The Saudi/US pact: reflection of a vulnerable America
The US is made a distant comeback. Its dollar was, at the start of the 1970s, in a precarious situation due to the exorbitant cost of the Vietnam war and the various social programmes whose combined effects meant the country could no longer maintain the parity with gold that was established in 1944 at Bretton Woods. As it was printing ever more currency in order to alleviate its growing deficits, the dollar’s value relative to gold of course diminished, bringing about a general distrust of the Greenback and causing countries like France and Switzerland to demand the immediate conversion into gold of their reserves held in dollars. Faced with the prospect of suffering an irreparable erosion of its gold reserves if other nations also demanded the immediate conversion of their dollars into gold, the US therefore announced in 1971 that it would be abandoning the Bretton Woods system and introduced the free circulation of its currency.
It was, however, obvious that this very real paradigm shift that allowed currencies to freely fluctuate against each other, independently of the price of gold, would in no way assuage America’s worries, where they were suffering a real crisis of confidence due to their poor economic and financial management. It is in fact not the free fluctuation of the dollar, announced unilaterally, that encouraged the nations and investors of the world to fund America’s debt that had become increasingly harder to control. The US absolutely had to find outlets for its debt market, without being forced to raise its interest rates.
This is when in 1974 President Nixon rushed his Secretary of the Treasury, William Simon, off to Saudi Arabia on a mission to negotiate an arrangement that still lasts to this day.The US would be the top weapons supplier to the Kingdom and its most ardent protector, in return for which the Saudis would recycle their dollars earnt from their oil sales to fund America’s deficits by buying back masses in Treasury Bonds. It is an exchange of goods borne of an infantile simplicity that relieved US public funding while also ensuring the security of an unstable nation, threatened from the outside by a tormented geopolitical arena, but also from within (let us not forget among others the assassination of King Faysal by his own nephew in 1975). The Petrodollar was thus born, from America’s desire to neutralise the weapon of petrol (that was becoming a greater and greater threat to the West at the time), and it also perfectly suited the Saudis who found in the US a refuge to bank their dollars.
This partnership – which must be recognised as going quite against nature – between the US and the Wahhabi Kingdom – at a time when Saudi Arabia ruled the Organization of the Petroleum Exporting Countries that dominated no less than half the market ! – forced all other exporters to use the dollar that then found for itself a new youth as it was sought, demanded and coveted by sellers and of course by buyers of petrol who by obligation had to get hold of the currency to pay their energy bill. Saudi oil for US protection was America’s guarantee of securely holding Arabian Petrodollars within its borders in exchange for the funding of its lifestyle: it is this US-Saudi pact that thus conferred the almighty power of the US dollar to the global level, with absolute opacity on both sides and with close mutual collaboration, as no one can assess with accuracy – even today – the nature nor the quantity of Saudi assets invested in the US.
In 2020, OPEC represents less than 30% of the global oil market and Saudi Arabia is only the third biggest producer behind Russia and…the US. Petrodollars are nevertheless still crucial for the US as it must fund a deficit in the way of a trillion dollars. Under other circumstances, the decline of OPEC and of Saudi Arabia’s role in it, now kept at arm’s length by the US that has itself become the biggest oil producer, should have sounded the death knell for the Petrodollar. However, without these billions and billions of dollars the US had to fund itself and so it has always been very sensitive and extraordinarily attentive to what is happening in Saudi Arabia and the surrounding region. The US therefore needed more than ever for the dollar to remain the most used currency in the world, as this is essential for the country to being able to attract enough financial flow to fund its deficits. A budget crisis brought on by a drying up of the supply of Petrodollars would cause an immediate rise in the US’s interest rates, a collapse of the dollar’s value, and a take-off of inflation – in short, a chain reaction whose shadow would obviously affect the country’s foreign policy.
This is why any producer’s vague hope of making its oil sales in euros or in any other currency is immediately taken very seriously by the US, which acts accordingly, whatever the human or geopolitical consequences may be. This is also why Saudi Arabia will remain a focal ally of the US, who will always support the regime, to protect the Petrodollar and, ultimately, to protect themselves.