. But the importance of the petrodollar is certainly not destroyed.
We can see the ongoing importance of the petrodollar in US foreign policy which had continued to antagonize and threaten any major oil-exporting state that moves toward ending its reliance on dollars.
As noted by Matthew Hatfield in the Harvard Political Review, it is not likely a mere coincidence that especially belligerent US foreign policy has been applied to the Iraqi, Libyan, and Iranian regimes. Hatfield writes: