After the world war 2 the world was left in a devasted economic state. The monetary system which was enforced by the world powers at the time was almost in the garbage bin of history. This gave way to introduction of new emerging superpowers this also implied introduction of new monetary system. An effort to overcome the financial and economic crisis, allied forces cooperated and in doing so at the Bretton Wood conference in 1944 dollar was made the global currency. The deal made it so countries worldwide would trade international commodities that are always priced in USD. The U.S. would also hold and protect gold reserves for various countries as part of the deal. This gave the United States a financial upper hand and in return, the U.S. pledged not to use the Federal Reserve to print massive amounts of USD. The Bretton Woods agreement fared well up until the Vietnam War, as American allies realized the Fed was printing money like no tomorrow for war expenditure. Few allies started to question the monetary scheme of USA as they suspected that USA was printing more dollar to support the war than the reserves of gold, this sparked the urge to ask USA to repatriate their gold reserves.
This posed a direct threat to the dollar and the new monetary system which making dollar as the fiat currency. 1971 Uncle Sam refused to the call and Richard Nixon presented something which was known as Nixon Shock. On August 15, 1971, President Richard Nixon declared a new economic policy, Nixon said he was removing the USD from the gold standard for a temporary period, but the move remained permanent. Two years later, Nixon begged the King of Saudi Arabia to only accept U.S. dollars for barrels of oil and in exchange, Nixon offered military protection. The U.S. President extended the same offer to key players in the fossil fuel-rich countries and by 1975 the plan captured every nation state tethered to the Organization of the Petroleum Exporting Countries (OPEC). This brought into being Petro-dollar and it was oil that was sustaining and strengthening dollar as fiat currency.
The recent crisis due to the pandemic has posed a direct threat to the oil market. In recent months world oil consumption has remarkably reduced due to the suspension of production and industrial sectors. While the supply of oil has not been changed and the demand being significantly decreased, oil market is now in hot waters. The effect has experienced a multiplier effect due tot the oil wars between Russia and Saudi Arabia. Prices have plunged down to unchartered territory, from $18 a barrel to as little as minus $40 a barrel according to the US oil benchmark, West Texas Intermediate (WTI).
According to Keiser, the impact of the oil war “will be a complete evisceration of the American shale industry. It’s going to need a massive bail-out, a massive money printing.” The US dollar is going “to suffer greatly” marking the beginning of the end for the greenback as the strongest and most-trusted global currency. Of course, any negative impact on the US economy will have ripple effects for others, including oil-producing nations heavily reliant on the commodity.
All the tension that is on the rise may culminate into another Middle eastern war which might mainly focus Iran and the gulf. As the uncontrolled oil producers at the time like Iran and Venezuela while the giants like Russia and China may become a significant threat to the oil market as their reliance on dollar as fiat currency would fade which can be attributed to not only the pandemic but increased uncertainty of USA’s foreign policy. It could may well be that the agreement between the US and Saudi Arabia is all but finished; indeed, the Saudis threatened to ditch the dollar for oil deals last year, although the last two countries in the region to do so faced NATO-led wars as a result. Libya’s Muammar Gaddafi wanted to cease trading in US dollars and use a gold-backed dinar instead, while Iraq’s Saddam Hussein insisted on dumping the dollar and switched to Euros back in 2000. Saudi Arabia is thus playing a dangerous game and, unlike Russia, it has no nuclear deterrent of its own and has sub-contracted its defense entirely to America.