Petrodollar Economy: A Major Determinant for the U.S. Foreign Policy

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The Industrial Revolution of the nineteenth century coupled with the Globalization era of twentieth, paved the way for a world order where ‘’Economics’’ ought to play a crucial role. Today, along with the military, strategic and political realm, economic sphere and the accompanying economic influence determine a state’s position on the world map. The impact of China and Japan over world affairs serves the perfect example of how the previously ‘military-centric’ approach has now been majorly, if not totally, shifted to the more viable and modern ‘economy-centric’ one, and how the latter affects the foreign policy is also not something recent.

The climax of Second World War brought the world powers to a consensus over a common economic structure and the Bretton Woods system was introduced in the year, 1944. The system thus agreed upon was one where the world currencies were backed by gold – the more gold in state reserves meant the more value of one’s currency and thus, the ability to print more money. This system commenced the inception of U.S. Dollar as the world’s dominant ‘vehicle and reserve currency’, where the dollar was weighed at $ 35 per ounce of gold and the other currencies were then balanced against the US dollar.

As the years went by, it became arduous for states and especially for America to accumulate huge amounts of gold to back their currency, as well as to sustain the arrangement. Soon the U.S. realized that the need to change the system had arisen and this requirement culminated in the abolishing of the Bretton Woods system in 1971 under the administration of President Nixon. But the end of it meant the death of the dollar dominance and monopoly, something that was acutely unacceptable for America. It became crucial for the U.S.  to somehow create a demand for dollars worldwide and she did this by using something which would prove pivotal for all states in the years to come – America used “oil” as a medium for the dollar-demand generation.

A new foreign policy orientation was adopted by the United States and through the backdoor offices; she struck a deal with Saudi Arabia; in 1974. The deal proved as a watershed moment in the foreign relations of the two entities and a new economic system – “The Petrodollar Economy” was introduced to the world arena. The pact thus finalized gave the U.S. the assurance that Saudi Arabia, as well as later on other OPEC states, would only use U.S. dollar as the currency for the trade of oil. Along with this, the guarantee of not introducing any oil embargo ever was also specified. The consequent Petrodollar structure set in a new era of economic dealings and world order, revolutionizing furthermore the foreign policy choices of United States for the Middle East.

But the diplomatic policy that materialized between Saudi Arabia and America was one of a kind, where in exchange for trading oil in dollars, Saudi Arabia; being the largest oil exporter; was promised security of the Kingdom of Saud, along with considerable military and technological assistance. The move to sustain dollar hegemony had and has compelled America to alter its foreign policy orientations, providing sizeable leverages to Saudi Arabia in the Middle East till today in addition to giving it the capacity to dominate the region since then.

The hegemonic structure of the petrodollar system has therefore been bolstered throughout via the specific foreign policy agenda of America with the aid of Saudi Arabia as its major international ally; and how some would call it; as America’s 51st State. In addition to this, US played smart by introducing a concept that it termed as the ‘Petrodollar Recycling’ to the OPEC states, where the surpluses earned by the trade of oil had to be invested in US Financial Markets and in buying the U.S. Treasury Bonds. This phenomenon till date ensures that America’s Public Debt and Trade Deficits are balanced and that an increased liquidity is provided to the dollar in the International Market.

Another major US foreign policy flashpoint arrived when under the rule of Saddam Hussain, Iraq set to challenge the very legitimacy and supremacy of the Petrodollar Economy. The Iraq War was labeled as a war against “an authoritarian and rouge regime’, against a state possessing the ‘weapons of mass destruction’. Little did the world know that behind the facade of WMD’s, was a clear cut foreign strategy end- the aim of restraining Iraq from adopting Euro as the currency for its oil trade in order to keep the Petrodollar structure and the accompanying U.S. hegemony prevailing, and in addition to prevent any chances of a possible ‘Petro-Euro’ system. Thus, the filth of an ‘Economic War’ was blanketed behind the cloak of the notion of ‘just war’ and the objective of the American policy concerning Iraq was consummated.

It is also worth mentioning, that the Petrodollar Economy has harvested manifold dimensions of economic along with political relations of America with countries like China and Japan – those having an intensively robust economic base. These countries being large importers of oil have their stakes invested in the dollar dominance. These states and many like them are the biggest American creditors who buy immense percentages of U.S. Debts as well as provide low-interest based loans to America. It is largely due to these countries that the Petrodollar system is maintained and it is hugely because these states themselves are dependent on the very structure. It is seldom that the U.S. Treasury Bonds that these states buy are redeemed, providing America with a twofold benefit of  keeping the dollar currency in circulation and protecting her from any major currency crisis. The states in turn are often favored by America when the formulation of future foreign economic and political policies is convened and the U.S. being one of the biggest export markets, supplies these states with the adequate economic activity required to create a kosher economic stature.

The petrodollar economy thus proves as one of the paramount determinants over which America constructs the base of its foreign policy setting. The preservation of this economic network is crucial to America and maintaining its supremacy vital, as this system ensures America’s status of a superpower. Once the dynamics of world economic structure change, the orientation and power distribution structure of the international sphere will change consequently and will put American influence very near to its ultimate depression. Till then, America will give its best to keep on uplifting this particular economic structure and will go to any lengths for demolishing the emergence of any competing arrangement, whether it’s ‘Petro-Euro’ or the ‘Petro-Yuan ‘ one.

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is a student of International Relations, pursuing her degree program, in the School of Politics and International Relations (SPIR) at Quaid-i-Azam University, Islamabad.

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