C (3:08)

Prior to the Iran war, were there any countries that did not use the petrodollar?

D (3:14)

So the dominance of the petrodollar really starts Post World War II when the dollar becomes kind of the you know, de facto reserve currency internationally. And it maintains, you know, some oil dealings would be done in like the British pound, but that became increasingly less common. And really throughout the Cold War and post Cold War era, the vast majority of trade is done in dollars. So the, the first like lasting shift away from the petrodollar is Iran starting around 2008. And then there's, you see Venezuela start to do that a few years later. And then the biggest probably shift is Russia abandoning the dollar after its invasion of Ukraine. And in all of these cases, it's an effort to try to evade U.S. sanctions. So to do that in a different currency, foreign.

C (4:30)

I want to come back to how effective I guess that has been with you a little bit later. But you mentioned that the dominance of the petrodollar really started after World War II. Right. But then you also hear people talk about how it really came to fruition in the early 70s. Right. And just explain, explain that to me.

D (4:47)

Sure. So I would say, and yeah, often you see that framing this idea that this gets started in like 1974, when in truth it's really a reaffirmation of the system and a doubling down on the petrodollar rather than it restarting. But what happens in 1973, 1974 is pretty critical. So in 1973, you have the Arab Israeli war, where the United States provides a lot of aid to Israel during that war and that triggers a backlash where the Arab countries, including Saudi Arabia, launch an oil embargo against the United States.

E (5:27)

What we want is the complete withdrawal of the Israeli forces from the occupied Arab territories. And then you'll have the oil at the same level of 9-73. Is this demand absolute and rigid or is this just a negotiating position? Definitely. We won't give up any inch of Peacelands.

D (5:50)

This coincides with a very tight oil market and an increase, a rapid increase in oil prices. And so there's an unprecedented amount of money flowing into the oil exporting countries, especially Saudi Arabia. And at the same time, Saudi Arabia and the other Arab oil exporters are at one of their lowest points in their relationship with the United States. You know, traditionally Saudi Arabia was an ally of the United States, but there's this real, genuine fear that there might be a permanent rupture between the two countries over the Arab Israeli dispute.

E (6:28)

Doesn't this new massive increase in the price of oil mean a change in the world balance of power between the developing nations like you, the producers, and us, the developed, industrialized nations? Yes, it will. And what do you think arises from that? Well, a new type of relationship, you have to adjust yourself to the new circumstances. And I think you have to sit down and talk seriously with us about this new era.

D (6:57)

And so the United States and Saudi Arabia both have interests to try to fix this relationship. Again, the long standing partners. And now Saudi Arabia is much more important in terms of oil exports, in terms of its financial wealth than it had been before. So there's strong reasons for the United States to want to patch up this relationship.

E (7:17)

We cannot have a new trading system in which we will all benefit, where each tries to gain at the expense of others. But the world is only going to be one in which we have a trading pattern which will be for the benefit of all if we have mutual benefit on both sides. The same is true of what negotiations we may engage in in terms of monetary affairs. And I would suggest to you also

D (7:46)

in the field of energy, what the United States basically does is they say, we will offer you, Saudi Arabia, lots of new weapons, lots of training for these weapons.

B (8:00)

The package for Saudi Arabia is not just sidewinders. And we're trying to work out with the State Department and obviously with the Saudi Arabian government a package of defense items that is reasonable, that is within the policy constraints of the American government, and that does not in any way violate our, our interest in and our commitment to Israel. And we think we can.

D (8:25)

We'll offer new financial instruments, we'll give you access to, to preferential purchases of U.S. treasury securities. We will give you good investment opportunities in both the public and private sectors of the US Economy. And in exchange, the Saudi Arabia will help lead an end to the Arab oil embargo. They will sell oil in dollars, continue to sell oil and dollars, and indeed Saudi Arabia decides to only sell its oil and dollars going forward after 1974. And the Saudis will be very firmly invested within the US Economy. And in that way there's kind of a mutually assured sort of both benefit but destruction if either side tries to pull out, right? So if the Saudis are investing all of their money in dollar denominated assets in US Institutions, they're basically, you know, pinning their economic prosperity on the strength of the dollar. And they can't take actions that would be so angering to the United States that they would risk seeing, you know, their wealth get seized, you know, having their assets get frozen within the United States.

C (9:50)

And this was all born out of a series of secret meetings and negotiations in 1974, right, that started with a visit by Richard Nixon's Secretary of State Henry Kissinger to Saudi Arabia. I've heard it called, like the Grand Bargain, right?

D (10:05)

Yeah, absolutely right. And I mean, you know, the, the meetings were. Were publicly announced, but the, the content, you know, what they were discussing behind the scenes was to a degree, kept secret.

C (10:18)

Why was it kept secret?

D (10:20)

So certain aspects, I think was important, especially for Saudi Arabia to maintain an element of deniability. Because both within Saudi Arabia and the larger Arab world, the United States was broadly unpopular because of its support for Israel. And also many of these financial investments in, in kind of orthodox understandings of Islam, you know, things like earning interest, that these might run afoul of Islamic teaching. And so for both legitimacy in the Arab and Islamic worlds, you know, many aspects of these deals would not have been popular. So for the Saudi leadership, being able to have plausible deniability, even if it was kind of an open secret that they were investing and dealing so closely with the United States was important. And so one of the things that the Saudis really wanted to keep secret was that they were purchasing so much U.S. treasury securities.

C (11:24)

Yeah, I mean, just to be clear, like, Saudi Arabia was financing US Government spending, essentially, just to understand.

D (11:33)

Oh, absolutely, yeah. And especially in the mid-1970s, you know, for the period from, like, 1974 to 1976, just from the available data, it's clear that they were funding something on the order of 12% of US federal deficit spending. And it could be even more if they had kind of like camouflaged some of their other purchases. But, yeah, I mean, if you're buying U.S. treasury securities, you're basically buying U.S. debt. You're helping to fund the U.S. government, operate where it would have to find a lender elsewhere. Otherwise.

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C (13:26)

Who else was pulled into this deal?

D (13:28)

So to a lesser degree, you had treasury securities being purchased by like the Kuwaitis, by Iran. But Saudi Arabia was by and far the largest. Now the broader sort of structures of opportunity to invest in the US Economy, to purchase US Weapons. This was something that also Iran was a major player in Kuwait and later down the line, increasingly the United Arab Emirates, Qatar.

C (14:02)

And just how beneficial was it for those Gulf countries in the immediate aftermath as well as in the, the long term?

D (14:12)

So there were many distinct benefits to this system. They got weapons that they wanted, they had a place. And especially for like Saudi Arabia, Kuwait, you know, sparsely popular, sparsely populated Arab countries, in the short term, they did not have many other ways to use their money because they were just receiving so much money that they had to invest some. They couldn't spend it all immediately on investments or weapons, even though they spent quite a bit on those things. So this gave them a safe place, you know, to have a solid return on their investments. You know, it helps to develop their infrastructure, their financial sectors, their industry. And so there's, there's a lot of benefits that they accrue and they also get closer security ties with the United States. The downsides, however, is that again, much of this is not popular with the broader populations in many of these countries. And especially in the case of Iran, much of the opposition to the monarchy, to the Shah in Iran kind of rally around the issue of kind of perceived injustices or grievances. The notion that Iranian oil wealth is being used in service of US Empire and for US Corporations rather than for the Iranian people. And so one of the things that the Ayatollah Ruhollah Khomeini really rails against during the 1970s and 1980s, both during the revolution and afterwards, one of his big attacks against the Shah and the monarchy in the United States is this notion that this petrodollar system is actually being used to fleece the Iranian people. And it's just going to, you know, the corrupt elites and to Americans. And so it's kind of this very anti globalization narrative and very populist that, you know, the United States is basically robbing the Iranian people. And this resonates with a lot of Iranians who do not see the immediate benefits are only seeing inflation or only seeing US Contractors kind of, you know, swarming their cities. And so, yeah, this really resonates and I argue is one of the core reasons that motivates people during the Iranian Revolution to revolt and overthrow the Shah

C (16:54)

and the Iranians, they were the only ones to feel this way, obviously. Right. And I've seen it described as not just a bargain, but a heist. You've called it a lose lose for much of the rest of the world. And why is that?

D (17:08)

Yeah. So for much of the global south, if they are not oil rich, if they're not oil exporters, initially there was some hope that this could be both a model for them and that they would be receiving large amounts of aid from an investment from countries like Saudi Arabia. But they largely came to feel that that was not the case, that they were not receiving nearly enough to develop their economies or even to offset the higher prices of energy that they had to pay. And so, to take, you know, one example, you know, Egypt, in Egypt, many Egyptians quickly came to rail against Saudi Arabia and other countries, kind of accusing them of getting rich while they were the ones who were kind of on the front lines, you know, challenging Israel or fighting. And so they kind of pointed to the 1973 war and argued that the Egyptians spilled blood and, and the Saudis earned money. They got profits off of it.

C (18:13)

So, you know, we've talked about how this was so beneficial for the United States, obviously something that they want to preserve. Right. And so how much of US Foreign policy would you say has been underpinned by the desire to make sure oil continues to be traded in US Dollars?

D (18:35)

I would say it's definitely been a priority across many US Presidential administrations to encourage and pressure countries to sell oil and US Dollars. So in our most recent sort of case with the war with Iran, I don't think that petrodollars is the sole or driving reason why the United States went to war with Iran. But I do think it's one of the key sort of concerns or consideration is the United States doesn't want to see Iran generating lots of, you know, petro yuan revenues. It would certainly like to see instead Iran go back to the dollar. And it certainly wants to keep other countries selling oil in dollars rather than other currencies.

C (19:30)

To this day, we see a massive amount of American weapons sold to Gulf countries, especially Saudi Arabia and the United Arab Emirates, which have been tied up in proxy conflicts with each other in Yemen, Libya, Emirati purchased weapons have been found in Sudan, where there's been a brutal civil war. And how do you see these as the ripple effects of the petrodollar scheme?

D (19:54)

Yeah, I think that's a very important part, is that so many weapons have been sold to the Middle east, and many of these are coming from The United States, but many of these are also coming from other countries. Previously the Soviet Union, now Russia, you know, major European countries like Great Britain, France, also China and. And many others. And, yeah, the Middle east has become just, you know, for many decades now, just this pit of weapons that then get, you know, inevitably put to use or transferred to conflicts all over the world. And that this has been very destabilizing and very destructive, and that this sort of fuels the longevity and destructiveness of these conflicts. And it's a very hard thing to curb because there's just such a strong financial incentive for the sellers of arms. And all the countries in the region are, you know, very eager to have the most advanced weaponry to either try to challenge their neighbors or defend themselves against.

C (21:26)

Do you ever wonder what the world would look like now if the petrodollar didn't come to be?

D (21:33)

Yeah, no. I mean, that's. That's an interesting question. I think it. It would, you know, probably be a very different one. It's, it's. It's almost hard to imagine what the last 50 years would be like if the petrodollar had not come to be. I think kind of looking forward, there's this kind of question of will the petrodollar stay in place and will that lead to changes and especially kind of this attention again to China and the possibility of the petro yuan. You know, will that create something that's just kind of similar? I don't know that it's an interesting question.

C (22:19)

Well, let's get back to that. The challenge to the petrodollar. Let's pick up where we left it at the beginning of the conversation. Since restricting the Strait of Hormuz, Iran has reportedly been collecting tolls in yuan, the Chinese currency, from some ships looking to pass through. And I just like. How much of a disruption does the yuan present to the petrodollar regime at the moment?

D (22:44)

Yeah, I mean, I would say between Iran and Russia, which in some ways is actually the bigger oil exporter. Right. So that's an even larger amount of oil that's being sold in yuan than even Iran. Those two defections from the petrodollar system is pretty remarkable. I mean, even during the Cold War, the Soviet Union largely sold its oil for dollars. And so in the last couple years, between Iran increasingly selling its oil for yuan, and then Russia after its invasion of Ukraine, those are some major, long lasting defections from the petrodollar system. And I think this, you know, combined with the fact that most of the Middle east already primarily trades both imports and exports with China. China is their number one trade partner. That this kind of speaks to the rise of the yuan and Chinese influence more generally in the Middle east, in Asia and in the global economy. So I don't think, you know, the petrodollar is just going to immediately disappear, but I think it is facing arguably its greatest sustained challenge, you know, since the end of World War II.

C (24:15)

I want to talk to you about or ask you about some news from this week. The UAE announced on Tuesday that they will be leaving opec. And opec, Reuters reported this as a win for US President Donald Trump as he's accused the organization of ripping off the world.

B (24:30)

OPEC has a dozen members in the Middle east and Africa and includes Venezuela. They produce roughly one third of the world's oil, but the group holds nearly 80% of known reserves. Saudi Arabia and the UAE were the leading members of OPEC. And OPEC, which includes other oil producers like Russia, the Emirates.

C (24:51)

Worth noting that last week the UAE approached the US for a currency swap line as a way to help ease the financial strain from the Iran war. We don't know yet if there's a direct connection, but now, as they break away from the oil cartel, how does this fit into the conversation that we are having right now about the petrodollar and I guess the somewhat decline of US Influence?

D (25:15)

Yeah, I would say that the decisions that the United Arab Emirates has made recently and the signals that they've been giving actually kind of speak to the durability of, of the US Petrodollar system in that, you know, faced with a crisis that is largely created by the United States in the region, the Emiratis appear to be doubling down again on the dollar. They're looking for an increase in dollars both through, you know, these credit lines and, and in leaving opec, the only reason really to do that is if they want to try to sell more oil than their partners in OPEC would have allowed, and they're planning, it appears, to continue to sell those in dollars. So, you know, we've seen this repeatedly. You know, a crisis occurs in the region and the Arab monarchies double down, try to re institute or further integrate themselves with the United States because they see the United States as their key economic and military backer. And so, yeah, I think this is evidence that at least for the Emirati leadership, they in the near term, see the United States as the key player and they see the ties to the dollar as their plan going forward.

C (26:52)

I mean, also, just listening to you I certainly get the vibe that you don't see the petrodollar going anywhere anytime soon.

D (27:02)

No, I don't think that the petrodollar is just going to disappear overnight. If they were to decide to shift away from the petrodollar, it would be a very gradual sort of shift for them that, you know, conceivably, okay, maybe they'll start doing some oil sales in yuan or in Euros, but they're not going to just abandon it overnight. It would just be way too costly for them. And then this sort of sense of military security agreements or protections from the United States. I think that they want to keep financial ties with the United States to try to encourage the US Government to continue to listen to their security concerns and needs and that, you know, right now, the United States remains the predominant military force in the region, and they're not going to want to lose their influence or access to that.

C (28:06)

Okay, David, this was great. Really interesting. Thank you so much.

D (28:11)

Thank you.

C (28:20)

All right, that's all for today. I'm Jamie Poisson. Thanks so much for listening. Talk to you tomorrow.

B (28:35)

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