The petrodollar has lived to see another day. Regime-change actions in Venezuela have been defended as a decision to stop narcotrafficking and take down a socialist dictator. But there may be another reason for the military operation in Caracas: preserving the petrodollar.
What Is the Petrodollar?
When President Richard Nixon closed the gold window, the US dollar needed an anchor in international trade. In the 1970s, then-Treasury Secretary William Simon helped to forge a US-Saudi Arabia agreement that transformed the world: Riyadh would price its crude oil in dollars, and Washington would provide military assistance. Surpluses generated by the Saudis would also be invested in US financial markets. It was the start of a beautiful friendship that caught on with other energy titans.
The US dollar's presence deepened in both global trade and capital markets, whether through purchases of US Treasury securities or lending to other economies, also known as petrodollar recycling. Decades later, the petrodollar has become a staple of the international order, the global economy, and worldwide financial markets.
This is why even higher crude oil prices are a boon for the US economy: More dollars circulate through the marketplace, driving a greater influx of capital into dollar-denominated assets. The United States still wins with falling oil prices because lower input costs limit price inflation, prompting consumers to spend, businesses to invest, and the Federal Reserve to cut interest rates.
Put simply, the house always wins, but several players have tried to take down Goliath.
Dedollarization
Over the last several years, Liberty Nation News has reported on the global dedollarization push led by China and Russia. Prior to President Donald Trump’s ascension to the White House for a second term, the anti-dollar initiative gained steam, with the expansion of the BRICS coalition and accelerated efforts to settle bilateral trade in local currencies rather than dollars.
Desperate to stave off an economic collapse, Venezuelan President Nicolas Maduro joined the crusade to dismantle the king petrodollar by selling more of its crude oil to China. Caracas exported approximately 450,000 barrels of oil per day to Beijing last year, which is about half of its daily output. While it is unclear if the two sides completed their transactions in yuan, China has regularly settled in non-dollar currencies, and Venezuela has been vocal in its support for dedollarization.
In addition to regime change, the current administration has threatened that countries engaged in anti-dollar activities would face the brunt of tariffs. This warning was enough to curb proposals to dethrone the US dollar. But every so often, those who step out of line need a reminder.
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President Barack Obama overthrew Libyan leader Muammar Gaddafi more than a decade ago when it appeared he wanted to establish a gold-backed currency for crude oil. Until that came to fruition, Gaddafi sought to settle oil purchases in Libyan dinars rather than dollars or euros.
A similar situation was observed in Iraq at the turn of the century. Saddam Hussein transitioned Baghdad's oil sales from dollars to euros, bypassing sanctions, and netted Iraq a handsome windfall. He described the greenback as "the currency of the enemy." Both men were eventually toppled.
Of course, the petrodollar was not the core objective behind Trump’s decision to overthrow Maduro. Speaking to reporters hours after the Latin American leader’s capture, Trump stated that the United States would take control of Venezuela’s oil. Despite allegedly having the world’s largest oil reserves – Caracas reported more than 300 billion barrels underground to OPEC – the country failed to prosper from these reserves due to aging infrastructure, mismanagement, and underinvestment.
Why should Caracas waste its enormous resources?
Necessary Tool
The petrodollar is critical. If Venezuela abandoned the petrodollar system by selling oil in pesos, yuan, or rubles, demand for the buck would decline. This would result in fewer dollars leaving the United States, keeping money at home rather than exporting it to the rest of the world. The result? Higher price inflation and rising interest rates.
Tariffs, regime change, and the US dollar. The stuff dreams - or nightmares - are made of.
