The Milestone June 8, 1974 agreement between the USA and Saudi Arabia was not about exclusively pricing oil in US dollars. It was about enabling Saudi Arabia to use its windfall of oil money into the US economy. The petrodollar system does and did become dominant but it was for mutual economic benefit. The non-renewal of the economic cooperation agreement is an issue but it is not the immediate collapse of the petrodollar system. Here is more of the details about it.
n a blog post published Friday, Paul Donovan, chief economist at UBS Global Wealth Management, remarked that the fake story had become surprisingly widespread, providing another lesson about the pitfalls of “confirmation bias.”
“Clearly, the story that is going around today is fake news. There was an agreement signed in June of 1974, but it had nothing to do with currencies because the Saudis carried on selling in sterling after that,” Donovan noted.
The surge in oil prices following the OPEC embargo was leaving Saudi Arabia with a surplus of dollars, and the Kingdom’s leadership was eager to harness this wealth to further industrialize its economy beyond the oil sector. At the same time, the U.S. wanted to strengthen its then-nascent diplomatic relationship with Saudi Arabia, while encouraging the country to recycle its dollars back into the U.S. economy.
Washington also wanted to ensure there wouldn’t be a repeat of the 1973 embargo, which sparked a destabilizing wave of inflation and an economic and stock-market crash.
According to Donovan and others who emerged on social media to debunk the conspiracy theories, a formal agreement demanding that Saudi Arabia price its crude oil in dollars never existed. Rather, Saudi Arabia continued accepting other currencies – most notably the British pound (GBPUSD) – for its oil even after the 1974 agreement on joint economic cooperation was struck. It wasn’t until later that year that the Kingdom stopped accepting the pound as payment.
Perhaps the closest thing to a petrodollar deal was a secret agreement between the U.S. and Saudi Arabia reached in late 1974, which promised military aid and equipment in exchange for the Kingdom investing billions of dollars of its oil-sale proceeds in U.S. Treasurys, Donovan said. The existence of this agreement wasn’t revealed until 2016, when Bloomberg News filed a Freedom of Information Act request with the National Archives.
The petrodollar system largely grew organically from a place of mutual benefit – rather than some shadowy agreement established by a secret cabal of diplomats – remains a matter of indisputable fact, according to Gregory Brew, an analyst at Eurasia Group
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I was always fascinated by the Middle East’s politics and contributions to civilization in the modern era. Though this particular episode almost 50 years ago is way before my time, it seems to highlight the ludicrous nature of how one part of the world can absurdly over-influence the success of modern human culture as a whole, primarily based on a near-arbitrary accumulation of cheap resources that the rich and ambitious and smart world, mostly elsewhere, require. Just based on the type of people, culture, infrastructure, and intra-political relationships Saudi Arabia and the surrounding regions possess and actively promote, they really have no reason to be part of modern post-industrial civilization at all — and I believe they would be more peaceful and fulfilled (such as is possible for regions that have periodic food, water, and stability issues) if they had never realized their untold treasures. That being said, I don’t believe that they can ‘buy’ a successful culture, and its only a matter of time before oil riches pass them all by (though possibly many decades in the future) and without a very sophisticated centralized and ultra-cheap power system such as nuclear or fusion that they can internally maintain, it is likely they are going to revert to a very wealth-disparate culture of a few bullies in charge with many unmotivated citizens doing the toil – more of a resort than a culture.
Then you haven’t been paying attention to recent massive investments by oil countries Saudi, Kuwait and Emirates over the last decade. They know at some near future point, all the oil left in the ground becomes a stranded asset. They’re quite clearly prepping to stay in the energy business. Research their massive investments into North African solar and plan to institute a ‘global interconnect’* (more like regional) of UHV DC transmission lines into Europe and other nearby points.
* The Chinese originally coined the term, and have been working on their own, looking to deploy ever-cheaper renewables throughout that corner of Asia.
History may not have led exactly to petrodollars, but it’s close enough in timing & effect to be real. To escape the historic hellacious inflation of the 1970s – also caused by soaring debt from the Vietnam war – the U.S., and Kissinger, agreed to militarily support S.A. using excess dollars from the oil trade. What was discussed between Kissinger and S.A. may never be fully known, but the alliance benefited both parties. Now, it’s not clear S.A. wants to continue it, given the sanctions against other trading partners for them.
The U.S. is monetarily sovereign and can never “run out of money” but it can be devalued internationally, or inflated to less value domestically.
Still, the dollar is sought after more than any other major currency right now. The dollar is strong and the U.S. is growing its GDP. It’s not at all clear the dollar will “collapse” no matter how many click-bait videos proclaim it to be forthcoming. As one FOREX trader told me, “it’s an ugly contest, where the least ugly currency gets bought.”
After 1974-75, there was an immense surge in Saudi Arabia purchasing US military equipment and services, including advanced training. But there was even a far greater expenditure on military and non-military infrastructure the US was known to benefit from. This was most evident in the first Gulf war. Seems to fit…