The U.S. dollar tale: Oil, Military might & the Debt spiral
As we learnt in the previous articles the closing of gold window by president Nixon in 1973 left the whole world in shock, and it was only the tip of the iceberg following numerous year of uncontrolled spending policies lead by the U.S. both internally and on the international chessboard.
Backing the U.S. dollar with OIL, America witnessed an incredible demand for his currency, cementing his position as the global reserve currency and bringing great benefits to the United States.
A richness and prosperity that comes under severe scrutiny, as we see the aftermath of such systemin relation to other nations wealth.
In this last chapter of the series, we will look at history in depth and how it has proven that American intervention in foreign countries policies, both diplomatically and militarily, have sometimes proven to be the fuel for destabilization and unquantifiable damages for those countries, most notably in the Middle East — a powder keg brewing with social and political unrest ever since the 2nd half of 1900s.
1973: the explosion of tensions in the Persian Gulf
1973 marks an important date in Middle East’ history and the U.S. foreign policies toward the region: the breakout of a war, known to Israelis as the Yom Kippur War, and to Arabs as the October War — an all-out conflict which tension were seen raising already 6 months prior that year.
In 1967, Israel launched attacks on Egypt, Jordan and Syria, unleashing the June War, that resulted in the Israeli occupation of what remained of historic Palestine, as well as the Egyptian Sinai desert, and the Golan Heights from Syria.
In a matter of six days, the Israeli army delivered a huge setback to the forces of three Arab countries and occupied territory that was three and a half times its size.
All of this happening while in the background, the politics of the Cold War between the Soviets — who supplied the Arab countries with weapons — and the US — which backed Israel — were influencing the war, bringing the two blocs to the brink of military conflict for the first time since the 1962 Cuban Missile Crisis.
Fast-forward six years, Egypt and Syria decided to launch a two-front coordinated attack to regain the territory they lost in 1967: a common front created following a secret agreement, signed in January 1973 to unify the two Arab countries armies under one command.
To catch Israel off guard, the Egyptians and Syrians decided to launch an attack on the Yom Kippur religious holiday, the only day in the year in which there are no radio or television broadcasts, shops close and transportation shuts down as part of religious observations.
The holiday fell on Saturday, October 6, 1973, and just after 2pm, the Egyptian and Syrian armies, with advanced Soviet weapons, launched a two-front offensive on Israel:
- Egyptian military crossing the Suez Canal in the south, claiming victory with the capture of the Bar Lev Line, a series of fortifications on the east bank of the canal;
- while the Syrian in northern front line, crossing the “Purple Line” (the 1967 ceasefire line) and managing to capture a key strategic point atop Mount Hermon.
Despite casualties and losses being so heavy, Israel mobilized several armored divisions, pushing Syrian into a retreat and advancing to within 35 km from Damascus, and on October 16 — right 10 days after the start of the war — managed to penetrate Egyptian and Syrian defense lines, arriving at the very proximity of the outskirts of Cairo , the Egyptian capital.
Despite Israeli’s military advance, the coalition of Arab armies mounted a tenacious resistance, causing the fight to come to a stalemate.
Weaponizing Oil
The cornered Arabs decided to use a different tactic — OIL.
The oil-producing countries, under the Organization of Petroleum Exporting Countries (OPEC) decided to reduce their oil production by 5% — pledging to maintain the reduction each month thereafter until the Israeli forces were fully withdrawn from all Arab territories occupied during the June 1967 War and to restore the legitimate right of the Palestinian people.
This move could be seen as the “nuclear option”, de facto triggering a major Oil crisis — which sent shockwaves around the world and led the prices of the “black gold” to skyrocket.
The United States were not spared from coping with the consequences of such move: an embargo was enforced upon them, suspending oil supply to the nation.
The reduction in oil production and supply led to major price hikes around the world, causing the US to reassess its support for the war.
The “First Oil Shock” and Protecting Vital Supplies
After the ensuing ‘oil shock’ of 1973, President Richard Nixon warned U.S. citizens “that American military intervention to protect vital oil supplies” in the region was a strong possibility. This speech marked the first official and formal commitment to deploy U.S. troops to the Middle East for the explicit reason of protecting America’s oil interests.
Interest that were put to a stress test, following the unfolding of social unrest in the U.S. after the oil embargo in 1973 and saw the prices of oil raising nearly 300%, from US$3 per barrel ($19/m3) to nearly $12 per barrel ($75/m3) globally, by March 1974.
In this climate of profound volatility, on March 1, 1980, the new administration — led by president Jimmy Crater — announced the creation of the Rapid Deployment Joint Task Force (RDJTF) — aimed to maintain regional stability in the Gulf and protect America’s interest. The task force was then morphed into a separate force known as the United States Central Command (USCENTCOM), responsible for the Middle East and Central Asian regions — in 1983.
This preventive move saw the following, feverishly built of U.S. military bases all over Western Asia — in a process which can be seen as backing up the precious black gold with America’s military might.
The 9/11: War Drums echoing in the Middle East
On September 11, 2001, America relations with the Middle East would be altered forever.
Following the tragic, dreadful event which saw the loss of life of thousands of people in NYC, Washington D.C., Shanksville, Pennsylvania & an American Airline Flight 77 crashing into the Pentagon — Secretary of Defense Donald Rumsfeld began ordering his staff to develop plans for a strike in Iraq and its leader Saddam Hussein — suspected to have orchestrated the attack using the terrorist group Al Qaeda (led by Osama Bin Laden), despite no absolute evidence linking the country, Saddam or Al Qaeda — in response to the attack.
On September 12, 2001, yet with zero evidence against Iraq, Defense Secretary Rumsfeld proposed to President George W. Bush that Iraq should be “a principal target of the first round in the war against terrorism.” Bush, along with his other advisors, including Deputy Secretary of Defense Paul Wolfowitz, strongly supported the idea that Iraq should be included in their attack plans.
Following a meeting between president Bush and U.K. Prime Minister Tony Blair, plans for an immediate attack to Iraq were drawn — leading to October 7, 2001 with Operation “Enduring Freedom” and the deployment of U.S. troops in the mountainous regions of Afghanistan .
“Iraq remains a destabilizing influence to… the flow of oil to international markets from the Middle East. Saddam Hussein has also demonstrated a willingness to threaten to use the oil weapon and to use his own export program to manipulate oil markets. This would display his personal power, enhance his image as a pan-Arab leader… and pressure others for a lifting of economic sanctions against his regime. The United States should conduct an immediate policy review toward Iraq including military, energy, economic and political/diplomatic assessments. The United States should then develop an integrated strategy with key allies in Europe and Asia, and with key countries in the Middle East, to restate goals with respect to Iraqi policy and to restore a cohesive coalition of key allies.”
That was the beginning of a large scale war which saw the U.S. be an active player in the region up until official withdrawal of troops in 2020–2021.
Saddam and the threat of Petro-euro
One move that can be seen as the trigger for America response in Iraq was the alleged discussion emerged from a meeting, on September 2000, where Saddam Hussein instructed his government cabinet on a move to transact oil exports in euros; a move soon officialized when he decided in October 2000 to move away from using US dollars — using the on-ramp created by president Clinton’s administration in 1995 such the UN ‘oil-for-food’ program.
Saddam also converted Iraq’s USD 10 billion reserve fund from US dollars to Euros; an advance which, despite not being of very great economic significance in overall terms, it represented for the United States a direct challenge to the use of the dollar as a currency for transactions.
By 2002, Saddam had fully converted to a Petro-euro — in essence, dumping the dollar but the real tipping point though, was Saddam’s decision to increment the number of oil contracts issued to non-US oil companies — most notably:
- the French oil giant TOTAL which ‘won’ the rights to develop the $3.4 billion Bin Umar project and the vast Majnoon field in southern Iraq;
- the Chinese CNPC [China National Petroleum Corporation], CNOOC [China National Offshore Oil Corporation], and SINOPEC with oil contract issued by Baghdad for the largest oil field in the country, the 17 billion barrel super giant Rumaila field;
- the Russian ROSFNET, LUKOIL and GAZPROM, with concessions in a 8000 km2 located in the Najaf and Muthanna provinces;
- and also other major oil giants such as ROYAL DUCTH SHELL (Netherlands), the Italian ENI Spa, KOREA GAS CORP and the Malaysian PETRONAS.
This should give a broader understanding of the magnitude of interests in the region.
Russia makes a compelling case though: while oil may be seen as the principal drive for Moscow interests in Iraq, another important factor to consider is the financial aspect — without loosing sight on the historical period in which the facts unfolded: the Cold War era.
Baghdad owed Moscow $7-$8 billion for Soviet-era arms sales during the Iran-Iraq War and even more importantly to the narrative, Russia had even a superior amount of billions wrapped up in oil future contracts.
as Samer Shehata — a Middle East expert at the Center for Contemporary Arab Studies in Washington — put it during an interview regarding the situation:
“Russia, China, France have the highest stakes in the Iraqi oil industry. Once Saddam is out, everything becomes null and void, and there is no legal authority to enforce those claims.”
Together with France and China, Russia stood to gain billions in future oil contracts when, and if, sanctions were lifted against Iraq.
The Iraqi Constitution, agreed in 2005, suggests oil is owned by all Iraqis but does not specify how its wealth would be shared. In an attempt to decide how money will be distributed, a National Hydrocarbon Law was drawn up back in 2007. However various drafts continued (and still continue) to fail to resolve disputes among oil and non-oil producing regions and the law still awaiting parliamentary approval nine years later.
In the middle of all of this the oil industry continued to function in a complex framework of varying interpretations of the constitution and laws dating back to before 2003. Production had increased as international companies have entered to exploit the established oil fields around Basra and Kirkuk through a series of licensing agreements.
We can clearly see a pattern here — a portrayal which clearly clashed with
the narrative supported by Washington, as those statements clearly reflect:
“The idea that the United States covets Iraqi oil fields is a wrong impression. I have a deep desire for peace. That’s what I have a desire for. And freedom for the Iraqi people. See, I don’t like a system where people are repressed through torture and murder in order to keep a dictator in place. It troubles me deeply. And so the Iraqi people must hear this loud and clear, that this country never has any intention to conquer anybody.”
(U.S. President George W. Bush)
Despite the adamant denial by the Washington elites that their intentions were anything but pure, it did not take long for dissenters to emerge. Anti-war demonstrations filled the public squares of nearly every American town.
But what really stroke out later, was the blunt admission of high hierarchy individuals, such as General John Abizaid, who was formerly the Commander of the USCENTCOM during the Iraq war, stated during an October 2007 round table discussion entitled: “Courting Disaster: The Fight for Oil, Water and a Healthy Planet” at Stanford University:
“Of course (the Iraq war) is about oil, we can’t deny that.”
and former U.S. Ambassador, John Bolton publicly admitted in an interview on Fox News dated Oct 22, 2011, that the multiple wars that America has fought in the Middle East have been about securing oil supplies. Speaking of the U.S.-Middle East conflicts, Bolton stated:
“The critical oil and natural gas producing region that we fought so many wars to try and protect our economy from the adverse impact of losing that supply or having it available only at very high prices.”
The government line was loud and clear: the Iraq war was not about oil.
The aftermath of Iraq war & the U.S. intervention in Afghanistan
The Bush administration promised that the war and overthrow of Saddam would provide a better, more stabilized life for Iraqis, while President Obama stated at the end of 2011 that the US was leaving behind a “sovereign, stable and self-reliant Iraq.”
Yet, Iraq’s present condition seems to negate any sense of certainty and hope these claims once held, and is not alone.
Afghanistan represented another cornerstone in the publicly proclaimed ‘War against terrorism” — a tale of 20 years of occupation culminated with U.S. troops withdrawal ahead of schedule on August 30th, 2021.
The intervention was once again in the name of “the spirit of democracy” and, while from an humanitarian standpoint it makes a valid point, it rose once again concerns about the ‘real’ interest of the United States involvement in the already problematic and volatile region.
From a geographical standpoint, Afghanistan was of strategical importance due to its position as the crossroad between Asia and the West and also, a nation surrounded by emerging economies sitting on immensely valuable oil reserves.
Oil which was the main commodity at which the value of the dollar was pegged.
Needless to state the events that followed: the rise of the militant extremist network of Al Qaeda, a deeper-than-ever destabilized region in the grip of terror, human rights abuses, countless deaths and socio-economical doom.
The 21st century epitome form of money: U.S. DEBT
Iraq and Afghanistan wars were both deeply intertwined with the underlying commodities associated — principally oil — with its role as U.S. Dollar peg for its hegemony as the world reserve currency.
After the disastrously and life-costly wars in the region though, a new stark truth emerged: oil was yes the principal commodity backing the U.S. Dollar, but so it was its whole military compartment — a powerful force which was the swiss knife of Washington in administrating and resolving its disputes, whenever America’s interest were questioned or undermined.
A powerful deterrent which, even to the more ‘courageous’ challengers, would have induced them to think twice before getting involved in a dispute with Washington.
This myth of the “military might” flanked by the creation of the FIAT monetary system — following the abandonment of the Gold Standard in 1971 — created a new ‘form’ of asset, being the embodiment of trust and stability of the monetary system:
U.S. Treasuries, or in simplistic terms DEBT.
U.S. Treasury securities (“Treasuries”) are issued by the federal government and were (and still are for many) considered to be among the safest investments an investor can make, because all Treasury securities are backed by the “full faith and credit” of the U.S. government and its capability to fine tune the economy.
The federal government offers fixed-income securities to consumers and investors to fund its operations, including:
- Treasury bonds (T-Bonds), bonds of long maturity, usually ranging between 20 and 30 years;
- Treasury notes, similar to Treasury bonds but with shorter terms, including two, three, five, seven, and ten years;
- Treasury bills, which have the shortest terms of all and are issued with maturity dates of four, eight, 13, 26, and 52 weeks and peculiar characteristics differing from T-Bonds and T-Notes.
Treasuries are, in summary, debt instruments in which investors are lending the U.S. government the purchase amount of the bond. In return, investors are paid interest or a rate of return. When the bond matures (or maturity date), investors are paid the face value of the bond.
The whole system is based on the absolute, adamant trust in the governing body and the institutions at the core of the very country system and we can see why it presents some flows:
after all, has the political class demonstrated his capabilities to fulfill its role as the helmsman of society, addressing its issues and intelligently manage resources aimed to boost and consolidate prosperity for the nation as whole?
Whether the question is either of political, humanistic, philosophical and/or economical depth and we may end with a polarized answer, it is undeniable that TRUST has deeply eroded and severely questioned in the eyes of the community.
But let’s go back to the subject; we’ve established that DEBT instruments provide capital to an entity that promises to repay the capital over time, in this case the U.S. government
but
what happen when we put into the picture the feature that an entity that — despite its claims of being ‘independent’ — operates in the ‘interests of serving the ‘public’ and has the power to print currency at will?
The answer are INFLATIONARY PRESSURES with the progressive erosion of purchasing power in real terms.
The United States has run annual DEFICITS — spending more than the Treasury collects — almost every year since the nation’s founding. The period since World War II, during which the United States emerged as a global superpower, is a good starting point from which to examine modern debt levels. Defense spending during the war led to unprecedented borrowing, with the debt skyrocketing to more than 100 percent of gross domestic product (GDP) in 1946.
But again, U.S. debt — pinned to blind trust in his government, and subsequently backed by U.S. military might and the pricing of the crucial commodity at the base of our modern societal evolution: OIL.
An unstainable system which has worked his way through the economy and has deeply shaped the last 50 of our modern history.
Closing thoughts
The oil/dollar narrative has shaped the last half century of history, with deep implications that will echo for the present generations and some of the future ones to come.
The degree to which, the privileged nation of the United States has been able to reap the benefits of the petrodollar system are undeniable and played a centric role in propelling, and cement the U.S. leadership on the global chessboard.
An hegemony derived by the demand of U.S. dollars. However, this demand for dollars is not genuine. It is purely artificial.
Dr. Bulent Gukay of Keele University puts it this way:
“This system of the U.S. dollar acting as global reserve currency in oil trade keeps the demand for the dollar ‘artificially’ high. This enables the U.S. to carry out printing dollars at a price of next to nothing to fund increased military spending and consumer spending on imports. There is no theoretical limit to the amount of dollars that can be printed. As long as the U.S. has no serious challengers, and the other states have confidence in the U.S. dollar, the system functions”
The indiscriminate policies conducted by the key advanced economies, together with serious mismanagement of resources and questionable action by the leadership has created a monetary behemoth that will eventually collapse under his own weight and, in absence of a valid alternative, dragging the whole financial system with it.
For updates & the latest news and analysis — follow me on Twitter @FilandroMi
Sources & Extra Resources:
- 1973 oil crisis:
https://en.wikipedia.org/wiki/1973_oil_crisis - Rapid Development Force:
https://en.wikipedia.org/wiki/Rapid_Deployment_Joint_Task_Force - United States Central Command:
https://en.wikipedia.org/wiki/United_States_Central_Command - Oil interests behind Iraq invasion?
https://www.theguardian.com/environment/earth-insight/2014/mar/20/iraq-war-oil-resources-energy-peak-scarcity-economy - Russia/France scramble into the conflict to carve up Iraqi oil reserves:
https://www.theguardian.com/world/2002/oct/06/russia.oil - The real reason behind U.S. invasion of Iraq — by W. Clark:
https://www.cse.unsw.edu.au/~norman/CurrentAffairs/DeeperNew.html - The Dragon influence in Iraq: Oil giants and the start of ambitious Cooperation Plan:
https://www.tandfonline.com/doi/pdf/10.1080/19370679.2015.12023256 - Rumaila Oil Fields — synopsis:
https://www.nsenergybusiness.com/projects/rumaila-oil-field/ - International Oil companies operating in Iraq:
https://www.iraq-businessnews.com/list-of-international-oil-companies-in-iraq/ - Russian arms sales in the Middle East:
https://www.washingtoninstitute.org/policy-analysis/russian-arms-sales-middle-east - The geopolitical narrative and the goal of controlling the middle-east region: the crossroad for natural resources into the global markets
(leaked classified documents):
https://www.theguardian.com/world/us-embassy-cables-documents/175722 - The dramatic trend of Debt purchasing as a Commodity: https://www.forbes.com/sites/forbestechcouncil/2020/08/03/millions-of-borrowers-are-purchasing-debt-as-a-commodity---and-its-costing-them/?sh=7ac756e34089
- America and his spending problems:
https://www.cfr.org/backgrounder/national-debt-dilemma
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