September 10, 2014 – The emergence of the Islamic State (hereafter referred to as ISIS) in the Middle East, the apparent ease at which it has taken over large parts of Iraq and Syria, and the well-publicized barbarity of its fighters towards their enemies has led to increased calls for renewed military intervention in the Middle East.
But the fact that the threat from ISIS has only come to public attention very recently is likely due less to concerns about ISIS activities in Iraq and Syria and more to the threat ISIS now poses to the security of the state of Saudi Arabia. Saudi Arabia has for the past four decades been the anchor of the petrodollar system, and if the Saudi state were to fall, the dollar’s demise as a reserve currency would be greatly accelerated.
After closing the gold window in 1971, President Richard Nixon struck a deal with the government of Saudi Arabia to prop up the dollar. In exchange for Saudi Arabia denominating oil sales in dollars, the United States would ensure the security of the Saudi state.
Because of Saudi Arabia’s status as one of the world’s top oil producers and exporters, denominating oil sales in dollars meant that foreign nations seeking to purchase oil on international markets needed to purchase dollars and maintain dollar reserves. This established a demand for the dollar as an international reserve currency that counteracted the desire of countries to move away from the dollar due to the US government’s inflationary policies of the 1960s and 1970s.
The symbiotic relationship didn’t end there, however. Saudi Arabia and the Gulf Arab nations (UAE, Bahrain, Qatar, Kuwait, etc.) themselves maintained large dollar reserves. According to official estimates, oil-exporting countries still hold over $260 billion of US Treasury debt. Dwarfing that, however, are the estimated sizes of the Arab countries’ sovereign wealth funds.
Totaling almost $2.5 trillion, these sovereign wealth funds have invested their oil revenues all over the world. Finally, Saudi Arabia and the UAE are among the top purchasers of US military hardware. Truly the leaders of the Arab world have benefited immensely from that initial arrangement with President Nixon.
All this is thrown into flux, however, by the appearance of ISIS. The Saudi government has long faced pressure not so much from without the country as from within. The roots of Salafism/Wahhabism in Saudi Arabia, the events surrounding Saudi Arabia’s emergence as an independent state, and the lavish lifestyles of many Saudi royals have led to a situation in which the Saudi Arabian government has had to engage in an increasingly tenuous balancing act in order to maintain its grip on power. Given the growth of Islamism over the past few decades and the increasing support for ISIS among Saudi clerics and members of the military, it is clear that ISIS could prove to be a real threat to the stability of the Saudi Arabian government.
If Saudi Arabia feels itself unable to combat the external threat from ISIS, or to contain the internal threat from ISIS sympathizers, do not be surprised to see a greatly increased US military intervention. Because of Saudi Arabia’s importance to the petrodollar system, the fall of the Saudi government could severely roil international oil markets. And if the dollar were to lose its position as the preferred currency in oil markets, it could rapidly lose its status as the world’s primary reserve currency.
That defense of the dollar’s status is the real reason for US intervention against ISIS. No one should be misled into believing that the United States is intervening against ISIS for humanitarian reasons in Iraq and Syria, to protect ethnic and religious minorities, or to combat the spread of Islamic terrorism. US intervention is purely an exercise in self-interest to defend Saudi Arabia, and with it the dollar’s reserve currency status.
Remember that Iraq began to accept euros in payment for oil not long before the 2003 US invasion. Iran agreed to accept non-dollar currencies on its oil exchanges and found itself the subject of harsh US sanctions. And now Russia, which has entered into agreements with China to move away from the dollar, finds itself facing US and EU sanctions. The US government will stop at nothing to try to keep the rest of the world from dropping the dollar. Do not be fooled into humanitarian excuses for supporting intervention against ISIS. That is just a front for the US government to defend its interest in securing the dollar’s status as a reserve currency.