The Vermont Cynic

Oil and the American petrodollar


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The plunge in the price of oil has shaken the international markets.

Russia’s currency nearly collapsed, the American shale oil industry fears extinction and consumers happily fill up their tanks at a lower cost.

At the same time, the dollar saw itself rise in value relative to other currencies. This can be attributed to the fact that oil is priced in dollars.

In other words, if any country wants to buy or sell oil, they have to do so exclusively in dollars.

Economic theory tells us that a decrease in the price of oil will increase its demand — which is not necessarily what happened — and therefore it would also increase the demand for dollars.

While this benefits the U.S. in a number of ways, such as being able to print money to buy oil and not having to worry about exchange rates, it creates a brick wall for an environmentally friendly economy.

Even if the U.S. reduces oil consumption, it can never truly eliminate its use as long as the dollar is dependent on oil.

If the U.S. economy were to completely break away from oil right now, it would be committing economic suicide.

The decrease in the demand for oil would shock the dollar, causing its value to depreciate drastically in relation to other currencies.

Thus, the manner in which we maintain our currency — the most elementary level of economic policy — is incompatible with the creation of an economy that is not dependent on greenhouse emissions for growth, a sustainable economy.

But this wasn’t always the case. Until the early 1970s, the dollar was tied to gold, a period known as the gold standard, until President Richard Nixon broke away from it in order to finance the Vietnam War.

However, this meant that our currency could no longer be converted into gold and it became a piece of paper, or in economic terms, a “fiat currency.” In order to amend this, oil was agreed to be priced in dollars, which would help maintain a demand for the dollar.

While mainstream economics attributes the period of “stagflation” the economy faced during the 1970s through the 1980s to oil price shocks, this can also be explained by the monetary policy of the era.

Since the dollar was no longer tied to gold, a limited resource, the treasury could print more money to help pay for the war in the short run, but this would later cause inflation in the long run.

But this isn’t about whether the gold standard should be reinstated or not, but rather about how the fundamental mechanics of our currency prevent us from seriously addressing climate change. 

We can reduce oil consumption by promoting better fuel efficiency, but neither our economy nor our economic policy is prepared for a complete abolition of its use.

Hence, as the 2016 presidential race gets underway, many candidates will say that they will address climate change without mentioning that as long as our currency is used to price oil, there is no incentive to heavily invest in renewable energy.

Some Republicans will deny climate change as they receive funding from oil corporations such as Chevron Corporation and Exxon Mobil.

Many Democrats will champion legislation to reduce carbon emissions on one hand and with the other write subsidies for fossil fuel producers.

Therefore, if we envision a world where our economy is powered by renewable energy, we have to address the principles of our currency and its dependency on oil.

Then, we can begin building an economy that is suitable for a better planet.

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The University of Vermont's Independent Voice Since 1883
Oil and the American petrodollar