I have written three articles on the US Petrodollar system.(1) It began in 1973 and is still the central feature of the US Empire. The system works like this: If anybody wants to buy crude oil, they MUST pay in US dollars. The Saudis were the first to agree but it soon became the only way to buy oil. The dollars paid to the Saudis and others is then deposited in US banks and form the basis of the world financial system. What does this mean? It means that the US occupies a special and very powerful place in the world. The way this works is explained in the Appendix a the end of the article: HOW DOES THE PETRODOLLAR SYSTEM MAKE THE US POWERFUL?
When I wrote this article at the end of 2015 I knew it could end, but I did not see how it could end without a war in which the US was destroyed by nuclear weapons. However I have just found an article which explains exactly how the Petrodollar system could end, and this may not be that far off. The article is written by Dr Jim Willie who writes for Max Keiser, Gold Eagle, Golden Jackass, Market Sanity, etc. The article is entitled "China Has the Leverage to Kill the Petrodollar".(2)
He describes the Petrodollar system as follows:
Its essence is the sale of crude oil universally in US Dollar terms. Typically the payment form is the US Treasury Bill. The OPEC crew typically sock their surplus petro dollars in US Treasury Bonds. The sale proceeds never exit the USD form. (...) The other little item in the Petro-Dollar defacto standard treaty is that the Saudis, along with the Gulf Arab neighbors, would buy US Military hardware exclusively. (...) The global currency reserve consists of the trade payments done in USD terms, together with the banking systems holding US Treasury Bonds as core assets.
HOW CAN CHINA BREAK THE SELL-OIL-FOR-US-DOLLARS SYSTEM?
The problem is that now the Saudi oil fields are almost empty. This is the reason for the Saudi war on Yemen. The Saudis want to steal their oil & gas reserves which are enormous and plentiful. They also want more cash. Since they cannot rely on oil income they have decided to sell stock in 10% of their giant oil company ARAMCO, formerly known as the Arabian-American Oil Company. Until now it has never operated as most companies in the West with publicly available shares and known shareholders. The Saudis value this asset at US$2 trillion but Western energy analysts value it at $500 billion. While the West may not want to buy what they consider an overvalued asset China might. Why?
China might over-pay for a stake in the ARAMCO company for two reasons. First, they want a toe-hold in the kingdom, in order to win other trade deals with a degree of exclusivity. They would become a favorite foreign son in the process, especially if other Western financial houses refuse to invest in the bloated over-valued petro-chemical firm. Second, the Chinese would then be in a position to demand that oil sales to China be paid in Yuan currency, in RMB terms. The ARAMCO investment, large or small, would serve as leverage to fracture the Petro-Dollar at its home base, within Saudi Arabia.
WHAT HAPPENS ONCE THE CHINESE CAN BUY OIL IN THEIR OWN CURRENCY, NOT THE US DOLLAR?
This will in turn have a very significant effect on other countries in the Middle East and the Far East:
Once the Chinese win the privilege to buy Saudi oil in RMB terms, the other Gulf Arab oil producers will match the offer of selling oil to the Chinese in their own currency, and NOT in the US Dollar. (...) The rival Gulf Arabs will not wish to lose market share to the Saudis. They will also permit the Chinese to pay in yuan. On the other side, Southeast Asian oil customers will wish to buy crude oil from the Gulf region generally in currency other than the US Dollar. They are fast dumping their US Treasury Bonds, a trend that has endured for almost two years. The Gulf Arabs will grant the Asians the right to pay for crude oil in whatever currency they wish, being very accommodative. The result will be deeply damaging. The Gulf Region will sell crude oil in non-USD terms on a widespread basis and significant scale.
The author writes that this development "is not covered well in the financial press, not even in the alternative media." You will have to look carefully to follow the negotiations between China and the Saudis. If this analysis is correct, we will have little warning before the core assets of the West, US Treasury Bonds, will drop in value to almost nothing and the US Empire will be unable to exert financial power over anyone. So will they use their military power instead? We hope not!
APPENDIX: HOW DOES THE PETRODOLLAR SYSTEM MAKE THE US POWERFUL?
There are at least three ways that the Petrodollar system works for the US to give it power over all other countries. The Petrodollar system puts all the profits from the sale of crude oil in the vaults of the major US banks. With much more money to invest or loan, the US banks have a clear advantage over the investors in other countries. Further, any country which does not have enough export income to buy oil must borrow US dollars from the IMF or the major US banks. Because most countries must import oil to function, the lenders can set any conditions on these loans they wish. These countries have no choice other than accepting any conditions. This certainly helps to create the well known poverty and underdevelopment in the 3rd world. These countries are simply bled dry by the investment vultures who run these institutions.
But the Petrodollar system also gives US government a significant advantage. All other countries need to focus on their balance of payments to make sure they have enough international currency to cover the cost of imported goods. However the US can simply print more money to pay for what it wants. Why is this? Countries want to have US dollars because they need US dollars to trade with other countries. As explained above, this is the role of a reserve currency. Without a reserve currency of one kind or another, world trade, and trade in oil and gas, would simply grind to a halt. Since there is no alternative to the US dollar, and everyone must have dollars to export or import goods, there is no practical limit on the amount of US dollars they create. This may seem insane, but this is how the world economy has worked since the 1970s.
So why is the US dollar still the reserve currency for world trade? Tyler Durden explains the even though the Federal Reserve Bank in the US has inflated the value of the US dollar so it loses value against other commodities, there has been no real alternative:
“The German Deutsche mark held its value better, but the German economy and its trade was a fraction that of the US, meaning that holders of marks would find less to buy in Germany than holders of dollars would find in the US. So demand for the mark was lower than demand for the dollar. Of course, psychological factors entered the demand for dollars, too, since the US was the military protector of all the Western nations against the communist countries.”(3)
Durden is quite aware of the power the US has from the dollar being the reserve currency and the way it is being used: “We need to look at the concept of a reserve currency differently, because it is important. We need to look at it as a privilege and a responsibility and not as a weapon we can use against the rest of the world.”(4)
When the US abandoned the gold standard for the US dollar and forced OPEC to sell all oil for US dollars, they forced all countries needing oil to acquire dollars, either by trade or by loans from US banks or the IMF. The aim the Petrodollar system is to force the world to accept the US dollar as the reserve currency, thus allowing the US to occupy the uniquely powerful position this creates. All countries must balance exports and imports except the US. Furthermore, the profit from the sale of oil by OPEC ends up in US banks. We will see in the next sections how the vastly increased power of these giant banks have totally transformed both economic and political life around the world.
1. How Does the US Empire Control the World? Petrodollars Rule, Ok! (Part 1)
How Does the US Empire Control the World? Petrodollars Rule, Ok! (Part 2)
How Does the US Empire Control the World? Petrodollars Rule, Ok! (Part 3)