The Petrodollar System Flirts With Collapse… What It Means for Gold, Oil, and the Dollar

International Man ^ | 03/27/2022 | Nick Giambruno

[SeekAndFind]

It’s been rightly said that “he who holds the gold makes the rules.”

After World War 2, the US had the largest gold reserves in the world, by far. Along with winning the war, this let the US reconstruct the global monetary system around the dollar.

The new system, created at the Bretton Woods Conference in 1944, tied the currencies of virtually every country in the world to the US dollar through a fixed exchange rate. It also tied the US dollar to gold at a fixed rate of $35 per ounce.

The dollar was said to be “as good as gold.”

The Bretton Woods system made the US dollar the world’s premier reserve currency. It forced other countries to store dollars for international trade or to exchange with the US government for gold.

However, it was doomed to fail.

Runaway spending on warfare and welfare caused the US government to print more dollars than it could back with gold at the promised price.

By the late 1960s, the number of dollars circulating had drastically increased relative to the amount of gold backing them. This encouraged foreign countries to exchange their dollars for gold, draining the US gold supply at an alarming rate.

To plug the drain, President Nixon “temporarily” suspended the dollar’s convertibility into gold in 1971. This ended the Bretton Woods system and severed the dollar’s last tie to gold.

The “temporary” suspension is still in effect today. And it’s had profound geopolitical consequences.

Most critically, it eliminated the main reason foreign countries stored large amounts of US dollars and used the US dollar for international trade. As a result, oil-producing countries began to demand payment in gold instead of rapidly depreciating dollars.

It was clear the US would have to create a new monetary system to stabilize the dollar. So it concocted a new scheme… and chose Saudi Arabia as its ally. This agreement came to be known as the “petrodollar system.”

The US handpicked Saudi Arabia because of the kingdom’s vast petroleum reserves and its dominant position in the global oil market.

In essence, the petrodollar system was an agreement that the US would guarantee the House of Saud’s survival. In exchange, Saudi Arabia would do three things.

First, it would use its dominant position in OPEC to ensure that all oil transactions would only happen in US dollars.

Second, it would recycle hundreds of billions of US dollars from annual oil revenue into US Treasuries. This lets the US issue more debt and finance previously unimaginable budget deficits.

Third, it would guarantee the price of oil within limits acceptable to the US and prevent another oil embargo.

The petrodollar system gave foreign countries another compelling reason to hold and use the dollar. And it preserved the dollar’s unique status as the world’s top reserve currency.

But… why oil?

Unmatched Geopolitical Power

Oil is the largest and most strategic commodity market in the world.

As you can see in the chart below, it dwarfs all other major commodity markets combined. The annual production value of the oil market is ten times bigger than the gold market for example.

Global Commodity Markets (Billions)

Every country needs oil. And if foreign countries need US dollars to buy oil, they have a compelling reason to hold US dollars.

Think about it… If Italy wants to buy oil from Kuwait, it must purchase US dollars on the foreign exchange market to pay for the oil first.

This creates a huge artificial market for US dollars.

This is what differentiates the US dollar from a purely local currency, like the Mexican peso.

The dollar is just a middleman. It’s used in countless transactions, amounting to trillions of dollars that have nothing to do with US products or services.

Since the oil market is enormous, it acts as a benchmark for international trade. If foreign countries are already using dollars for oil, it’s just easier to use the dollar for other international trade.

In addition to nearly all oil sales, the US dollar is used for about 80% of all international transactions.

This gives the US unmatched geopolitical power.

The US can sanction or exclude virtually any country from the US dollar-based financial system at the flip of a switch.

By extension, it can also cut off any country from most international trade. And that would be a financial kiss of death. This creates a powerful incentive for governments to stay in Washington’s good graces.

The petrodollar system is why people and businesses worldwide take US dollars. They have had little choice but to accept this.

Today, the biggest US exports are dollars and government debt. The US government can create unlimited quantities of both… from nothing.

It requires no effort to create US dollars, which can then be exchanged for real things like French wine, Italian cars, electronics from Korea, or Chinese manufactured goods.

Ultimately, the petrodollar boosts the US dollar’s purchasing power. This is because it entices foreigners to soak up many of the new currency units the Fed creates.

The system has helped create a deeper, more liquid market for the dollar and US Treasuries. It also helps the US keep interest rates artificially low. This allows the US government to finance enormous deficits it otherwise would be unable to.

This kind of spending would otherwise be impossible without destroying the currency through money printing.

It’s hard to overstate how much the petrodollar system benefits the US. It’s the bedrock of the US financial system.

China, the Saudis, and a Paradigm Shift

For nearly 50 years, the Saudis had always insisted anyone wanting their oil would need to pay with US dollars, upholding their end of the petrodollar system.

But that could all change soon…

China is the world’s largest importer of oil and Saudi Arabia’s top customer. Beijing buys over 25% of Saudi oil exports.

The Wall Street Journal recently reported that the Chinese and the Saudis had entered into serious discussions to price Saudi oil exports to China in yuan instead of dollars.

The WSJ article claims the Saudis are angry at the US for not supporting it enough in its war against Yemen. They were further dismayed by the US withdrawal from Afghanistan and the nuclear negotiations with Iran.

In short, the Saudis don’t think the US is holding up its end of the deal. So they don’t feel like they should hold up their part. In this context, the Saudis have entered serious talks with China to sell oil in yuan.

Even the WSJ admits such a move would be disastrous for the US dollar.

“The Saudi move could chip away at the supremacy of the US dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit.”

Here’s the bottom line.

Saudi Arabia is flirting in the open with China about pricing oil in yuan. It signals an imminent and enormous change for anyone holding US dollars. It would be incredibly foolish to ignore this giant red warning sign.

We are likely on the cusp of a historic financial earthquake…

One that could alter that direction of the US forever and mark the biggest economic event of our lifetimes.

Editor’s Note: The Fed has already pumped enormous distortions into the economy and inflated an “everything bubble.” The next round of money printing is likely to bring the situation to a breaking point.

[Vermont Lt]

Perhaps our senile President can call the Crown Prince of SA a murderer in public again. That will help. //sar

[lucky american]

The people holding paper commodities hardest hit. When TSHTF, there won’t be enough to spread around.

[BobL]

“The Petrodollar System Flirts With Collapse”

Not a problem for me if the West collapses, all I want to do is stick it to Putin! That’s all that I care about.

[icclearly]

“ Perhaps our senile President can call the Crown Prince of SA a murderer in public again. That will help. //sar”

Heck, he’s tried to ring him up by telephone, but the crown prince won’t answer the phone when “ Biden” shows up on caller ID.

[Poison Pill]

Another brain dead non prediction. If the petro dollar is dead, can this man please tell us what system takes its place and how that system is enforced?

[PGR88]

collapse isn’t the right word.

the USA certainly is no longer a free-market, property-rights protecting country. We’ve actually become more like China and Russia - central planning, social engineering on society, effective one-party, bloated government rule, oligarchs whose wealth depends more and more on government favors, and political control of everything.

That doesn’t mean the world will run to put their money in Yuan or Rubles. They certainly aren’t better. Rather, we have dropped to their level.

But the political use of banks, the random seizing of both citizen and government assets, and massive printing of money has put everyone on notice - The USD is not a shining beacon of stability it once was.

[Its All Over Except ...]

And you nailed it right there! Succinct.

Brain dead libtards are all over the place are using Rachel Maddow tactics of Putin! Putin! Putin!, Russia!, Russia!, Russia!.

Then there are the chickenhawk, keyboard warriors who also deflect and try to make Putin or Russia the focus in an effort to play on people’s emotions and egg the US into more involvement in Ukraine.

Russia isn’t a match for NATO and I imagine Putin knows this. Putin is brutal and he and high heels Zelenskyy are both autocrats and govern as such. Putin shut down the media and Zelenskyy used Russia as an excuse to shut down all media free speech in Ukraine critical of him, painting them with a broad brush. He did nothing to run off the bioweapons labs being in Ukraine, Soros and the WEF are tied to him, but the pro-Soros, Biden, and WEF crowd know this so they have to continually deflect to Putin.

In closing, it isn’t our job to protect their borders, we should be concerned with protecting America’s borders, we aren’t world policeman, enough with being involved in one war after another, plus we are over $30 trillion in debt and broke; time for a unified European military to keep Putin in check. Period.

[Jumper]

There is no reason that anyone selling oil cannot accept other currencies... thus the dollar may not be the gold standard... all money is good as “good as gold for a day” when accepted.

[Bogie]

We’ve actually become more like China and Russia - central planning, social engineering on society, effective one-party, bloated government rule, oligarchs whose wealth depends more and more on government favors, and political control of everything.

Really, why would a two party system be so much better than a one party system, anyhow? Humanity being similar all over the planet, that is.

[C210N]

When the petro dollar is dead and gone, the US will need a Recovery Act for National Economic Security.

Hopefully something along that line will surface.

[bunkerhill7]

I dealt with many Chinese investors coming out of Hong Kong, China, Singapore and Indonesia etc... When one lady opened a restaurant in California, I was her friend. She asked me to introduce her to my stock broker.
When she asked him to purchase stocks for her account, he said OK.
She then pulled out a big cloth bag full of gold pandas and used it to pay for the stocks. I kid you not. Hard cold gold. I dealt with South African gold businesses before. Roll your gold.
My advice is to buy a gold/silver platinum/palladium mine, or two.

[sauropod]

For study.

[Georgia Girl 2]

“If the petrol dollar is dead can this man please tell us what system takes its place.”

First the author of the article is correct. The petrol dollar is all but dead. The entire world is going to shift to a new gold backed system with a one to one exchange. The US dollar is going to be called the US note. One US note will equal one Ruble, one yuan, one rupee, one peso etc.

China, India, Russia and Saudi Arabia and I believe Brazil have already agreed to this as of a week or so ago. So that means about 3.5 billion people have shifted away from the central banking system. That’s half the population of the world.

The US is preparing to join the new global system shortly as soon as the illegal foreign belligerent force is removed from DC. I was watching a video of a guy who is involved in the alternative media. He is a former Deputy Sheriff not a kook in any way. He said he spoke with a friend recently who is a VP at a Wells Fargo bank and was told that they have been training for six months for the transfer to the new system. Trump recovered our gold while he was in office. We now have sufficient reserves to be in the new system.

The Federal Reserve and SWIFT are going bye bye. They may still refer to the Fed in name only but it will be completely absorbed by the US Treasury. Nobody is going to lose their money in the transfer. It will be one for one.

[nathanbedford]

Xi jinping is fully familiar with the tenants of general Sun Tzu and therefore it is essential that one looks upon the battle environment the way xi jinping no doubt will do as his disciple.

Mindful that The Art of War emphasizes the need for quick victory, Putin's fiasco in Ukraine will be of profound disappointment to the Chinese leader. Moreover, he will take a serious lesson from the failure of Russia's invasion.

Sun Tzu emphasizes the need not only to know one's enemy but to know oneself. At this point it is difficult to assess what motivates Xi Jinping respecting his ambitions for Taiwan. We think we know what motivated Putin respecting Ukraine. The most likely analysis of Xi Jinping is that he is a flat-out fully dedicated communist who has drunk the Kool-Aid and is ideologically and emotionally committed to seize Taiwan. If that is the case, it will make it more difficult for him to comply with the mandates of The Art of War which will tell him to avoid conflict when other means might suffice.

Xi Jjinping will survey the environment with respect to his ambitions to take over Taiwan. He will, of course, weigh the power of the Taiwanese themselves to defend their island and he will further consider the power of the United States to intervene. Certainly, he will consider whether Joe Biden has the stones to intervene and will come to conclusions concerning each of these factors. But this article is concerned about the impact of sanctions on the dollar as a reserve currency and this makes up a very serious part of the environment that Xi Jinping will not fail to consider.

If xi jinping applies the principles of The Art of War he will recognize that his best course now is not to invade but to appear to cooperate with Taiwan, the United States and world opinion. This is for the obvious reason that he would like to avoid the sanctions that would probably come in the wake of an invasion. More important, he will know that the sanctions imposed on Russia have a chance of crashing the dollar as the world currency. If that occurs the military power of the United States will be dramatically vitiated because America will sink into a Great Depression aggravated by inflation caused by doomed Keynesian attempts to spend to recovery.The battlefield environment would then be greatly altered in xi jinping's favor.

There is, however, a counter consideration fo xi jinping if he delays an invasion as he waits for Taiwan to virtually fall into his grasp. His own economy is in desperate trouble with the all-important real estate sector in effect bankrup and generating knock on effects for the rest of hi economy that, anyway, is now struggling with Covid lockdowns and supply chain blockages.

He may conclude that he is in foot race with America to see whose economy will suffer first. He may conclude that it is not in his interests at this point in his marathon contest over generations to eclipse America to sacrifices economy. He might conclude that if America loses the dollar as reserve currency, America will plunge into a deep recession which in turn will drag China down. He may think that the risk for China of a deep recession are worse than the advantages that it might provide in his generations long contest with America. He might conclude that the risk of internal unrest, the internal bogeyman of the Chinese government, is simply to grave an existential risk to court.

Indeed, is even possible for these reasons that Xi Jinping will pressure Putin to cut his losses and at least enter into some sort of armistice to begin to take sanctions off the table. A world of sanctions is not a healthy world for China, no matter how ineffective many of those sanctions when directed against China might be because China is winning so long as the world sleeps. Ukraine is waking the world up and that is not in China's interest.

Whatever scenario xi jinping chooses, it is possible that these events in Ukraine have in fact made an invasion of Taiwan less likely and might even have delayed one that was already scheduled. He may want to put the world back to sleep.

[rollo tomasi]

Our "betters" in the private sector do not know what is going on because they are short-sighted buffuns addicted to debt/leveraging and bailouts, "great reset here, great reset there" while throwing poop on the wall, seeing if it sticks and securing their assets anyway they can.

The idiots running central governments just appease the fools who follow the fools as they drive up spending and regulate anything that moves as control mechanisms because they are micro-managing boneheaded PR creatures enjoying their ride at the expense of people just trying to get by in life.

A wicked lounge, but hopefully will be remodeled soon.

[DoodleDawg]

Your imagination knows no bounds, does it?

[Poison Pill]

There is no reason that anyone selling oil cannot accept other currencies...

Here is a thought experiment. You operate an oil refinery in Brazil. You agree to buy a tanker full of Saudi oil and pays for it in yuan. Just before the ship leaves port in Saudi Arabia, the US announces that the American navy will no longer guarantee the saftey of tanker ships at sea whose cargo is not denominated in USD. In other words, it won't prevent another country from sinking the ship with your oil, or taking the oil for their own use. The US navy will not do piracy interdiction to keep pirates from stealing your oil. The Americans won't answer any distress call for your ship at all. Zero protection. Just then, Lloyds of London calls to tell you that based on the new policy from the Americans, they no longer want to indemnify your cargo at the previous rate. They want the new premium to be half the value of the oil or board. How do you make sure the ship arrives safely in Brazil?

[Jim Noble]

The House of Saud realizes that they are vulnerable to both internal and external forces that could result, shall we say, in a decline in their standard of living of their heads into baskets (fixed it).

It is perfectly obvious that the US has picked a side in the Yemen-Iran-Syria vs. SA war, and it's not them.

Therefore, teaming up with China, if China is stupid enough to take them on as a client, would be a wise move.

[Georgia Girl 2]

Its OK Dawg. Its not important for you to understand what’s happening. 😉