(Part 2) The Politics of Oil: How Black Gold Controls the World

In Part 1, we explored how oil transformed from an industrial commodity into a geopolitical tool — how Western companies established monopoly control over Middle Eastern oil, how OPEC was born, and how the foundations of oil politics were laid.

This part covers the next chapter of that story — where OPEC first demonstrated its true power, where the petrodollar system was born, and where the battle between America, Russia, and China for control over the world's energy supply began in earnest.

The Background: The Wound of 1967

To understand the 1973 embargo, you have to go back six years. In the 1967 Six-Day War, Israel defeated Egypt, Jordan, and Syria in just six days, capturing the Sinai Peninsula, Golan Heights, and West Bank. The humiliation was deep across the Arab world.

Egyptian President Anwar Sadat wanted to erase this defeat. But beating Israel militarily was difficult with American backing. So Sadat developed a revolutionary strategy: use oil as a weapon alongside military force.

In secret talks with Saudi King Faisal, Sadat argued: "If war starts and America helps Israel, we must use oil as a weapon. If you don't stand now, the Arab people will never forgive you." Faisal agreed.

The Yom Kippur War Trigger

October 6, 1973 — Yom Kippur, the holiest day in Judaism. Israel's military was at minimal readiness. At 2 PM, Egypt and Syria launched a coordinated surprise attack. Egyptian forces crossed the Suez Canal into Sinai. Syrian forces stormed the Golan Heights. Israel was completely caught off guard.

When Israel's position became critical, Prime Minister Golda Meir appealed to America for emergency military aid. President Nixon and Henry Kissinger launched "Operation Nickel Grass" — massive C-5 Galaxy cargo planes flew day and night, delivering approximately 22,325 tons of military equipment to Israel in weeks. Israel turned the tide.

The Embargo: Oil Becomes a Weapon

On October 17, 1973, OAPEC met in Kuwait City and made a historic decision: complete oil embargo on the United States and any country supporting Israel, plus a 5% monthly production cut until Israel withdrew from occupied Arab territories.

Saudi Oil Minister Ahmed Zaki Yamani declared: "Oil is no longer just a business commodity. From now on, it is a political weapon."

The Global Shock

In America: Gas stations had lines stretching for hours. "No Gas" signs became common. The government imposed odd-even rationing (odd-numbered plates on odd days, even on even days). Highway speed limits were cut to 55 mph. President Nixon told Americans to turn down thermostats and skip Christmas decorations. US GDP fell 4.7% and inflation hit 11%.

In Europe: West Germany banned Sunday driving — people walked on the Autobahn. Britain introduced a three-day work week to save electricity. Television shut off at 10 PM. The Netherlands banned all Sunday driving. European GDP dropped 2.5%.

In Japan: The shock was most severe — 90% of Japan's oil came from the Middle East. Industrial production fell 20%. Panic buying emptied supermarket shelves. Japan's GDP fell 7%.

In just a few months, oil prices quadrupled from approximately $3 to $12 per barrel — the fastest, largest price increase in history at that time.

Long-Term Transformations

The 1973 crisis permanently reshaped the world. Three critical lessons emerged:

• Oil dependence is a national security risk — Western nations began building strategic petroleum reserves. The IEA was founded in 1974.
• Alternative energy is essential — France decided to go nuclear (eventually generating 70% of electricity from nuclear). Investment in solar and wind research surged.
• OPEC is a real global power — The organization that the West dismissed as a "talk shop" in 1960 proved it could bring the world's biggest economies to their knees.

The Crisis After Bretton Woods

To understand the petrodollar, go back to 1971. In the Bretton Woods system (established 1944), all currencies were pegged to the dollar, and the dollar was backed by gold. But America's Vietnam War spending forced it to print too many dollars — the gold link became unsustainable.

On August 15, 1971, President Nixon announced the dollar would no longer be convertible to gold — the "Nixon Shock." Suddenly, the world asked: if the dollar is not backed by gold, why should anyone hold it?

Kissinger's Brilliant Solution

Henry Kissinger saw an opportunity within the crisis. Arab countries were suddenly earning unimaginable amounts from the oil price surge — Saudi Arabia's oil revenue jumped from $4.3 billion in 1973 to $22.5 billion in 1974. Kissinger reasoned: if that money could be channeled back to America, two things would happen — the US economy would be strengthened, and the demand for dollars would remain permanent.

In late 1973 and early 1974, Kissinger made multiple trips to Saudi Arabia to negotiate with King Faisal. The deal was straightforward:

• America would guarantee Saudi security — protect the royal family, provide weapons and military training.
• In return, Saudi Arabia would sell oil exclusively in US dollars and invest surplus oil revenue in US Treasury bonds.

In June 1974, US Treasury Secretary William Simon traveled to Riyadh to finalize the arrangement. The deal was never formally signed — no official document exists. But both sides understood exactly what was required. By 1975, all OPEC members were selling oil exclusively in dollars.

How the Petrodollar Works: A Simple Example

Say Japan wants to buy oil from Saudi Arabia. First, Japan must convert yen to dollars. Then it uses those dollars to buy oil. Saudi Arabia receives the dollars and invests them in US Treasury bonds. America uses that money to fund government spending.

In this cycle, America benefits most because the entire world needs dollars to buy oil — creating permanent dollar demand. This allows the US to borrow at lower interest rates, print money with less inflation risk, and maintain economic dominance. Economists call this "exorbitant privilege."

According to the IMF, as of 2023 approximately 59% of global central bank reserves are held in dollars. Saudi Arabia holds approximately $119 billion in US Treasury bonds.

What Happens When You Challenge the Petrodollar

Two historical examples illustrate the consequences:

Saddam Hussein's Euro Experiment: In November 2000, Saddam announced Iraq would sell oil in euros instead of dollars. Many analysts believe this deeply alarmed Washington. Three years later, in 2003, America invaded Iraq. After the war, Iraqi oil sales returned to dollars.

Gaddafi's Gold Dinar Plan: Libya's Gaddafi proposed a gold-backed African currency to replace the dollar in oil trade across the continent. In 2011, NATO intervened in Libya. Gaddafi was killed. The gold dinar plan died with him.

Whether these events are directly connected is debated. But the timing is significant.

The Seeds of Revolution

After the 1953 CIA coup, Shah Pahlavi ruled Iran with an iron fist. Oil revenue funded his "White Revolution" modernization program — but the benefits went mostly to elites. His secret police SAVAK tortured and imprisoned dissidents. When oil prices quadrupled in 1973, the sudden wealth was concentrated at the top, fueling inequality and resentment.

Ayatollah Khomeini, exiled in Iraq and then France, became the voice of resistance — reaching millions through cassette tape recordings smuggled into Iran.

Revolution and Oil Shock

By late 1978, oil workers went on strike, crippling Iranian production. On January 16, 1979, the Shah fled Iran. On February 1, Khomeini returned to Tehran — greeted by millions. By February 11, the Islamic Revolution was complete.

According to the IEA, Iran's oil production crashed from approximately 6 million barrels per day before the revolution to just 1.5 million afterward — removing 4.5 million barrels from the global market. Panic buying and stockpiling drove oil prices up 170% in just two years, from $14 to $38 per barrel.

The Carter Doctrine: America's Red Line

In January 1980, President Carter told Congress: "Any attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States. Such an assault will be repelled by any means necessary, including military force."

This Carter Doctrine essentially declared the Persian Gulf an American sphere of interest — and it led to the permanent US military presence in the region that continues today.

Saddam's Problem

The 8-year Iran-Iraq war left Iraq bankrupt. The country owed approximately $40 billion to Saudi Arabia and Kuwait alone. Saddam's only path to recovery was higher oil prices — but Kuwait was overproducing, keeping prices down. Saddam accused Kuwait of "economic warfare" and stealing oil from the shared Rumaila field.

The Invasion and the Oil Math

On August 2, 1990, Iraqi forces invaded Kuwait. Within hours, Kuwait was occupied. By controlling both countries, Saddam now held approximately 195 billion barrels — 19% of the world's proven reserves. If Saudi Arabia also fell, that figure would jump to 44%.

US Defense Secretary Dick Cheney told Congress: "Do we want to live in a world where Saddam Hussein controls a significant portion of the world's oil reserves?"

Operation Desert Storm

A 34-nation coalition led by the United States launched Operation Desert Storm on January 17, 1991. After 42 days of air strikes and just 100 hours of ground combat, Iraq was expelled from Kuwait.

Retreating Iraqi forces set fire to approximately 730 Kuwaiti oil wells. According to the Kuwait Institute for Scientific Research, these fires burned 6 million barrels per day and took 9 months to extinguish, causing an estimated $50-100 billion in environmental damage.

The petrodollar system is now under pressure from multiple directions:

• China launched yuan-denominated oil futures in Shanghai in 2018. In 2023, Saudi Arabia agreed to sell some oil to China in yuan.
• Russia has been selling oil in rubles and yuan since Western sanctions in 2022.
• BRICS nations are exploring alternative payment systems for energy trade.

But the petrodollar system remains strong because no currency has the global acceptance to truly replace the dollar. However, history teaches us that systems which seem permanent can also change — Bretton Woods once seemed unbreakable too.

If the petrodollar system collapses, America's "exorbitant privilege" ends. That would be an unprecedented transformation in the global economy — one whose effects would be felt from New York to Dhaka.

The events covered in this article — the 1973 embargo, the petrodollar deal, the Iranian Revolution, and the Gulf War — are not isolated historical incidents. They are interconnected chapters in a single story: the story of how oil became the most powerful political tool in human history.

Each crisis taught the world the same lesson: whoever controls oil controls the global economy. And every major power — America, Russia, China, Saudi Arabia — has built its strategy around that fundamental truth.

"Oil is no longer just a business commodity. It is a political weapon." — Ahmed Zaki Yamani, Saudi Oil Minister, 1973.