Trump's Venezuela Oil Move: A Strategic Play for Petrodollar Dominance
Former President Donald Trump's recent actions to control Venezuela's oil supply might have a deeper petrodollar angle. This move could help the United States bolster its oil production and stimulate global demand for the dollar simultaneously.
Capturing Venezuelan Oil Reserves
Hours after the US announced the capture of Venezuelan President Nicolas Maduro in a covert operation, Trump claimed the United States would "run" the country for the foreseeable future. He aims to reclaim American oil interests there.
Trump stated that Venezuela would turn over between 30 and 50 million barrels of high-quality, sanctioned oil to the United States. His energy secretary, Chris Wright, added that the US would oversee Venezuelan oil production indefinitely.
This development is not surprising. Venezuela produces about 1 million barrels of oil per day. However, it holds the world's largest oil reserves, estimated at 300 billion barrels. That accounts for 17% of global stock.
Access to these vast reserves would cement the US status as the dominant crude producer globally. It would also provide a vital geostrategic advantage over rivals like China and Russia.
Understanding Petrodollars
Petrodollars are US dollars earned by oil-exporting countries as revenue for their crude oil exports. Since the 1970s, major oil producers, led by Saudi Arabia, have priced their oil in dollars. This practice made the greenback the primary currency for oil trade worldwide.
The petrodollar system has played a key role in maintaining the dollar's status as the world's reserve currency. It is essentially a notional currency and does not form a formal trading system.
Historical Context of Dollar-Denominated Oil
The 1944 Bretton Woods Conference established the dollar as the world's primary reserve currency, pegged to gold. By 1947, the US owned an estimated 70% of global gold reserves, according to IMF estimates.
This system collapsed in 1971 when President Richard Nixon ended dollar convertibility due to dwindling gold reserves. The dollar became a fiat currency, issued by the government.
During the 1973 oil crisis, OPEC announced a trade embargo against countries supporting Israel in the Yom Kippur War. Faced with a 300% increase in oil prices, the US negotiated a deal with Saudi Arabia in 1974.
The informal understanding involved the US offering military protection for Saudi oil fields. In return, Saudi Arabia priced its oil exports exclusively in dollars and invested its massive oil revenue surpluses in the US financial system.
Following Saudi Arabia's lead, most other major oil suppliers also priced oil in dollars. This forced oil-importing countries, including India, to continuously purchase dollars to buy crude. The arrangement created unceasing demand for the dollar, boosting Washington's economic and strategic might.
Shifting Fortunes of the Petrodollar
For decades, the US was a large importer of crude oil. The petrodollar arrangement helped oil-exporting countries build large trade surpluses with the US. These surpluses were often invested in US Treasury securities, stocks, and other dollar-denominated assets.
The standardization of oil trade in dollars and reinvestment of surpluses strengthened the US economy. It allowed the US to exert significant leverage over countries involved in oil trade, both exporters and importers.
However, the petrodollar arrangement has weakened in recent years. Several factors have contributed to this shift.
The US shale revolution, starting in the early 2000s, boosted domestic oil output. Today, the US is the world's largest oil producer and a net exporter, reducing its dependence on the petrodollar system.
Large oil producers are now increasingly using their surpluses to maintain their own fiscal health rather than investing heavily in US markets.
China's rise as an emerging economy challenges US hegemony. Trump's willingness to levy tariffs and sanctions at whim against perceived rivals also threatens the dollar's status as the world's reserve currency.
There is a growing effort by countries in the Global South to unite and push for de-dollarisation. Geopolitical fault lines with major oil producers like Iran, Russia, and Venezuela have led to sanctions. Oil from these countries is often traded in other currencies, predominantly by China.
While the dollar remains dominant in oil trade, the share of other currencies has been rising. Any shift away from the dollar's dominance would likely be protracted, given its entrenchment in the global economy.
Trump's Strategic Objective
Trump aims to maintain the dollar's dominance. Exercising control over the world's largest oil reserves in Venezuela can certainly help achieve this goal. By securing access to Venezuelan oil, the US can reinforce the petrodollar system and counter de-dollarisation trends.
This move underscores the ongoing strategic importance of oil in global economics. It highlights how control over resources can influence currency dynamics and geopolitical power.
