As part of negotiations for Saudi Arabia to recognize Israel, the United States is demanding that Riyadh keep pricing its oil in dollars, not China’s renminbi or other currencies.
by Ben Norton
Part 2 - How the petrodollar system helps maintain US dollar hegemony
The petrodollar system has been a key pillar holding up the hegemony of the US currency.
The fact that countries that import oil need dollars to pay for it ensures steady demand for Washington’s currency around the world.
This stabilizes the dollar, helping to finance the massive current account deficit the United States has maintained for decades.
The fact that countries that import oil need dollars to pay for it ensures steady demand for Washington’s currency around the world.
This stabilizes the dollar, helping to finance the massive current account deficit the United States has maintained for decades.
When most countries have a consistent trade deficit, their national currency depreciates against the currency they use to pay for imports. As the local currency weakens, this makes imports more expensive and exports cheaper, encouraging the country to balance its trade.
However, the United States has long been able to maintain a gargantuan trade deficit with the rest of the world because there is so much demand for its currency.
The petrodollar system is one important reason for this high demand for dollars (among several other factors – such as overwhelming US military power, the impression that the currency is a stable store of value, open capital markets with many investment opportunities, etc.).
However, the United States has long been able to maintain a gargantuan trade deficit with the rest of the world because there is so much demand for its currency.
The petrodollar system is one important reason for this high demand for dollars (among several other factors – such as overwhelming US military power, the impression that the currency is a stable store of value, open capital markets with many investment opportunities, etc.).
When Saudi Arabia has a glut of dollars, it has historically deposited them in the US banking system, which in turn uses the excess currency to fund more loans.
Saudi Arabia’s central bank also invests excess dollars it receives from crude sales in the purchase of Treasury securities, effectively financing US government spending.
As Geopolitical Economy Report previously noted:
Saudi Arabia’s central bank also invests excess dollars it receives from crude sales in the purchase of Treasury securities, effectively financing US government spending.
As Geopolitical Economy Report previously noted:
In 1974, [US President Richard] Nixon sent his Treasury secretary, William Simon, to Saudi Arabia. “The goal” of the trip, Bloomberg explained, was to “neutralize crude oil as an economic weapon and find a way to persuade” Saudi Arabia “to finance America’s widening deficit with its newfound petrodollar wealth”.
Washington signed a historic agreement with Riyadh, pledging to protect the Gulf monarchy in return for Saudi Arabia selling its oil exclusively in dollars, depositing those petrodollars in US commercial banks, and investing in Treasury bonds.
Bloomberg explained: “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”.
Washington signed a historic agreement with Riyadh, pledging to protect the Gulf monarchy in return for Saudi Arabia selling its oil exclusively in dollars, depositing those petrodollars in US commercial banks, and investing in Treasury bonds.
Bloomberg explained: “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”.
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