Petrodollar Agreement 1973 Wikipedia History

In 1973, the world witnessed a pivotal shift in the global economy with the Petrodollar Agreement. The agreement was a result of the 1973 oil embargo, which was imposed by the Organization of Arab Petroleum Exporting Countries (OAPEC) in response to the United States' support for Israel in the Yom Kippur War.

The US dollar was chosen as the reserve currency for oil transactions, solidifying its position as the global reserve currency. This decision was influenced by the US's strong military presence and economic influence.

The Petrodollar Agreement marked a significant departure from the previous system, where oil was traded for gold. The agreement ensured that all oil transactions would be conducted in US dollars, creating a new economic order.

Suggestion: When Was the Petrodollar Made

The 1973-1974 Petrodollar Agreement was a significant event that cemented the United States' position as a global economic power.

This agreement gave the US a new "privilège exorbitant", or a significant economic advantage, as mentioned by Aymeric Chauprade. This advantage was due to the fact that the US dollar became the standard currency for oil transactions, known as the petrodollar system.

The petrodollar system allowed countries that export oil to sell their oil only for US dollars, which they would then use to purchase US goods and services. This created a massive demand for the US dollar and helped to maintain the US currency's value.

The petrodollar system was a major factor in the US' economic power and stability, and its potential decline was a significant concern for the US government.

The Organization of Petroleum Exporting Countries (OPEC) was founded in 1960 by five nations: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. They met in Baghdad to discuss ways to increase the price of crude oil produced by their countries.

The Baghdad Conference was held from September 10-14, 1960, and it led to the formation of OPEC to secure the best price available from the major oil corporations. Saudi Arabia, along with Arab and non-Arab producers, formed OPEC to counterbalance the power of the major oil corporations.

In 1961, Qatar joined OPEC, followed by Indonesia in 1962, Libya in 1962, and the United Arab Emirates in 1967. By the early 1970s, OPEC's membership accounted for more than half of worldwide oil production.

OPEC's early years were marked by coordination problems among its members, but in 1971, an accord was signed between major oil companies and OPEC members doing business in the Mediterranean Sea region, known as the Tripoli Agreement. This agreement raised oil prices and increased producing countries' profit shares.

The 50/50 profit agreements with oil companies were still in place until 1970 when Libya negotiated a 58/42 agreement with the oil company Occidental, prompting other OPEC members to request better agreements.

OPEC is often cited as a textbook example of an international cartel that cooperates to reduce market competition. Economists point to OPEC's agreements about oil production and price levels as evidence of anti-competitive behavior.

These agreements between national governments are a key characteristic of international cartels, which can cover products like coffee, sugar, and oil. International commodity agreements like OPEC's are often seen as examples of cartels that cooperate to reduce market competition.

However, OPEC members prefer to describe their organisation as a force for market stabilisation rather than a powerful anti-competitive cartel. This perspective is supported by the fact that OPEC was founded as a counterweight against the previous "Seven Sisters" cartel of multinational oil companies.

Despite this, OPEC has been accused of widespread cheating, with each member nation individually discounting its price and exceeding its production quota. This behavior erodes OPEC's ability to influence global oil prices through collective action.

The US Energy Information Administration's glossary explains OPEC as an intergovernmental organization whose objective is to coordinate and unify the petroleum policies of member countries.

In October 2022, OPEC+ led by Saudi Arabia announced a large cut to its oil output target in order to aid Russia.

This move was met with resistance from the US government, with President Joe Biden vowing "consequences" and saying the US government would "re-evaluate" the longstanding U.S. relationship with Saudi Arabia.

US Senator Robert Menendez called for a freeze on cooperation with and arms sales to Saudi Arabia, accusing the kingdom of helping Russia underwrite its war with Ukraine.

Saudi Arabia's foreign ministry pushed back on this pressure, stating that the OPEC+ decision was "purely economic" and taken unanimously by all members of the conglomerate.

However, the White House accused Saudi Arabia of pressuring other OPEC nations into agreeing with the production cut, with some feeling coerced.

The US National Security Council spokesman John Kirby said the Saudi government knew the decision would "increase Russian revenues and blunt the effectiveness of sanctions" against Moscow.

Here are some key points about the oil production cut:

The Privilege Du Dollar refers to the significant power and influence that the United States gains from the petrodollar system. This system allows countries to settle their oil transactions in US dollars, increasing demand for the currency and giving the US a major advantage in the global economy.

According to Aymeric Chauprade, the petrodollar system provides the US with a new form of privilege, similar to the "exorbitant privilege" of the dollar. This means that the US has a significant advantage in the global economy, which can be both beneficial and worrying for other countries.

The possibility of countries switching from the petrodollar system to a system using a different currency, such as the euro or yen, is a major concern for the US. This could limit the US's influence and power in the global economy.

The US may view the desire to leave the petrodollar system as a significant grievance, which could lead to diplomatic tensions and even military interventions.

The financialization of the economy is a complex topic, but one of the key factors is the emergence of the petrodollar in 1973. This led to a massive influx of financial flows across borders, which some economists, like Michel Aglietta, argue contributed to the financialization of the global economy in the 1980s.

The dollarization of oil exports has significant consequences. For instance, the constant dependence of the global economy on oil leads to a crucial economic factor: the exchange rate of each country against the US dollar.

This dependence affects the prices of raw materials in a country. The dollarization of oil exports also creates enormous dollar-denominated liabilities for the US Federal Reserve, as oil-exporting countries receive large dollar inflows from oil sales.

These countries' central banks end up accumulating large dollar reserves. The dollarization of oil exports also means that the US Federal Reserve receives foreign exchange reserves equivalent to the oil prices paid by oil-importing countries.

The dollarization of oil exports has three key implications:

The petrodollar agreement had a profound impact on the global economy, particularly in the years following the 1973 oil crisis. By 1974, the foreign debts of 100 oil-importing developing countries increased by 150% between 1973 and 1977.

Consider reading: 1973 Ike Dollar Value

As a result of the crisis, the International Monetary Fund (IMF) implemented a new lending program called the Oil Facility, which provided financial assistance to governments struggling with trade imbalances. This program was funded by oil-exporting states and other lenders.

Between 1974 and 1981, the total current account surplus for all members of OPEC reached a staggering US$450 billion, with 90% of this surplus accumulated by Arab countries of the Persian Gulf and Libya.

In the late 1970s, the oil crisis and subsequent oil glut had a profound impact on the global energy landscape.

The price of oil reached new peaks approaching US$40/bbl in 1979-1980, prompting industrial nations to reduce their dependence on OPEC oil.

Oil nationalizations and regional instability, particularly the Iranian Revolution and Iran-Iraq War, disrupted oil supplies and further exacerbated the crisis.

Electric utilities worldwide switched from oil to coal, natural gas, or nuclear power, while national governments initiated research programs to develop alternatives to oil.

Daily worldwide demand for oil dropped by 5 million barrels by 1986, and non-OPEC production rose by an even-larger amount, causing OPEC's market share to sink from 50 percent in 1979 to less than 30 percent in 1985.

The price of oil plummeted more than half in 1986 alone, illustrating the volatile multi-year timeframes of typical market cycles for natural resources.

Saudi Arabia pressed OPEC for audited national production quotas in 1982 to combat falling revenue from oil sales and boost prices.

However, other OPEC nations failed to comply, leading Saudi Arabia to slash its own production and later flood the market with cheap oil, causing prices to fall below US$10/bbl.

The OPEC Fund for International Development was established in January 1976, building on the concept of the OPEC Special Fund conceived in Algiers, Algeria, in March 1975.

The Fund's resources were additional to those already made available by OPEC states through bilateral and multilateral channels, and it aimed to strengthen cooperation between OPEC countries and other developing countries.

By 1980, the OPEC Fund for International Development had become an official international development agency and was granted Permanent Observer status at the United Nations.

In 2020, the institution ceased using the abbreviation OFID, marking a change in its branding but not its mission to support socio-economic growth in poorer nations.

The 2005-2014 petrodollar surge was a significant period in the evolution of the petrodollar system. During this time, financial decision-makers were able to benefit from the lessons of the previous cycle.

Developing economies generally stayed better balanced than they did in the 1970s. This was likely due to the fact that the world economy was less oil-intensive, allowing them to avoid the economic shocks that came with rapid oil price increases.

Oil exporters opted to make most of their investments directly into a diverse array of global markets. This approach helped to reduce their dependence on intermediary channels such as international banks and the IMF.

The recycling process was also less dependent on these channels, allowing oil exporters to accumulate significant financial reserves. OPEC revenues approximated an unprecedented $1 trillion per year in 2008 and 2011-2014.

Sovereign wealth funds worldwide amassed $7 trillion by 2014-2015. This influx of capital had a significant impact on the global economy.

Some oil exporters, such as Iran, Iraq, Libya, Nigeria, and Venezuela, were unable to reap the full benefits of the petrodollar surge. This was due to multi-year political obstacles associated with the "resource curse".

In July 2021, the United Arab Emirates rejected a proposed eight-month extension to oil output curbs by Saudi Arabia.

The UAE asked for its maximum oil output to be raised to 3.8 million barrels a day, compared to its previous 3.2 million barrels.

A compromise deal allowed the UAE to increase its maximum oil output to 3.65 million barrels a day.

Under the terms of the agreement, Russia would increase its production from 11 million barrels to 11.5 million by May 2022.

All members would increase output by 400,000 barrels per day each month starting in August to offset previous cuts.

UAE Energy Minister Suhail Al-Mazrouei thanked Saudi Arabia and Russia for facilitating dialogue leading to an agreement.

The compromise underscored OPEC+ unity and showed that even in disagreement, cooperation is possible.

This agreement strengthened OPEC+'s ties and ensured its continuity, according to Saudi Energy Minister Prince Abdulaziz bin Salman.

Related reading: Saudi Arabia Not Renewing Petrodollar Agreement

The concept of Petroeuro is an interesting one, but it's still largely theoretical. It refers to a situation where oil trade is conducted in euros, similar to the Petrodollar system.

Deriving from the Petrodollar concept, Petroeuro aims to reduce dependence on the US dollar and diminish its value. This idea has been explored by some countries in the past.

Syria, for instance, made a switch to the euro to avoid dependence on the US dollar. The Irak also attempted to switch to the euro during Saddam Hussein's rule, but later reversed the decision under US leadership.

The Iran planned to open an oil exchange in March 2006, with the goal of trading oil exclusively in euros. However, the prices were ultimately quoted in the Iranian rial.