In a remote corner of New Hampshire in July of 1944, a new world order was born. A summit of delegates representing 44 Allied nations gathered in the quaint village of Bretton Woods to craft a plan for financial resilience in the aftermath of World War II. Immobilized and war-torn, a tattered consortium of European nations passed the diplomatic baton of global stability to the United States — a young country far more sprightly and nimble than its battered European counterparts.
The international symposium — famously dubbed the Bretton Woods Conference — resulted in a few notable achievements. The delegates created the International Monetary Fund and the International Bank for Reconstruction and Development, two financial institutions conceived to secure global economic stability and promote sustainable growth. But perhaps the most salient result of the conference was the creation of a fixed exchange rate linking the value of the U.S. dollar to the value of gold. The dollar was convertible to gold at a set rate of 35 dollars per ounce.
The establishment of this fixed standard made the dollar the most powerful and versatile currency on the planet. Economists theorized that competitive currency devaluations — “currency wars” — up until the 1930s had contributed to the Great Depression. Pegging the U.S. dollar to gold would now ensure global economic integrity.
Thus the lasting dollar hegemony of the United States was forged. All international balances were settled in dollars, and most countries converted their reserves into U.S. currency. The creation of the “Bretton Woods system” underpinned the United States’ emerging role as a linchpin of the world economy.
Around the same time, U.S. foreign policy in the Middle East began to change. On his journey home from the famed Yalta conference in 1945, President Franklin D. Roosevelt met with King Abdulaziz ibn Abdul Rahman Al Saud (often abridged to Ibn Saud), the founder of modern Saudi Arabia. The meeting began a valuable (albeit rocky) alliance between the two nations extending to the present.
Roosevelt saw Saudi Arabia as a desirable asset. The Middle Eastern nation offered both a wellspring of untapped oil and a central geographic location between Europe and Asia as the wheels of the Cold War began to spin. The president formed a personal bond with Ibn Saud that set a precedent for the amicable tone defining future administrations.
The bilateral partnership between the two countries remained intact for decades. In exchange for access to Saudi repositories of oil, the United States offered the House of Saud military aid and protection from outside threats. That unbridled access to foreign oil sparked decades of petroleum dependence that would eventually open the door to the modern climate catastrophe decades later.
During the early 1970s, President Richard Nixon witnessed the U.S. stumble as the costs of the unpopular Vietnam War skyrocketed. In a startling political move known as the “Nixon shock,” the president abruptly cut ties with the gold standard and effectively liquidated the entire Bretton Woods system. The dollar was reopened to a floating exchange rate on August 15, 1971.
The decoupling of the dollar from gold was a success that rescued the U.S. from rapid inflation and unemployment. But it didn’t take long for gold to be insidiously replaced by an emerging alternative: petroleum.
In the wake of the breakdown of the Bretton Woods system, the Organization of the Petroleum Exporting Countries (OPEC) passed a series of resolutions reiterating the need to preserve the real value of oil profits. As the U.S. dollar dipped in value, Middle Eastern members of OPEC raised the price of crude oil by over 70 percent to protect petroleum assets.
In 1973, amidst conflict between Israel and Egypt in the Yom Kippur War, the United States came to the aid of its regional ally, Israel. An antagonized House of Saud reacted furiously, ordering an oil embargo against the United States that lasted several months. While the embargo was eventually lifted, the dispute shed insight into the concerning nature of America’s dependence on an authoritarian Middle Eastern monarchy for a sizable portion of its energy supply.
Through a series of bilateral negotiations with Saudi Arabia, the United States cajoled OPEC into standardizing the sale of oil in U.S. dollars. The key pact was signed on June 8, 1974 by the U.S. Secretary of State Henry Kissinger and Saudi Crown Prince Fahd bin Salman Al Saud. Heralding an era of closer economic partnership between the two nations, the accord delineated Saudi investment in the U.S. and outlined American support for Saudi military initiatives. Declassified government documents reveal a more specific addendum to the agreement a few months later that allowed Saudi authorities to purchase U.S. Treasury bonds outside regular auctions and at preferential rates.
Quickly, the dollar began to dominate foreign oil transactions. In 1974, 20 percent of global oil was transacted in the British pound. But by 1976, that number had plunged to 6 percent. The neologism of the “petrodollar” had taken hold. The United States once again had the upper hand in the Middle East.
The petrodollar system bolstered the economic stability of the United States and enabled the country to guarantee security of a valuable commodity by controlling the currency underlying its trade. Since the emergence of the petrodollar system in the 70s, the fossil fuel industry has only tightened its grip on American politics and trade. Today, nearly 90 percent of all international currency transactions are conducted in dollars. But the petrodollar is a double-edged sword: It entangles the United States economy with petroleum at a fundamental level.
If the petrodollar system were dismantled tomorrow, the ramifications would be cataclysmic. Hyperinflation would ensue, oil and gas prices would skyrocket, and businesses would crumble under heightened interest rates. The entirety of the United States’ economy rests squarely in the hands of petrodollar hegemony — for now.
Saudi oil politics, tenuous alliances in the Middle East, and the erosion of the Bretton Woods system firmly ensnared the United States in the trap of the petrodollar. Can the U.S. escape before the climate crisis worsens?
In the past decade, the U.S. has pioneered a movement toward oil independence. The goal is to reduce reliance on energy imports from Saudi Arabia and other unpredictable oil-exporting countries. In 2011, the U.S. became a net exporter of refined petroleum products. In 2019, the country became a net exporter of crude oil. The “shale revolution” — the invention of hydraulic fracturing and horizontal drilling technologies — is primarily responsible for the uptick in domestic oil production.
Meeting the increased demand for domestic oil without depending so rigidly on the foreign petrodollar requires federal sanctioning of drilling on U.S. lands. And this central paradigm puts President Joe Biden in an especially challenging position. How can pro-climate politics be reconciled with expanding domestic oil demand and waning foreign petroleum trade?
In May, the Biden administration defended an oil drilling initiative in Alaska’s National Petroleum Reserve — much to the chagrin of environmental advocates. And although Biden immediately signed an executive order to dismantle the Keystone XL oil pipeline, other major pipelines (namely the Dakota Access Pipeline and the Line 3 pipeline expansion) have gone untouched thus far by the ostensibly climate-conscious presidency. Plus, Biden refuses to uphold a campaign promise to permanently ban new oil and gas leases on public lands.
Even as the new president turns somewhat of a blind eye to big domestic oil, some dependence on foreign exports from the Middle East persists. In fairness, the Biden administration has adhered to some campaign promises to limit domestic oil protection. New oil and gas leases were temporarily halted, leases were suspended in Alaska’s National Wildlife Refuge, and endangered-species protections on drilling lands were expanded. These actions provide OPEC more leverage to engineer foreign oil supply.
As the world emerges from the coronavirus pandemic and oil demand surges, oil-exporting states will latch onto the opportunity to churn out more petrodollar capital again. Consequently, gas prices in the United States surged to a seven-year high this July and disgruntled Americans have been quick to grumble about the costs of fuel.
Unsustainable gas prices could undermine Biden’s core emphasis on middle-class prosperity and economic success. To prevent the alienation of his base of Democratic supporters, opening the tap on foreign oil could be the only temporary solution. Does it make more sense to expand domestic oil production and fulfill at-home energy promises, or resuscitate foreign entanglements to secure oil reserves?
It’s a clear catch-22. Neither choice is great for the climate.
A potential avenue to erode the petrodollar system without engendering economic collapse lies in the proliferation of green energy and renewable sources. Power generation from non-fossil fuel sources increased to 21 percent of all energy generation in 2021, with most of the developments stemming from solar and wind expansions in the electric power sector.
Could the continued growth of renewable technologies end the hegemony of the petrodollar? Or will the transition stifle the U.S. economy and expose the nation to a resurgence of energy security risks?
“The more dispersed – and more local – nature of renewable energy production will mean less reliance on a single currency,” wrote Chris Iggo, the Chief Investment Officer at the global asset manager AXA Investment in a statement. “The ‘petrodollar’ is a thing of the past and the need for certain currencies to be pegged against the dollar will disappear.”
The global shift toward clean energy is projected to cause oil demand to peak within the next decade and then begin to fall off sharply. The International Energy Agency forecasts that world oil demand will fall by more than a quarter in less than 20 years. Green energy is already starting to threaten the system.
Given the fragile balance of power in the Senate, bipartisan support will be necessary to facilitate continued green energy growth. And though the politics will be difficult, even some staunch pro-oil Republicans in Congress are growing tired of tangling with Saudi Arabian geopolitics.
“That’s not how friends treat friends,” said Senator Kevin Cramer (R-ND) last April, referring to Saudi Arabia’s role in exacerbating energy turmoil even as the U.S. continues to offer military aid. “Saudi Arabia’s next steps will determine whether our strategic partnership is salvageable,” he added.
There are some bipartisan renewable energy initiatives in the works. The Senate Committee on Energy and Natural Resources (ENR) approved an infrastructure package called the Energy Infrastructure Act on July 14 that aims to invest partially in clean energy, water, and ecosystem restoration. The bill passed by a 13-7 vote, with Senator Steve Daines (R-MT), Lisa Murkowski (R-AK) and Bill Cassidy (R-LA) voting with Democratic senators in support of the bill.
On June 10, the House also passed a $715 billion bill known as the INVEST in America Act (H.R. 3684), which provisions more than $40 billion for vehicle electrification initiatives including electric vehicles and charging infrastructure. The beginnings of a bipartisan framework for domestic renewable energy are on the horizon, especially if tensions with Saudi Arabian continue to swell.
But a transformation to an energy economy rooted in renewables is only one of myriad possible alternatives to the petrodollar system. Cryptocurrency advocates argue that the Bitcoin movement will upend the petrodollar economy and usher in a new era defined by the prevalence of digital currency. The rising prominence of China, Russia, and the eurozone also give credence to the idea that a “petroyuan,” “petroruble,” or even “petroeuro” may undermine dollar hegemony before a renewable energy market can truly take shape. The future remains uncertain. But a push toward renewables would begin to destabilize the fraught petrocurrency system and minimize the necessity of a thorny alliance between the U.S. and Saudi Arabia.
The world of 1944 was a vastly different place than the diplomatic landscape of 2021. After emerging from a deleterious economic crisis and a war that catapulted the country from global competitor to preeminent superpower, the U.S. solidified itself as the international mediator of foreign trade. The first instrument of control in the modern world was gold, the second was petroleum.
There is hope for a geopolitical landscape that transcends the dominance of the petrodollar. While a new green energy standard may not directly tie renewable energy to the strength of the U.S. dollar in such a clear-cut way, the growth of clean power will certainly jeopardize the hegemony of a financial system centered on foreign oil reserves. But that system is contingent on a number of factors — complex and ever-shifting relationships with the Middle East, technological breakthroughs in renewable energy, and a bipartisan consensus strong enough to funnel through a split Congress. The perpetual petrodollar machine may eventually wind down, but not without strategic and dedicated effort.