Whether Sweet or Sour, the Sauce Must Flow
The geopolitical dynamics of the oil industry within the global capital order
In a recent dispatch, we explored the historic background to the announced expansion of BRICS—Brazil, Russia, India, China and South Africa, now admitting Saudi Arabia, Iran, the United Arab Emirates, Egypt, Ethiopia, and Argentina to (what they’ve apparently decided to call) BRICS-11 in 2024—and contrasted it against the post-WWII (unipolar) capital order. If you’re not familiar with BRICS, The Washington Post summarizes it pithily:
The BRICS group of emerging market nations […] has gone from a slogan dreamed up at an investment bank two decades ago [by economist Jim O’Neill] to a real-world club that controls a multilateral lender […] [Its] enlargement will pair some of the world’s largest energy producers with the developing world’s biggest consumers, potentially enhancing its economic clout. The expansion also gives the bloc […] more scope to challenge the dollar’s dominance in oil and gas trading by switching to other currencies.
Of course, the enhanced clout in energy production comes mainly from the addition of Saudi Arabia. In 2022, Russia (the world’s third-largest oil producer) pumped more than 11 million barrels a day, while Saudi Arabia (the world’s second-largest) pumped more than 12 million barrels per day. The United Arab Emirates’ daily production of 4 million barrels and Iran’s of 3.8 million barrels means that the expanded BRICS-11 will produce nearly a third of the almost 94 million barrels pumped worldwide each day last year, and greater than 50% more than the world’s largest producer, the United States, which pumped 17.8 million barrels per day in 2022.
Certainly energy production won’t be BRICS-11’s only advantage. As Pepe Escobar reports, the bloc will represent 47% of the world’s population and 36% of global GDP-purchasing power parity (PPP)—“already larger than the G7”—with $8.9 trillion in total debts, one-sixth of the G7’s $55.5 trillion.
Still, while BRICS-11 will enjoy the formidable benefits of a high share of global GDP-PPP and low national debts, it’s nonetheless difficult to overstate the significance of an economy’s oil supply in predicting its economic growth, to which Majed Almozaini’s “The Causality Relationship between Economic Growth and Energy Consumption in the World’s Top Energy Consumers” (2019) certainly attests. To investigate “the causal relationship between economic growth and energy consumption in five countries with high consumption” from 1968 to 2016, Almozaini examines “the cointegration relationship between the variables” for “evidence of the long-term equilibrium” between them, the presence of which indicates “that the variables move together over time.” Observing cointegration “between economic growth (GDP) as the dependent variable and oil, gas, and energy consumption (EC) as the independent variables” allows Almozaini to infer “the causal relationship between energy consumption, oil consumption, gas consumption, and GDP.”
The five countries that Almozaini studied—China, Japan, India, the U.S., and Saudi Arabia—variously exhibit both unidirectional and bidirectional causal relationships according to their differing economic circumstances. Almozaini finds “a one-way long-term relationship from oil consumption to GDP” for China, the world’s largest single oil importer (though still importing less than Europe does as a bloc), whose own National Bureau of Statistics shows its domestic energy consumption “increased from 131 [million tons of oil equivalent] in 1965 to 3,014 Mtoe in 2015, with GDP increasing from 172 billion yuan (in 1965) to 67,670 billion yuan (in 2015).”
Similarly, “oil consumption in India is a leading determinant for assessing its economic progress, as its enormous usability [for] production and transportation purposes directly push the economy further toward growth” with those industries representing “strong influences on employment [and] that, in turn, leads to economic development.”
In Japan, trends of economic growth “imply increased per capital income for its population, which, in turn, encourages greater energy consumption in the short term and vice versa.” In the long term, “increasing energy consumption implies increased transportations and industry production growth, which, in turn, contributes to the GDP in Japan.”
For the U.S., on the other hand, Almozaini’s finds “a bidirectional predictability between economic growth [and] as its coal consumption trends in the early 1990s. However, this reflects unidirectional predictability during the later years of the 1990s” with this changing causal relationship resulting from the “varying degree of dependency [at different times] on its [domestic] stock of coal, natural gas, and oil” of what was then the world’s second largest petroleum producer.
Among the five, Saudi Arabia stands out for its “unique dependency on its energy consumption to determine its economic growth prospects […] because the nation is one of the major international suppliers of oil at present.” Given that, it’s of course unsurprising to learn that “a long-term unidirectional causality has been observed from energy price to the rate of economic growth recorded in the country.” Nonetheless, “long-term unidirectional causality is observed from the energy consumption patterns to the economic growth trends”—therefore demonstrating that, even in Saudi Arabia’s unusual case, energy consumption is a strong predictor of economic growth.
But that’s just the start of Saudi Arabia’s strategic contribution to the trading bloc. As a September 2023 policy brief from the Al Jazeera Center for Studies informs us, BRICS established itself as “a trade bloc of the major emerging economies in 2009 following the global financial crisis” with each one seeking “to strengthen their global economic position independent of the Western-dominated financial and economic order.” In 2015, the same year that the bloc established its New Development Bank as an answer to the IMF and World Bank, “China established its own interbank payment system, seeking to make the yuan an international currency of exchange and payment”—and, therefore, a viable alternative to the U.S. dollar.
In their apparent efforts to establish an alternative to the post-WWII international monetary system, the admission of Saudi Arabia to the bloc represents a true coup: a challenge to the petrodollar system that has maintained the U.S. dollar’s status since the 1970s as the global reserve currency.
For a ten-minute summary of the petrodollar system, the historical context in which it arose, and the geopolitical implications of its erosion, I suggest turning to The Grayzone’s original live-streamed coverage of the BRICS summit from Johannesburg, South Africa. During that broadcast, Max Blumenthal asked Anya Parampil (at ~0:48:50) about what BRICS’s announced expansion may mean for economies restricted by international sanctions:
BLUMENTHAL: I don't think we’ve talked enough about BRICS expansion as it relates to sanctions. Anya, can you just give us a brief primer on the petrodollar [and] how […] the dollar-based international financial system has been used to enforce sanctions, and what a membership of states like Iran—which have borne the brunt of U.S. sanctions—in BRICS means for the future of this sanctions regime which […] has been imposed on the lives of something like one-third of the world’s population?
PARAMPIL: It’s a big question. I’ll try to answer it in in terms of a timeline that builds up to where we are now […] World War II drew the lines and […] integrated the globalized economy […] it was ostensibly the end of European colonialism but because of the establishment of the Bretton Woods system and the IMF […] [which] was supposed to be the rules of this newly integrated global economy […] they sold it through the IMF as a way to develop the newly independent non-industrial former colonial world by establishing [the World Bank,] funded by the formal colonial powers, the G7 […] that were extracting the wealth from the former colonized world […] the World Bank give their money as the baseline, but then if you’re the developing world […] you want to get this money to develop your economy […] [But] if you get an IMF loan you have to liberalize your economy, basically your policies are subject to approval by the IMF, not your sovereign government, so […] you’re going to be constantly ferrying the questions about your economic policy over to the supranational transatlantic network.
Of course, that Bretton Woods system established the basic framework of the post-WWII global capital order, and set the stage for neoliberal globalization in the latter half of the 20th century.
Nonetheless, Parampil sees comparative value in the Bretton Woods system, explaining (at ~0:52:08) how the gold standard allowed other countries to better support their own currencies than the petrodollar system that succeeded it:
The original Bretton Woods system was based on the gold standard of a fixed exchange rate […] [T]hey knew they needed one currency. If you have a newly integrated global economy, it's easier if everyone can trade in one currency, but if you have a national currency you need a method for exchanging that back […] into a currency that is your national fuel for your economy, and so because of the fixed exchange rate […] there was something called the U.S. treasury gold window, where they could come and they could exchange their dollars for gold, bring that to their central banks, and convert it back into their national currency. But […] after the Marshall Plan played out, the United States grew and exploited its victory in World War II to extract wealth out of Europe and Asia and subjugate Japan, Germany, these powerhouses of industry […] after a few decades those countries started to recuperate their economies, and simultaneously, the United States government has lent out way more dollars than it actually maintained in gold in its [Treasury].
Returning readers will recall the Marshall Plan as a lynchpin in the economic strategy to maintaining a U.S. trade surplus to support the value of the dollar following WWII. But inevitably—or so I imagine, anyway—maintaining that monetary asymmetry proved unsustainable. Parampil describes (at ~0:53:53) the circumstances that led to the collapse of the Bretton Woods system:
After France, Germany, and a collection of European states started calling back their dollars because they realized […] the Vietnam War and Lyndon Johnson’s Great Society was all financed by this inflated dollar that didn’t exist—that was how we built our U.S. empire—and so the European powers woke up and started calling their money back and we didn’t have the money to give […] the U.S. gold reserves dropped to the lowest in the history of the United States, and so unilaterally one day Nixon closed the gold window at the U.S. Treasury Department […] they even went to a meeting of the G7 in Rome that year and said, “The dollar is our currency but it’s your problem, sorry,” and so no one wanted dollars anymore.
The 1971 closing of the U.S. Treasury gold window threatened the dollar’s status as the global reserve currency that it had enjoyed since the end of WWII. This, Parampil explains (at ~0:55:07), led finally to the 1973 announcement of the petrodollar system negotiated with Saudi Arabia, whose ascendance to BRICS-11 next year threatens to overturn the dynamics of foreign currency exchange in the global capital order that for fifty years now Saudi Arabia has helped the U.S. maintain:
Nixon fixed that by establishing the petrodollar agreement with Saudi Arabia just two years later, in the midst of the international oil [supply] crash when Saudi Arabia actually stopped selling its oil to the West […] Nixon sent the Treasury Secretary and Secretary of State Kissinger […] to Saudi Arabia, and Saudi Arabia—which was the largest exporter of oil—as a result of that meeting decided to only accept U.S. dollars in exchange for its oil as long as the U.S. gave them weapons […] it meant that any country that wanted to buy oil in the world, even if they were trying to buck the dollar, had to have dollars if they wanted to buy oil […] and U.S. sanctions in recent years have cut off Iran, […] Venezuela, Russia, major oil producers from accessing dollars, and so by their own actions now […] big players in the oil market aren’t trading in dollars, and why would they? Now even Saudi Arabia knows eventually the dollar is going to be weaponized against them, so now they’re turning to the rest of the world and saying, “Let’s start exchanging between ourselves, forget about this special arrangement with the United States, they have to come to terms with [the fact that] the only value that they have in their money is their military,” and everybody knows that that’s the only reason now the dollar is the world’s reserve currency. There’s no other value—tangible value—to the U.S. dollar: no oil, no gold.
Though the petrodollar system has been one of the U.S.’s primary instruments for reinforcing its own economic hegemony, one might accuse Parampil here of downplaying the armed forces now backing the dollar. But we can assume, of course, that she’s as familiar as anyone with the U.S. military’s function as an instrument of resource conquest—anyone, that is, who lived through the 2003 invasion of Iraq, or who saw President Trump say of the U.S. occupation of Syria, “We’re keeping the oil. We have the oil. The oil is secure. We left troops behind only for the oil.”
Unfortunately, the future may rhyme with that shameful history. According to a June 2023 report from the editors at OilPrice.com, some in the Pentagon have begun exploring means to weaponize the global oil trade more explicitly:
U.S. Defense Department officials have been busy spreading the message that in the event of an intensified conflict with China, CENTCOM could cut off China’s oil imports by blocking oil shipments through the Strait of Hormuz, most notably, along with some other chokepoints. In terms of potential foreign policy stances, this isn’t the 1940s anymore—this a world of entrenched globalization, and the knock-off effects of such a move would have far-reaching consequences well beyond any sanctions on Russian oil over Ukraine.
The argument being circulated by certain DoD officials is this: Because some 98% of China’s energy imports from the Middle East traverse the Strait of Hormuz, cutting off this chokepoint would do severe damage to Beijing, and CENTCOM is positioned to step in.
While “China is increasing its intake of discounted Russian crude”—with that intake having increased more than 25% year-to-date as China takes advantage of the sanctions and price cap imposed by the G7 on Russian oil following the launch of its Feb 2022 military operation in Ukraine—still, “the Saudis remain China’s top oil exporter.”
Therefore, in the event of war between the United States of America and the People’s Republic of China, the Pentagon would surely see the strategic value in depriving China of as much of its oil imports as it can. Accordingly, the editors consider the potential aftermath of this proposed blockade in the Strait of Hormuz, and pay particular attention to how it might impact not just the G7’s economic measures to punish Russia, but the armed conflict between Russia and NATO’s proxy in Ukraine:
Cutting off Middle East oil exports to China would be an immediate boost to Russian oil, of course, and Putin’s war with Ukraine is a long war that will not likely see any resolution. At best, it will become a frozen conflict that leaves no window open for a relaxed sanctions regime.
Beyond this, a U.S. military move on the Strait of Hormuz would ignite the Middle East. If Russia’s war on Ukraine and the Western response was not enough to launch WWIII, cutting off oil in the Strait of Hormuz would.
Of course, such a blockade would have secondary consequences felt far beyond Ukraine. The editors explore a few of them, such as the responses of Saudi Arabia and Iran “at a time when Riyadh has been repairing diplomatic relations with Tehran”—and this was their concern in June, after Saudi Arabia and Iran announced a China-brokered deal to reestablish ties just three months earlier, and long before knowing both countries would be invited to join BRICS-11.
In terms of what ramifications the U.S. might suffer, the editors propose that it “may be far more insulated (as it has been with Russia sanctions),” but under neoliberal globalization, its domestic energy industry can only provide so much protection during a worldwide meltdown. Curiously, the editors also make sure to note that blockading the Strait of Hormuz and the ensuing global energy crisis “would, of course, further boost the push for clean energy, though having mega dollars to fund that transition is critical.” Nonetheless, even the ideal scenario, with optimal investment in clean energy, entails monumental consequences involving the responses of both markets and militaries:
Even discounting the prospect of WWIII, massive damage would be done to global markets. When Iran attacked two vessels in the Strait of Hormuz in 2019, oil prices immediately shot up 4%. That is merely a tiny taste of the market response to a blockage of China-bound oil shipments. Inventories would soar, forcing OPEC into a major production cut, with the Saudis bearing the brunt of that. Such an attack would be viewed as an attack on Saudi Arabia.
Iran would rally behind the cause for an initial war against the U.S. in the Persian Gulf, solidifying an axis of China, Russia and Iran, with the Saudis and UAE left to choose sides. Iran’s response would be to attack the Strait of Hormuz, through which some 30% of the world’s seaborne crude oil passes, rendering the Strait unsafe and putting Western markets in a state of turmoil, as well.
We know now, of course, which side Saudi Arabia and the UAE would choose.
The genius of the petrodollar system has been in linking the value of the dollar to a commodity so closely correlated to economic development. Oil consumption is a crucial factor in predicting economic growth, as evidenced by Almozaini’s research, and arranging Saudi Arabia’s use of the dollar in selling its petroleum exports has for fifty years been the key pillar supporting the dollar’s status as the world’s reserve currency.
Today, however, the petrodollar system seems to have an expiration date that we can now see approaching. BRICS’s further expansion on the first of next year to include even more major oil-producing nations—especially Saudi Arabia, the petrodollar system’s benefactor and beneficiary—and the alternative to international lending through the World Bank and the IMF that BRICS’s New Development Bank has been readying itself to provide, both evince the petrodollar’s erosion.
That, of course, carries significant geopolitical implications, particularly regarding the enforcement of economic sanctions. By shifting towards alternative currencies for oil trading, BRICS-11 members like Iran can reduce their vulnerability to U.S. sanctions, which have affected a substantial portion of the world’s population. But because BRICS’s expansion challenges the dominance of the U.S. dollar in global oil and gas trading, the threat that it represents to the petrodollar system will unfortunately increase the likelihood of direct military conflict between members of BRICS-11 and the U.S. and other members of the NATO alliance.
The expansion of BRICS to include Saudi Arabia, Iran, the United Arab Emirates, Egypt, Ethiopia, and Argentina marks a shift towards a more multipolar world where economic power is distributed among a more diverse group of nations, potentially leading to changes in the international financial landscape and the dynamics of global trade. The implications of this transformation will continue to unfold in the coming years, shaping the future of the global economy and geopolitics. Though one hopes that the advent of a multipolar capital order will produce a more harmonious international community and a more equitable distribution of material prosperity worldwide, we must beware the violent reprisals such will invite from those who fear losing their current advantages.