Why US Hegemony and the Petro-Dollar System Means No End for Oil

To understand America's indifference to climate change, one must first understand the petro-dollar system.

Oil producers throughout the world - in exchange for implicit and explicit US military protection and/or the implicit threat of US military intervention - sell oil priced in US dollars. In order to buy oil, energy consuming countries must first obtain US dollars. This ensures a constant global demand for the greenback.

Oil producers then take the US dollars they receive and recycle a significant portion into US assets, such as Treasury Bonds. America in turn benefits from a) constant support for the dollar, b) constant flow of liquidity into US assets, thus propping up prices, and c) the ability to finance persistent deficits without negative implications for bond yields or the dollar.

Put simply, the Petro-dollar system is the foundation for American economic and military hegemony. The system supports America's ability to outspend the world, thus making it the dominant player in world affairs.

The centerpiece to this system is the Kingdom of Saudi Arabia, as they are the world's most dominant oil producer, having massive and accessible oil reserves. Indeed, the origins of the petro-dollar system begin with negotiations between America and the House of Saud.


My explanation may be an oversimplification, but the point is that America's success as a nation, and the standard of living of each of its citizens, depends on the existence of the petro-dollar system. Since the system is constructed on the foundation of global oil production and consumption, America's success is therefore dependent on oil.

A quick scan of 21st-century geopolitics proves the point. While Saudi Arabia receives unconditional support from the American government, countries that moved off the system - e.g. Iran, Iraq (during Saddam's rule), Libya, Venezuela - do not. Indeed, countries that threaten the sanctity of the petro-dollar system are considered America's enemies and are subject to sanctions, proxy wars, overthrow and direct military invasion.

America's unconditional support for Saudi Arabia is not benign. The 2001 attack on the World Trade Center was perpetrated by Saudi citizens. Saudi crown prince Mohammed bin Salman is credibly implicated in the murder of Washington Post journalist Jamal Khashoggi, who was critical of the House of Saud. Saudi Arabia is currently committing the world's greatest humanitarian crisis in Yemen, with millions suffering from starvation and disease. Yet, one has barely heard a peep of condemnation from the American government.

Why? Because the American government is fully aware of the critical importance of the petro-dollar system, in which Saudi Arabia must cooperate.

It is difficult to overstate how critical continued demand for American dollars is to the American way of life. Not only does America owe multiples of its current GDP, trillions more dollars are owed in the way of future entitlements. A collapse of the petro-dollar system - and therefore the US dollar - would lead to the non-payment of America's current and future obligations, through a combination of default and inflation.

This leaves American politicians with a choice: Save America or save the planet?

While the choice might seem tough to most of us, it isn't to most politicians who think in terms of election cycles. Any career politician who wishes to get re-elected will choose America. It would be political suicide to enact policies that quickly and dramatically destroy what remains of the American Dream.

Moreover, any career election who wants power and money will support decisions backed by big oil and defense manufacturer lobbyists. There is no money to be made weaning the world off oil. 

Finally, if the current US dollar based petro-dollar system were to collapse, it would likely be replaced by a new, similar system. It is no secret that China wants to compete for reserve currency status, thus the end to the petro-dollar would soon lead to the birth of the petro-yuan. The benefits are simply too good to pass up.

From this perspective, there is a near-zero chance that America seriously enacts any legislation that weans the country (or planet) off oil. 

The downsides are simply too great.

Therefore, the only credible climate action that will be supported by most mainstream American politicians - Republican or Democrat - will be carbon capture technology. 

2 comments:

  1. Great article that illustrates how a new dollar is born out of thin air for each dollar of oil drilled. Perhaps another aspect not clearly stated here but perhaps obvious: The Saudi citizens (and I have come across many of them since early 1970's as graduate students in engineering) are aware that 1) the Saudi oil revenue is used as a personal kittie by some hundred princes and their families with just peanuts left for their citizens, 2) rest is squandered on military equipment just to protect those families and not the country (remember when Kuwait was invaded -- well, if you ask iraq citizens, their land rich in ioil was carved out nicely to form Kuwait to put the oil in the hands of another despondent family by the western powers so that they can control the oil flow -- the Kuwaitis could not even use their costly and superior fighter planes and instead flew them to safety in SA), 3) the country's wealth is again stored in western countries instead of being used for domestic development and just to be stolen if they act against them (remember the freezing of Iranian assets for 30 plus years) and 4) most of the oil are in the region where shiite moslems live in poverty and state sponsored terror (in fact, shiites are the most persecuted in most moslem countries by the sunni majorities -- look at what happens in Pakistan, for example -- and hence fear they may revolt with the help of Iran, a shiite majority country as well as now sort of new, liberated Iraq ruled finally by the majority Shiites). No wonder ordinary SA citizens hate USA and other western nations even though they would have been educated here from their undergraduate education.

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  2. You think that's why Russia sells 75% of their oil for US dollars? US protection? Or are they afraid of the USA?

    "Put simply, the Petro-dollar system is the foundation for American economic and military hegemony."

    The petrodollar myth is a conspiracy theory to distract edgy baristas and failed authors from their meaningless existence.

    The following facts are irrefutable, and so far, nobody has even attempted to refute any of them.

    the USA wants Iran to sell oil for dollars so bad that the USA made it illegal for Iran to sell oil for dollars.

    The USA needs Venezuela to sell oil for dollars so bad that the USA made it illegal for Venezuela to sell oil for dollars.

    The USA actually voted to allow Hussein to sell Iraq's oil for Euros - http://www.cnn.com/2000/WORLD/meast/10/30/iraq.un.euro.reut/

    How has the dollar performed without these sales? -

    It's up 10% over the past year! https://www.tradingview.com/symbols/TVC-DXY/

    how, you ask?

    Because oil transactions make up less than 1% of global dollar trade. Over 99% of global dollar trade is not oil

    Total global oil trade is only about $1.7 Trillion each year https://www.visualcapitalist.com/size-oil-market/

    But total dollar demand is over $4.6 trillion EVERY.SINGLE.DAY! https://www.businessinsider.com/heres-how-much-currency-is-traded-every-day-2016-9?IR=T

    Do you remember that time the dollar collapsed in value because oil prices dropped by 75%?

    Yea, me neither.

    These facts have cause many heads to explode, so we all understand if you are incapable of responding. I hope you are ok.

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