Tuesday, October 01, 2013

Kissinger, Saudis and Birthing the Petrodollar

Floating around financial and economic websites is the word petrodollar. Supposedly, it is going to collapse any moment now. Not quite as the core piece to the petrodollar puzzle is American military might protecting the non-Iranian Persian Gulf petrostates. The gulf kingdoms have been diversifying their reserves, but there is no giant China arms deal in the works for Saudi Arabia yet. There are no rumors of yuan for oil. That sneaky genius Kissinger got the Saudis to price their oil in dollars, forcing others to comply since the Saudis were the big swingers in the Middle East along with Iran. The odd thing is that no one ever explains what Kissinger did to create the petrodollar and cement the Kingdom of Saudi Arabia (KSA) into the U.S. mob empire.

The creation of the petrodollar was a resolution to twin crises. There was the problem of the severing of the dollar from gold, creating a situation where the developed world sold goods and services to the oil exporters for higher and higher prices while the oil exporters received locked in dollar revenue based on production that was no longer back by gold. The oil exporters were in negotiations with the Seven Sisters over how much to increase the price of oil as Sadat was planning his surprise attack. The surprise attack started a little war called the Yom Kippur War. In the YK War, Egypt and Syria performed a sneak attack on Israel that Israel knew was coming but did not preemptively strike in defense. The Israelis become hysterical early on and demanded assistance from the U.S. since the Soviets were aiding the Egyptians and Syrians. Yes, it was a mini-Cold War proxy fight. The U.S. did aid the Israelis, and lo and behold in solidarity, the Arab oil exporters decided to unilaterally lift oil prices and begin the oil embargo of 1973-1974.

The U.S. had balanced its attitudes in the Middle East between the Arab friendly politicians and the Israel friendly politicians. This may have been the moment when America went in the tank for Israel. One must wonder how much the American media would have asked, "Who lost Israel?" for twenty five years like the media and politicians asked, "Who lost China?". Nixon was well acquainted with that concept as he was one of the fiercest pushers of the red China situation. That question was part of American rational behind the Korean and Vietnam wars, so it is a great unknown how losing Israel would have forced us to idiotically throw American lives into the meat grinder. Without Israel, foreign policy presidential debates would have to find fifteen minutes of material to discuss.

The fighting in the Yom Kippur War ended October 25th, 1973, yet the oil embargo continued until March of 1974. The disengagement of the combatants was at the end of May 1974, so the dates do not line up properly if the embargo was related to the peace process. There is a note in the embargo chronology that in mid February, some countries (KSA included) saw progress in YK war resolution negotiations due to Kissinger's shuttle diplomacy. Those shuttle dates still do not line quite so well. What does line up a bit better is the creation of the U.S.-KSA petrodollar agreement of 1974.

The Saudis are key because they had taken over the role of swing producer from Texas. Saudi Arabia had a larger role due to the global oil game. The KSA's oil exports were 21% of global oil exports in 1973. Creating a petrodollar system and pulling OEPC into such a system would logically start with the swing producer. Due to their share of the export market and their status as supplier to multiple developed nations, the Saudis announcing they would only accept dollars for their oil set the method of operation for the rest of the OPEC group to follow. Like any cartel, the desire to cheat quotas for personal gain or be a first mover in economic or power terms is strong. Setting up a petrodollar arrangement is not cheating, but it is acting independently and reaffirmed the link of oil and dollars instead of a chaotic system of bilateral currency for oil deals.

The initial petrodollar agreement is commonly stated as the U.S. protecting the KSA in exchange for pricing their export oil in dollars to create a base bid for dollars. It also solidified dollar recycling as those dollars are used to purchase treasury bills and bonds that are held in the U.S. and spent on goods and services provided through the U.S.-KSA economic agreements. In his book "Confessions of an Economic Hit Man", John Perkins explains how the U.S.-KSA Joint Commission on Economic Cooperation was a means for starting the petrodollar system as well as laundering the American dollars spent on foreign oil back to America for construction and engineering firms. Perkins says that the U.S. frantically worked hard after the embargo to lock the Saudis into a deal. He is wrong. Kissinger arranged for the petrodollar connection through Joint Commission on Economic Cooperation by way of the Technical Cooperation Agreement signed February 13th, 1974. That is right when certain countries (chiefly the KSA) proclaimed progress in the YK war talks and that an end to the embargo was in sight. We renew this TCA every five years (here is 2008's). While JCEC was the final program, it was a follow up to the TCA which was agreed to four months prior to the JCEC's founding right in the middle of the embargo.

While an act of solidarity during a conflict not involving members, OPEC's embargo was really about their share of the economic rents in the oil game. It was the start of a long process of reorganizing oil wealth. It was also one of the first steps in the great scramble for footing in the 1970s after the dollar stopped gold convertibility in 1971. An agreement as broad and open as the TCA does not form overnight. Kissinger's shuttle diplomacy was a combined effort to bring peace to the west coast of the Middle East and pacify the Saudis into playing the American financial game. This is nearly half a century old but the technical agreement makes America a player involved with the kingdom's nuclear ambitions. America's leadership must recognize that if we allow Iran to seek peaceful use of nuclear technology, their wealthy rivals, and staunch funders of the American dollar scam, will want the same right. The dollar might not have been as good as gold until the end of the decade, but the Kissinger-KSA deal bought the Saudis internal security, modernization and the best muscle on the global block.

1 comment:

Anonymous said...

Nice article. Always suspicious of Kissinger...Not that this lends credence to my suspicions. A neat summary of the petrodollar :)