Syed Zain Ul Abideen
In global politics, the interplay between military strength and economic power has historically defined a nation’s influence. Technological advancements further shape these dynamics. A central element in this transformation is the petrodollar system, a phenomenon with profound implications for international relations and economics. Over the past six decades, oil has met approximately 85% of the world’s energy needs, making it a cornerstone of global economic activity. As alternative energy sources gain prominence, the future role of oil in shaping geopolitics is becoming increasingly uncertain.
Historical context of oil’s geopolitical significance
The origins of oil’s geopolitical importance can be traced back to its discovery in Pennsylvania, USA, in the mid-19th century. Initially, oil’s primary use was for lighting, replacing whale oil, which was the predominant source of illumination at the time. Edwin Drake’s successful drilling in 1859 marked the beginning of a new era. His discovery in Titusville led to the commercialization of oil, significantly impacting global trade and finance.
The impact of early oil discoveries
The town of Pithole, Pennsylvania, offers a vivid example of the rapid impact of oil discoveries. Following Drake’s find, Pithole’s population surged from fewer than 50 to 10,000 within a year. The town saw the establishment of new hotels, telegram stations, and a post office. However, this initial boom was short-lived, as the excitement around the oil discovery waned and Pithole’s significance diminished.
Modern oil exploration and production
The modern era of oil exploration began with the efforts of the Standard Oil Company of California. Drilling at the Dammam oil field in Saudi Arabia in 1935 revealed indications of oil and gas after reaching a depth of 700 meters. Despite equipment failures and technical difficulties, notable progress was made.
Well No. 7, drilled in 1936, eventually became a significant source of oil, marking the beginning of Saudi Arabia’s oil export industry. The first shipment of Saudi oil to the United States in 1939 catalyzed the formation of a joint consortium of American firms, known as Aramco, which began extracting large quantities of oil from Saudi Arabia.
The rise of Saudi Aramco
By 1958, Saudi oil production had reached 10 million barrels per year, establishing American companies’ dominance in the Saudi oil sector. In 1972, Saudi King Faisal acquired a 20% stake in Aramco, and by 1980, the Saudi government decided to purchase the remaining assets held by American firms. This acquisition led to the establishment of Saudi Arabian Oil Company, or Saudi Aramco, in 1988. Today, Saudi Aramco is the largest oil company globally, with around 120 oil and gas fields under its control. It also constructed the world’s longest petroleum pipeline, extending from the eastern region of Saudi Arabia to Sidon on the Mediterranean coast, operational from 1948 until 1983.
The evolution of petroleum use
The term “petroleum” derives from Latin, combining “petro” (stone) and “oleum” (oil). Initially discovered for illumination, petroleum’s applications soon expanded to transportation. In 1799, French engineer Nicolas-Joseph Cugnot developed a steam-powered vehicle, and in 1885, German engineer Karl Benz created the first petrol-powered car. The aviation industry saw its first petrol-powered airplane in 1903, followed by the first public flight in France in 1908 and the introduction of petrol-powered aircraft in the United States in 1909. These innovations marked the beginning of ongoing advancements in transportation technology.
The geopolitical significance of the petrodollar
Post-World War II, the strategic importance of petroleum increased, transitioning from a mere utility to a key asset in global politics. The 1944 Bretton Woods Conference, held in New Hampshire, brought together delegates from 44 nations to establish a unified international trade and financial system. The consensus on the need for a common currency for international trade led to the establishment of the U.S. dollar as the global currency, supported by America’s substantial gold reserves and its post-war dominance. This development significantly benefited the United States, cementing the dollar’s role as the primary global currency. In contrast, while Europe served as a counterbalance, Russia lacked substantial European support.
Recent developments and shifts in global trade dynamics
Recent developments indicate a shift in global trade dynamics. In March 2022, the Wall Street Journal reported that Saudi Arabia is considering accepting the Chinese yuan for oil transactions. Additionally, in June 2022, Saudi Arabia explored adopting digital currencies, including the yuan, yen, euro, and Bitcoin, for transactions. The 1974 petro-dollar agreement, which mandated payments for Saudi oil in U.S. dollars, has reinforced the dollar’s dominance in global trade.
Challenges to the petrodollar
The dominance of the petrodollar has had significant economic ramifications. Petroleum’s role extends beyond energy, influencing industries such as agriculture and manufacturing. Despite substantial oil reserves in countries like Venezuela, Saudi Arabia, Iran, Iraq, Canada, Kuwait, and the UAE, Western countries have maintained control over the global oil market through strategic monopolization. The Organization of the Petroleum Exporting Countries (OPEC), founded in 1960 and headquartered in Vienna, Austria, has played a crucial role in this control. OPEC’s membership grew to twelve countries by the 1973 oil crisis, with Saudi Arabia being the largest producer within the organization.
Future directions and alternatives
In 2024, the global oil and gas trade is projected to exceed $5.4 trillion annually, with transactions predominantly conducted in U.S. dollars. The dominance of the petrodollar is now facing increasing scrutiny. The BRICS coalition comprising Brazil, Russia, India, China, and South Africa was established in 2009 to reduce the petrodollar’s influence. Recent geopolitical tensions, including conflicts involving Russia and economic pressures on Brazil and South Africa, highlight the ongoing challenge to the petrodollar. China’s growing economic and technological influence poses a significant threat, with potential areas of conflict including Taiwan and the South China Sea. The BRICS nations advocate for reforms in the global financial system, with discussions about alternative currencies and energy sources. Future explorations will focus on whether electric batteries can replace petroleum in meeting energy demands across various sectors, from domestic needs to military technology and transportation. This shift could potentially transform global trade and geopolitics, marking a new era in energy and economic interactions.
The author is the Director of RFI Digital Media.
