High-Level Terms of the Petrodollar Agreement
  • The US would help the House of Saud stay in control of Saudi Arabia
  • Saudi Arabia Would:
    • Require that oil transactions with other countries be conducted in US dollars
    • Ensure that other OPEC members also required payment in US Dollars
    • Recycle dollars back into the US by:
      • Buying American weapons and other goods
      • Contracting with American infrastructure companies
      • Purchasing US treasuries
    • Help ensure an agreeable price of oil for the US
    • Prevent oil embargos in the US

The Petrodollar System Provides the United States With Huge Benefits
  • Gave foreign countries a new reason to hold and transact in US dollar
    • Every country that wants to buy oil has to purchase dollars first
    • This creates a huge non-local demand for the dollar
    • Once other countries are already using the dollar for oil, it's natural to use it for other trade transactions
  • Helped the US dollar retain its position as the world's reserve currency
    • The US dollar is used for roughly 80% of all international trade transactions
  • Ultimately allows the US to continue issuing more debt and run large budget deficits
  • Allows the US to print dollars for nothing and to use them to buy international goods
  • Helps Keep US interest rates low
    • The demand from foreign buyers with dollars drives down US rates
  • Also gives the US tremendous power
    • Since the US controls dollars, it can instantly cut off any country from the US dollar system
      • This hinders that country's ability to trade internationally
      • This creates an incentive for countries to succumb to the US's demand

Future Problems This System May Cause
  • The system works as long as other countries continue to accumulate and use US dollars
  • If other countries started to base their trade on alternative currencies or gold, the system could collapse
    • There would be a surplus of dollars
    • This could cause severe US inflation

    This could result in another Global Monetary Reset

    Case For Ending The System

    • The system has pitfalls that relate to the Triffin Dilemma
    • The US can't solve its structural problems if it is still the reserve currency
      • It has to let the value of its currency drop to become price competitive & export again
      • The opposite is what happend to the UK when they held the reserve currency
        • The UK's high currency value further reduced it's ability to compete globally and export