Bitcoin may play a significant role in the future of finance due to discontents with the petrodollar.

Over the past few years, and particularly in the last six months, countries such as Russia and Saudi Arabia have indicated their desire to move away from the “petrodollar” system. The petrodollar system, which started in 1973, involves the use of US dollars to denominate and settle global oil trades. It is not a formal rules-based system, but rather one aspect of the role of the dollar as a global reserve currency and the resulting “exorbitant privilege” enjoyed by the US.

An erosion of the dollar’s reserve status could seriously undermine US debt financing and other economic fundamentals. Recent news in oil markets has caused anxiety about the dollar, such as reports that Saudi Arabia and China were accelerating talks to price and settle oil contracts in Yuan via a Shanghai petroleum exchange. China has also conducted talks with Brazil, a significant crude oil exporter, about ditching the dollar. Indian traders have reportedly settled some Russian oil purchases in rubles and dirham, the currency of the United Arab Emirates.

However, it appears that much of this is empty posturing, not because the world loves the dollar or the US, but because no other national fiat currency is positioned to supplant their role in the system. At the same time, the petrodollar system has given oil exporters large and sometimes troubling influence over the United States via investment. In the long term, this highlights the potential demand for a truly neutral, global currency not subject to politicized manipulation by a single issuer, which could look something like Bitcoin.

There have been conspiracy theories about the petrodollar system and its emergence, but according to economic historian David Spiro, “none of this was a conspiracy.” The petrodollar system did not emerge through a backroom arms-for-debt financing deal between the Nixon administration and Saudi Arabia. Rather, the immediate concern was a global trade imbalance and the potential for instability. As the price of oil rose in the early 1970s, oil exporters, particularly Arab nations, began to accumulate large trade surpluses and piles of cash parked in banking institutions around the world. If those oil earnings did not get back into the global capital system, credit markets could have seized up and collapsed.

The most conspiratorial view of the petrodollar system hangs on the genuinely secretive US efforts to help solve the issue. The fate of the credit system and funding for US debt, far more than the future dominance of the dollar, was the priority when Nixon administration Treasury Secretary William Simon traveled to Jeddah, Saudi Arabia in 1974 to pitch the Saudis on investing in US Treasuries. Simon offered to let the Saudis bid on US Treasury bonds via the so-called “add-on” system, rather than via the standard Treasury auction, which gave the Saudis better pricing and made the purchases secret. This secrecy was necessary because the US was breaking a trade agreement with Europe by cutting a bilateral deal to recruit Saudi capital. The subsequent Saudi purchases of a total of $117 billion dollars’ worth of Treasuries was kept secret from the world until 2016.

According to experts, the yen, yuan, ruble, and euro are not ideal for filling the role of the petrodollar.

However, many believe that the Saudi-U.S. deal also included an unrecorded agreement for the U.S. to aid in Saudi defense. Some argue that the two Iraq Wars were pursued in service to a clandestine Saudi-U.S. defense pact.

Petrodollars and the neoliberal order

According to Spiro, this U.S. deal allowed America to use political and military leverage to maintain economic hegemony. Another line of thinking claims that Saudi investments were guided by market forces rather than U.S. power. This so-called “institutionalist” view argues that the petrodollar system emerged because dollar assets were appealing places to put capital. This view aligns with “neoliberal” ideas about the power of free-market forces in global finance, in contrast to the more managed gold-standard monetary regime.

Financial data predating Simon’s deal supports this naturalist, free-market interpretation. Dollar assets held by oil-exporting countries in European banks stood at $0.8 billion in 1964, according to research by Christopher Kopper, but had increased to $10 billion by 1972 – well before the Nixon deal. Despite formal barriers, these investments rose, seemingly attracted by the fundamentals of the dollar assets themselves. The desire to skirt U.S. barriers led to an offshore market for dollar bonds and deposits in Europe, sold via London- and sometimes Luxembourg-based banks and branches. These became known as “Eurodollar” assets. This financial market was already developed when a long-term climb in oil demand and prices began in 1973, leaving oil exporters with even more money to invest.

The idea that U.S. defense of Saudi is part of a secret oil deal is up for debate. An early mutual defense pact between the U.S. and Saudi was signed in 1951, more than two decades before William Simon went to Jeddah. Moreover, the broader Cold War context may be as or more significant than oil per se: before the 1990s, Saudi’s hereditary monarchs wanted good U.S. relations as a bulwark against both domestic insurrection and the nearby Soviet Union.

And whatever the public or private terms of the U.S.-Saudi relationship, it never had juridical power over the broader oil market. Economist Dean Baker wrote in 2009 that “oil producers are free to construct whatever terms they wish for selling their oil, and many often agree to payment in other currencies.” In fact, even the Saudi relationship has had to be shored up occasionally, as in a 1978 meeting when Saudis reiterated their commitment to the dollar.

The paranoia of global finance

Understanding the origins of the petrodollar system is important because it helps us understand its future. If U.S. political maneuvering was a key factor in where petrodollar surpluses were invested, then it should be relatively simple to escape the petrodollar system through similar political deals. However, if market forces are the main factor pushing oil surpluses into dollar assets, and in turn maintaining the dollar’s reserve status, it’s far less plausible that even a command economy can will an alternative into existence.

On this count, the neoliberal explanation seems to be winning: political attempts at creating a petrodollar alternative have been unsuccessful for decades. Current concerns about Russia and China cutting deals with Saudi Arabia are similar to those discussed in a 2009 account, which ominously warned of “an extraordinary transition from dollar markets within nine years.”

Back in 2009, there were fears that non-U.S. oil trading nations could make a game-changing anti-dollar deal that would affect the global trade, not just for oil. However, economist Dean Baker argued that such fears were unrealistic and would make a good plot for a Hollywood movie, but not for economics. Even if a political exit from the petrodollar were possible, the current Saudi-China-Russia constellation has little chance of accomplishing it. This constellation could be seen as a threat of economic blackmail from Saudi Arabia, aimed less at actually transitioning away from the dollar than at influencing U.S. monetary and foreign policy in the short term. However, there is little evidence that this kind of threatening gesture is effective, and there is deep skepticism of the upside for the Saudis. It has become clear that holding U.S. debt doesn’t actually translate to much power.

Despite the worst fears of the 1970s or 2023, the U.S. debt held by Saudi Arabia doesn’t seem to actually offer them terribly much in the way of leverage. In other words, there simply is no alternative to the dollar in the present day. China’s yuan and Russia’s ruble offer none of the liquidity and convertibility of the dollar, and add risks to boot.

This article discusses the idea of a shift away from the US dollar as the global currency, particularly in the context of petrodollars. While some countries, such as Saudi Arabia, may benefit from such a shift, officials in the Middle East are skeptical due to the fact that the dollar is freely convertible and liquid, whereas other currencies such as the yuan are not. Furthermore, the article discusses how reinvested petrodollars have significant influence over US businesses seeking capital, despite concerns about the reputational risks of doing business with Saudi Arabia following the murder of journalist Jamal Khashoggi. The article also highlights the role of petrodollar reinvestment in the startup ecosystem and how this has not necessarily led to positive outcomes, with examples such as SoftBank’s Vision Fund underperforming compared to the S&P 500 and investments in companies such as WeWork and Uber failing to turn a profit.The article discusses the issues surrounding the startup ecosystem that has become too reliant on Arab petrodollars. Venture capitalists like Ben Horowitz are more focused on creating stories that will appease the Arab princes and keep their jobs rather than building successful companies. This has led to compromises and ties with Saudi investors, which could potentially be equivalent to the Iraq invasions. The article suggests that Bitcoin could be a viable alternative to the petrodollar system, as it is a neutral, global currency that is not tied to any national currency. However, there are technical and administrative hurdles to overcome before such a transition can occur. The article concludes by stating that building a fair system that is not controlled by anyone is possible with the use of Bitcoin as a model.

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