“Who controls the food supply controls the people;
who controls the energy can control whole continents;
who controls money can control the world.”
Sept 10, 2011
By Nalliah Thayabharan
UNDERSTANDING THE PETRODOLLAR
At the end of WWII, an agreement was reached at the Bretton Woods Conference which pegged the value of gold at US$35 per ounce and that became the international standard against which currency was measured. But in 1971, US President Richard Nixon took the US$ off the gold standard and ever since the US$ has been the most important global monetary instrument, and only the US can print them. However, there were problems with this arrangement not least of all that the US$ was effectively worthless before it reneged on the gold-standard. But more importantly because it was the world’s reserve currency, everybody was saving their surpluses in US$. To maintain the US$’s pre-eminence, the Richard Nixon administration impressed upon Saudi Arabia and therefore Organisation of Petroleum Exporting Countries (OPEC) to sell their oil only in US$. This did two things; it meant that oil sales supported the US$ and also allowed the USA access to exchange risk free oil. The USA propagates war to protect its oil supplies, but even more importantly, to safeguard the strength of the US$. The fear of the consequences of a weaker US$, particularly higher oil prices, is seen as underlying and explaining many aspects of the US foreign policy, including the Iraq and Libyan War.
The reality is that the value of the US$ is determined by the fact that oil is sold in US$. If the denomination changes to another currency, such as the euro, many countries would sell US$ and cause the banks to shift their reserves, as they would no longer need US$ to buy oil.