The Yom -Kippur War was fought between Israel and Arab countries in 1973. The USA has supported Israel. So to retaliate against the USA, Saudi-Arabia raised the weapon of oil after the 1973 Yom-Kippur War and seriously damaged the US economy by increasing the prices of crude oil.
A question is raised, why didn’t the USA take over the Saudi oil fields by force? This would have secured the oil fields, produce enough oil for Western European and Japanese needs, and priced at a level that would not be inflationary.
Meanwhile, William Simon, the deputy secretary of the Treasury, along with Kissinger and Sonnenfeldt had another plan to deal with the Saudis. That plan was the creation of a petrodollar.
What Is The Petrodollar?
An agreement took place between the USA and Saudi Arabia. According to an agreement, the Saudis would continue pricing crude oil in dollars, reinvesting the same proceeds in the US Treasuries and Euro-dollar deposits. The US would stabilize the dollar so that its weakening did not erode the value of Saudi Arabia’s dollar investment. The US would also sell advanced weapons to the Saudis Arabia.
Initially, Saudis vacilitated or dithered. But finally, Saudi Arabia accepted the petro-dollar deal with the provision that the Saudis’ holding of the US Treasuries would remain a secret. By 1978, continuing high inflation in the US led the dollar to fall by 13% from its 1975 high. The Saudi asked the USA government to stabilize the dollar but the USA could not do that. So the Saudi retaliated by doubling oil prices between 1979 and 1980.
The appointment of Paul Volcker as the chairman of the Federal Reserve to tame the US inflammation by tight money led to a rise in the value of the dollar to its level when the petro-dollar deal was signed. Thereafter, all the US administrations intoned the “strong-dollar ” mantra. The petro-dollar deal stayed intact till 2010, and the dollar’s role as the main reserve currency was strengthened.
To conclude, the petrodollar was one of the tools of the USA to manage global politics. Whenever the petrodollar was in danger, the USA used to take rapid action to protect it. We can find a lot of incidences of it.
What Is The Petrodollar? | Creation Of Petrodollar
