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Running on Empty, Part II

Running on Empty, Part II

How the Petrodollar Poisoned Foreign Policy with Financial Profiteering

Welcome to Part II of Running on Empty, my three-part analysis of the Petrodollar system. Part I of this series explained what the petrodollar system is, how it came to be, and what its financial effects have been on the United States. In Part II, I’ll explain the petrodollar’s implications for foreign policy. In Part III, I’ll show how those implications paved the way for the Russo-Ukraine War, and why that’s causing the system to break down.

America’s Chief Export is the US Dollar

As explained in the previous installment, the petrodollar system is based on an agreement between the US and Saudi Arabia. Under the terms of the deal, the US guarantees the security of Saudi Arabia and in exchange, Saudi Arabia guarantees that all petroleum is sold by OPEC for US dollars, with the US dollars re-invested into America via petrodollar recycling. The result: Since everyone needs petroleum, everyone needs US dollars. Oil replaces gold as the hard backing for the dollar. 1

Since the petrodollar system was put in place, the US has enjoyed a comparative advantage in manufacturing currency that no other nation enjoys. Under conditions of free trade, a country produces and exports more of a good for which it a comparative advantage, and produces less and imports more of the goods for which it doesn’t. And that’s what has happened: Since the petrodollar system was put in place in 1973, America has produced more and more dollars and produced less and less of everything else. The dollar is today our nation’s #1 export.

How large is the circulation of US dollars? As of April 2022, the American money supply, which economists call M2, stands at $21,728 Billion Dollars. M2 includes three types of money:

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