Economy

Oil currencies: the history of the petrodollar

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In the 1970s, as the 1944 Bretton Woods agreement collapsed, the American dollar’s hegemony in global trade was under attack. While Europe pondered over the future of their currencies, America went back to the drawing board. 

This time, the idea didn’t depend on their European allies but rather the oil-rich Middle East. Its success wholly depended on the virtues of oil. The Petrodollar became the silent warrior that created a novel form of dollar imperialism. 

Woefully for the Americans, their system is coming under siege not by the finite nature of oil but rather by the world’s next superpower, China. Officially launched in 2017, it is called the Petroyuan. 

While the collapse of the Petrodollar is inevitable, Trump’s foreign policy has been murdering it. Their principal modus operandi is to push away American adversaries into the arms of the nation’s most formidable rival, China. 

Until 1971, the Bretton Woods agreement pegged the dollar to gold. For every $35 a nation had, it could, in theory, be converted into an ounce of gold.

All 44 nations were obliged to demand the dollar to retain this peg, paving the path for a robust dollar. Unfortunately, this agreement fell apart when the Americans printed more dollars than their gold reserves. 

As the dollar was in free fall, the United States convinced OPEC nations to exclusively export oil in American Dollars – reinstating a stable demand. Oil is the world’s most traded commodity at an annual rate of $14 trillion, greater than the trade of all metals combined. 

This holds wider ripple effects that culminated in the dollar becoming the de facto currency for international trade. As oil-importing nations seek to build their dollar reserves, they demand dollars for their exports. 

The petrodollar system allows America’s Federal Reserve Bank to mindlessly inject capital into the global economy without facing adverse repercussions. For any other national economy, the injections would be the seed to uncontrolled and high levels of inflation. 

As the majority of American Dollars are held outside the US itself, these injections do not cause inflation in America. Furthermore, the petrodollar also permits the American economy to run long-term and colossal trade deficits. 

In 2018, the deficit amounted to $621 billion, the largest in the world. With Jerome Powell’s Federal Reserve fund rates reaching dangerously low levels at 1.75%, it’s now even more important to ensure that the reckless expansion in money supply does not translate into unsustainable hyperinflation. 

China’s petroyuan has become a sought-after competitor to the petrodollar, both pawns in the intricate Sino-American rivalry. It’s no coincidence that the petroyuan campaign was officially launched in 2018, the same year China became the world’s largest oil importer; surpassing America. 

For almost 150 years, America may have been the world’s largest economy, but the Chinese economy grows at a rate three times that of America. To depose the Americans, the petroyuan entices nations such as Iran, Russia and Venezuela; all adversaries and victims of American sanctions. 

In 2018, when Trump withdrew from the Iran Nuclear Deal, sanctions on Iran were reinstated. With the world’s fourth-largest oil reserves at almost 160 billion barrels, oil is the key to rescue them from the shackles of a depressed economy.

In 2019, their oil exports plunged to around 10% of 2018 – limiting their access, participation and empowerment of the petrodollar. In efforts to circumvent these sanctions, Iran has defected in favour of petroyuan, exchanging Iranian oil for Chinese Yuan.

Iran is not alone in this mutiny. With an economy in hyperinflation, one can not be surprised if Venezuela breaks international norms to cash in their greatest asset, their crude oil. 

As holders of the world’s largest proven oil reserves, they have yet to extract about 300 billion barrels. It is simply brutal American sanctions that prevent them from enjoying wealth, power and status possessed by their friends at OPEC such as Saudi Arabia. 

As the Trump administration perpetually alienates Venezuela’s Nicolas Maduro, the President furthers the Chinese Petroyuan campaign. 

Interestingly, China is not the first to challenge the petrodollar. Great anti-American leaders such as Libya’s Gaddafi and Iraq’s Saddam Hussein had tried. Gaddafi yearned for gold in return for oil while Hussein demanded Euros. Why did they fail? They simply lacked the economic might of China. 

China’s current economy is over 140 times larger than Libya under Gadaffi ever was. With the world’s third-most powerful army, a home-grown rebellion or a foreign invasion is not enough to shatter the momentous rise of the Petroyuan. 

For around half a century, the petrodollar has been the warrior in America’s dollar imperialism. It asserted global dominance without hurting its domestic economy. 

It may touch a raw for mainstream media but the petrodollar is a system designed to be vanquished by the passage of time. It’s wholly sustained by a commodity that is expected to run out in around half a century. 

A regrettable by-product of Trump’s foreign policy simply shortens an already short 50-year timeline. At the cost of America’s century-long unipolarity, the petroyuan thrives. 

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