The Oil & Petrodollar Connection to the Recent Military Conflict in Iraq & The Future of the Dollar as a Petrodollar.
In this paper, I intend to assess the validity of claims that there is a definite connection between the petrodollar and recent military conflicts. I will also look at why the United States needs to keep the dollar as the global reserve currency to secure their global hegemony for the future and what other contenders for the role of reserve currency are emerging. The Petrodollar Connection with the Recent Military Conflict in Iraq
There is a history of violence related to oil. A major example of this is World War Two. In 1945, Albert Speer, the German Armaments minister told his Allied forces captors that “the need for oil was certainly a prime motive” for Hitler to invade Russia even though Hitler had told the German people that the motive was to “save the western world” from barbaric and godless communists (Black, 2007). Now with the trade of oil linked so closely to the hegemony of the US, this history of violence is set to continue. After World War Two, world leaders met at Bretton Woods to negotiate a new international monetary system. The front runners in the negotiations were the United States and the United Kingdom. John Maynard Keynes, the UK’s leading economist, called for more realist policies and believed that no national currency would be strong enough to be the global reserve currency. He suggested that a new currency would be created (which he called ‘bancor’) and that it would be administered by a world central bank. This did not fit in with the policies of the US and their leading economist Harry Dexter. The World War had left many countries in debt and the UK was no exception. The UK had borrowed money from the US in order to fund their participation in the war. Therefore, the US was able to get their way when it came to the matter of negotiating the future of the global currency at Bretton Woods. The US dollar became the global reserve currency at a price linked to gold. While the US did compromise on some matters, this was one thing they did not. This shows how important having the dollar as the leading currency in the international monetary system is to the US (O’Brien & Williams, 2010). While the US dollar is no longer linked to gold due to President Nixon breaking the link when a problem called the ‘Triffin Dilemma’ was uncovered, where there would not be enough gold to cover the amount of dollars there were outside of the US, the US dollar still remains as the global reserve currency to this day and the US have shown that they are prepared to use extreme measures in order for it to stay this way. From the 1970s when the link to gold was cut, the US dollar became an oil-backed currency. Many argue that this provides reason for the US to use extreme measures such as military intervention in oil producing countries (Clark, 2005).
One of the key factors keeping the dollar as the global reserve currency is its unique position as ‘petrodollar’. This means that transactions for oil are made using the dollar. Through the process of petrodollar recycling, the US is able to sustain yearly current account deficits and fund its military supremacy amongst other things. So it is therefore important to the US to keep the dollar as the currency used to trade oil. After the cold war, Europe became more united and eventually a single monetary zone was created along with the euro currency. Before this, there was not another currency that could challenge the dollar to its throne of global reserve currency. On the 24th September 2000, Saddam Hussein announced after a meeting of his government that Iraq would begin the transition from using the dollar for its oil transactions to using the euro currency. This caused the US to make plans to ensure that this did not happen and to keep the dollar as the currency Iraq, one of the biggest oil producing countries in the world, used to sell oil...
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