It has been almost two weeks at the time of this writing that missile and/or drone strikes were launched against Saudi Arabian oil production facilities. Lives were lost and a dent was put in global oil refinery capabilities. It is estimated that these attacks destroyed some five percent of the entire global refinery capability. Most readers might worry about the impact at the gas pump, but increased gas prices may be the least of our worries.
To understand the full implications of this situation we have to go back to 1971. At that time, President Nixon took the U.S. dollar off the gold standard (for many reasons beyond this discussion). He simultaneously negotiated a deal for the “petrodollar” with OPEC countries, headed by Saudi Arabia. The deal was simply this: In the future, all OPEC countries would sell oil for only U.S. dollars. In exchange, the United States would guarantee the military security of the producing countries.
The formation and defense of the petrodollar forms a framework through which much of the conflict of the last fifty-plus years in the Middle East can be analyzed. The preeminence of the petrodollar is one of many reasons why the U.S. dollar has remained strong in comparison to other fiat global currencies such and the Euro and Yuan. As countries have tried to circumvent the dollar, as Iran and Venezuela have recently done promising oil in exchange for gold, America has found ways to intervene. Some are diplomatic and subtle, others not so subtle, such as the ongoing Gulf War.
And the Trump administration now finds itself in a bit of a conundrum. Intelligence sources agree that the attack can be traced back to Iran, even if it was executed by proxies. By virtue of the standing 1971 agreement, the United States is duty-bound respond to this recent attack. This creates political difficulties. To preserve the expectations of the petrodollar arrangement, the Saudi’s, and others who fear Iranian aggression, expect an equivalent response. President Trump has already approved the movement of more men and materiel into the Middle East. We are preparing for something.
But American citizens would not respond well to a new conflict in the Middle East. The activist media would condemn the administration and military for any aggression, despite more than a half-century of precedent. Trump has budgeted liberally for the military and may have to put that shiny new military to the test. There are few good solutions and certainly no peaceful (or inexpensive) pathways in an aggressive response.
On the other hand, if we do nothing or simply tell Saudi Arabia it is their problem, we stand in direct violation of the petrodollar deal. The consequences could do far more harm to the dollar and our economy than a military entanglement. If the U.S. military does not ride into this conflict as Saudi Arabia’s white knights, the undermining of the petrodollar could spell long-term economic difficulties in an already fragile global economy. It would certainly take the edge off of American economic hegemony.
There are numerous reports of building military movements in the region, as troops and equipment are being offloaded in Saudi Arabia. A major conflict with Iran could spark a widespread regional or global conflict. We should be focused on this situation and seriously concerned. We should all hope and pray for the least contentious solution possible.