The US-Saudi Arrangement: Sign of American Vulnerability

Petrodollars remain crucial to the United States in order for it to pay its trillion-dollar debt. This is why any hint by an oil-producing country of trading in euros or a currency other than the U.S. dollar is taken so seriously by America, which reacts accordingly, without regard for the human or geopolitical costs.

The United States exists in a touch-and-go situation. In the early 1970s, its dollar was in a precarious predicament from the exorbitant cost of the Vietnam War. At the same time, the combined effects of various social spending programs did not allow for the continuance of the U.S. dollar’s parity with gold that had been established with Bretton Woods in 1944. As America printed ever more money to ease its expanding deficits, its value could only drop against gold, which would spread the general mistrust of the greenback that prompted France and Switzerland to demand the conversion of their U.S. dollar reserves into gold bullion. Faced with the erosion of their gold stocks if other countries did the same, in 1971, the Americans abandoned the Bretton Woods system and openly floated their currency.

It was nonetheless apparent that overturning the old system meant letting the world’s currencies freely compete against each other independently of gold prices, and this did nothing to palliate America’s crisis of confidence about its poor economic and financial management. It was not really the unilaterally instituted free trading of the U.S. dollar that would encourage the world’s countries and individual investors to finance America’s ever more uncontrollable debt. Thus, it was imperative for America to find outlets for its debt market without being forced to raise its interest rates.

Dealing in Processed Bonds

That was why in 1974 then-U.S. President Richard Nixon sent his Treasury Secretary William Simon to Saudi Arabia to negotiate an arrangement that lasts to this day. Under it, the U.S. would act as the kingdom’s main protector and arms supplier, in exchange for which the Saudis would recycle their U.S. dollars earned from selling American oil into massive purchases of U.S. Treasury bonds. Childishly simple, this bond dealing enabled America to fund its public spending. At the same time, it assured the security of an unstable country that was threatened from without by shifting geopolitical trends, and also from within, for example, with the 1975 assassination of King Faisal bin Abdulaziz Al Saud by his own nephew. The petrodollar was thus born of American determination to neutralize the use of oil as a weapon, which was then a menace to the West. It perfectly suited the Saudis, who found America a haven for their U.S. dollars.

This rather unnatural alliance between America and a Wahhabi kingdom occurred at a time when the Saudis dominated the Organization of the Petroleum Exporting Countries, accounting for no less than half the market, allowing them to force all other OPEC members to use the U.S. dollar. This gave it a new lease on life as the most wanted, demanded and coveted currency, which both buyers and sellers of oil had to have in order to run their energy production. The exchange of Saudi oil for American protection with the promise of securing Arab territories in order to finance the American way of life is the Saudi-American arrangement that established the almighty dollar as the global norm. It operates in close collaboration out of sight from everyone else, so that even now no one can know precisely either the nature or the amount of Saudi investments in America.

The Necessity of Preserving the Petrodollar

But now in 2020, OPEC represents a mere 30% of the world oil market, while Saudi Arabia is just the third largest oil producer after Russia and − America! Nevertheless, petrodollars are still and always crucial to America, since they are needed to finance its trillions of dollars of debt. In other circumstances, OPEC’s decline, and that of Saudi Arabia within it, would have caused America to distance itself from its old ally and signaled the end of the petrodollar. That, however, does not take into account the thousands of billions of dollars that America owes itself, making it acutely sensitive and watchful about what goes on in Saudi Arabia and the Middle East. Now more than ever, America needs its dollar to remain the most sought-after currency in the world in order to continue the flow of money to finance its deficits. A budget crisis brought about by the ebbing of this petrodollar flow would provoke an immediate hike in interest rates, a collapse in the U.S. dollar’s value and a takeoff of inflation; in short, a chain reaction, the fear of which decisively influences American foreign policy.

This is why any hint from an oil-producing country of trading in euros or any currency other than the U.S. dollar is immediately taken so seriously by America, which reacts accordingly, without regard for the human or geopolitical costs. It is also why Saudi Arabia will remain a vital ally of America, which will always support the Saudi regime in order to preserve the petrodollar and, ultimately, itself.