U.S.-Saudi petrodollar agreement
In June 1974, U.S. Treasury Secretary William Simon negotiated a confidential agreement with the Saudi government: Saudi Arabia would price all its oil sales in U.S. dollars and recycle a substantial portion of its oil-export revenue into U.S. Treasury bonds. In exchange, the United States would extend security guarantees and provide military equipment. The Saudi Treasury holdings — which the U.S. agreed to keep confidential, an exception not granted to any other country until 2016 — became the structural backbone of the post-Bretton-Woods monetary order. The petrodollar made every nation's oil import bill simultaneously a dollar-demand event.
The Treasury Department refused to disclose Saudi Arabia's specific holdings of U.S. Treasury debt for 41 years. The aggregate figure was first published in 2016, and as of recent reports the Saudi holdings have run between $100 billion and $170 billion — a meaningful but not enormous share of total foreign holdings. The strategic value of the petrodollar arrangement was always less about the specific bond purchases than about the dollar-denomination of the whole oil trade.
04 · The Petrodollar
When Nixon closed the gold window in August 1971, the dollar lost its commodity backing. It immediately gained a new, less visible one. In 1974, Saudi Arabia agreed to price all its oil exports in U.S. dollars in exchange for American security guarantees and a Saudi commitment to recycle oil revenues into U.S. Treasury bonds. Every country that wanted oil now needed dollars. Sovereign wealth funds emerged as the warehouses of recycled petroleum money. The petrodollar system was as load-bearing for the post-Bretton-Woods financial order as gold had been for the previous one — and far less visible.
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