Trouble Ahead For The Petrodollar?

The number one American export is U.S. dollars. It is paper currency that is backed up by absolutely nothing, but the rest of the world has been using it to trade with one another and so there is tremendous global demand for our dollars. The linchpin of this system is the petrodollar. For decades, if you have wanted to buy oil virtually anywhere in the world you have had to do so with U.S. dollars. But if one of the biggest oil exporters on the planet, such as Saudi Arabia, decided to start accepting other currencies as payment for oil, the petrodollar monopoly would disintegrate very rapidly. For years, everyone assumed that nothing like that would happen any time soon, but now Saudi officials are warning of a “major shift” in relations with the United States. In fact, the Saudis are so upset at the Obama administration that “all options” are reportedly “on the table”. If it gets to the point where the Saudis decide to make a major move away from the petrodollar monopoly, it will be absolutely catastrophic for the U.S. economy.

The biggest reason why having good relations with Saudi Arabia is so important to the United States is because the petrodollar monopoly will not work without them. For decades, Washington D.C. has gone to extraordinary lengths to keep the Saudis happy. But now the Saudis are becoming increasingly frustrated that the U.S. military is not being used to fight their wars for them. The following is from a recent Daily Mail report…

Upset at President Barack Obama’s policies on Iran and Syria, members of Saudi Arabia’s ruling family are threatening a rift with the United States that could take the alliance between Washington and the kingdom to its lowest point in years.

Prince Bandar bin Sultan told European diplomats that the United States had failed to act effectively against Syrian President Bashar al-Assad and the Israeli-Palestinian conflict, was growing closer to Tehran, and had failed to back Saudi support for Bahrain when it crushed an anti-government revolt in 2011, the source said.

Saudi Arabia desperately wants the U.S. military to intervene in the Syrian civil war on the side of the “rebels”. This has not happened yet, and the Saudis are very upset about that.

Of course the Saudis could always go and fight their own war, but that is not the way that the Saudis do things.

So since the Saudis are not getting their way, they are threatening to punish the U.S. for their inaction. According to Reuters, the Saudis are saying that “all options are on the table now”…

Saudi Arabia, the world’s biggest oil exporter, ploughs much of its earnings back into U.S. assets. Most of the Saudi central bank’s net foreign assets of $690 billion are thought to be denominated in dollars, much of them in U.S. Treasury bonds.

“All options are on the table now, and for sure there will be some impact,” the Saudi source said.

Sadly, most Americans have absolutely no idea how important all of this is. If the Saudis break the petrodollar monopoly, it would severely damage the U.S. economy. For those that do not fully understand the importance of the petrodollar, the following is a good summary of how the petrodollar works from an article by Christopher Doran…

In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.

This means that every country in the world that imports oil—which is the vast majority of the world’s nations—has to have immense quantities of dollars in reserve. These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.

This arrangement works out very well for the United States because we can wildly print money and run up gigantic amounts of debt and the rest of the world gobbles it all up.

In 2012, the United States ran a trade deficit of about $540,000,000,000 with the rest of the planet. In other words, about half a trillion more dollars left the country than came into the country. These dollars represent the number one “product” that the U.S. exports. We make dollars and exchange them for the things that we need. Major exporting countries (such as Saudi Arabia) take many of those dollars and “invest” them in our debt at ultra-low interest rates. It is this system that makes our massively inflated standard of living possible.

When this system ends, the era of cheap imports and super low interest rates will be over and the “adjustment” to our standard of living will be excruciatingly painful.

And without a doubt, the day is rapidly approaching when the petrodollar monopoly will end.

China is now the number one importer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.

So why should Russia, China and virtually everyone else continue to be forced to use U.S. dollars to trade oil?

That is a very good question.In fact, China has been making a whole lot of noise recently about the fact that it is time to start becoming less dependent on the U.S. dollar. The following comes from a recent CNBC article authored by Michael Pento…

Our addictions to debt and cheap money have finally caused our major international creditors to call for an end to dollar hegemony and to push for a “de-Americanized” world.

China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, “Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated.”But you very rarely hear anything about this on the evening news, and most Americans do not understand these things at all. The fact that the U.S. produces the de facto reserve currency of the planet is an absolutely massive advantage for us. According to John Mauldin, this advantage allows us to consume far more wealth than we actually produce…

What that means in practical terms is that the United States can purchase more with its currency than it produces and sells. In theory those accounts should balance. But the world’s reserve currency, for all intent and purposes, becomes a product. The world needs dollars in order to conduct its trade. Today, if someone in Peru wants to buy something from Thailand, they first convert their local currency into US dollars and then purchase the product with those dollars. Those dollars eventually wind up at the Central Bank of Thailand, which includes them in its reserve balance. When someone in Thailand wants to purchase an imported product, their bank accesses those dollars, which may go anywhere in the world that will take the US dollar, which is to say pretty much anywhere.

And as Mauldin went on to explain in that same article, a significant amount of the money that we ship out to the rest of the globe ends up getting reinvested in U.S. government debt…

That privilege allows US citizens to purchase goods and services at prices somewhat lower than those people in the rest of the world must pay. We can produce electronic fiat dollars, and the rest of the world accepts them because they need them to in order to trade with each other. And they do so because they trust the dollar more than they do any other currency that is readily available. You can take those dollars and come to the United States and purchase all manner of goods, including real estate and stocks. Just this week a Chinese company spent $600 million to buy a building in New York City. Such transactions happen all the time.

And there is one other item those dollars are used to pay for: US Treasury bonds. We buy oil and all manner of goods with our electronic dollars, and those dollars typically end up on the reserve balance sheets of other central banks, which buy our government bonds. It’s hard to quantify the exact amount, but these transactions significantly lower the cost of borrowing for the US government. On a $16 trillion debt, every basis point (1/10 of 1%) means a saving of $16 billion annually. So 5 basis points would be $80 billion a year. There are credible estimates that the savings are well in excess of $100 billion a year. Thus, as the debt grows, the savings also grow! That also means the total debt compounds at a lower rate.Unfortunately, this system only works if the rest of the planet has faith in it, and right now the United States is systematically destroying the faith that the rest of the world has in our financial system.

One way that this is being done is by our reckless accumulation of debt. The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined. The rest of the world is watching this and they are beginning to wonder if we are going to be able to pay them back the money that we owe them.

Quantitative easing is another factor that is severely damaging worldwide faith in the U.S. financial system. The rest of the globe is watching as the Federal Reserve wildly prints up money and monetizes our debt. They are beginning to wonder why they should continue to loan us gobs of money at super low interest rates when we are beginning to resemble the Weimar Republic.The long-term damage that we are doing to the “U.S. brand” far, far outweighs any short-term benefits of quantitative easing. And as Richard Koo has brilliantly demonstrated, quantitative easing is going to cause long-term interest rates to eventually rise much higher than they normally should have.What all of this means is that the U.S. government and the Federal Reserve are systematically destroying the financial system that has enabled us to enjoy such a high standard of living for the past several decades.Yes, the U.S. economy is not doing well at the moment, but we haven’t seen anything yet. When the monopoly of the petrodollar is broken, it is going to be absolutely devastating.And as I wrote about the other day, when the next great economic crisis strikes it is going to pull back the curtain and reveal the rot and decay that have been eating away at the social fabric of America for a very long time.Just check out what happened in Detroit recently. The new police chief was almost carjacked while he was sitting in a clearly marked police vehicle…

Just four months on the job, Detroit’s new police chief got an early taste of the city’s hardscrabble streets.While in his patrol car at an intersection on Jefferson two weeks ago, Police Chief James Craig was nearly carjacked, police spokeswoman Kelly Miner confirmed today.

Craig said he was in a marked police car with mounted lights when a man quickly tried to approach the side of his car. Craig, who became police chief in June, retold the story Monday during a program designed to crack down on carjackings.

These days, the criminals are not even afraid to go after the police while they are sitting in their own vehicles.And this is just the beginning. Things are going to get much, much worse than this.

So let us hope that this period of relative stability that we are enjoying right now will last for as long as possible.The times ahead are going to be extremely challenging, and I hope that you are getting ready for them.

I know many here would argue otherwise but... perhaps having multiple currencies to be used in addition to the Petro-Dollar might be a good thing.

I believe that the Dollar and the ‘presses’ that print them are way overheated and desperately need a cooling down period.

While on this topic, better watch this brand new video of an interview with Jim Sinclair:

http://usawatchdog.com/jim-sinclair-50000-gold-us-dollar-collapse-hyperinflation-and-more/

He addresses the ramifications of loss of the petrodollar, among many other things. Its not pretty. But I think its just what the US needs, as a final punch in the mouth of the statists and socialists.

"Think about the ramifications of this future incident. If this incident were to take place, what would be the implications on the domestic energy producers?"

Well said and asked. With future U.S. dollars, they'll sell very cheaply. There are enormous numbers of people living in squalor in all countries that are net oil exporters (except for Canada). We've been seeing much propaganda about having a rich economy with agriculture and energy exports but without a large manufacturing base.

Imagine a U.S.A. that consumes far less oil than it does now--a net oil exporter. At least most of the most influential bipartisan constituents behind the politicians are very concerned about the overpopulation they're seeing in the U.S.A., their concern excepting incoming hordes of non-western-culture folks. The politics and social order of today are, as we see in each of our locales, of the do-do-on-the-neighbors kind.

Due to the costs of fracking, producing our oil is only profitable above a certain global price. Falling oil prices will not be of benefit to us. We are nowhere near energy independence btw and even if we were, it still doesn’t fix the problems created by a crashed petrodollar. Our entire way of life is based on the petrodollar. If it were to suddenly crash today, you wouldn’t recognize your country tomorrow. You choose to ignore this threat at your own peril.

Don’t get me wrong. I don’t think for one minute we are going to get things back on track. I fully expect a total economic collapse in the next 2-5 years and maybe grid failure or some other type of cyber attack. Its all bad and getting worse. The dollar will most likely collapse. three more years of Obalynski and we will be “in the chit” as Gordon Ramsey loves to say.

"This isn’t about oil, it’s about currency. Our number one export is dollars. Should that end, exporting oil won’t solve solve the new problems that will be arising."

Very true, but we'll get bicycles and those cool, conical rice hats. We can practice kung fu to serve our warlords.

Great article, by the way. Well done. Excellent. Thanks!

We will become an exporter of our natural resources to countries that still have a manufacturing base with no Obamacare.

As a socialist nation, we will have a far too high tax base for corporations to function, and cheap coal power plants will provide countries power for their manufacturing base. We will export the coal they need, since our coal plants will be shuttered due to the global warming hoaxers.

This isn’t about oil, it’s about currency. Our number one export is dollars. Should that end, exporting oil won’t solve solve the new problems that will be arising.
.............
Yes but in five years when the USA is producing 5 million barrels@ day more oils/natural gas/gas condensates/ the US balance of payments will go positive. So the USA will no longer be exporting dollars.

Further, if you’re watching the federal deficit is falling fast. If the rate continues—the federal deficit will be almost nothing in 3-5 years.

With the USA becoming an export driven economy with no federal deficits—the dollar will go up wildly.

You’re not seeing what’s happening.

OPEC Has Already Turned to the Euro
GoldMoney Alert
February 18, 2004

...The source for the euro exchange rate is the Federal Reserve, and I have calculated the euro's average exchange rate to the dollar for each year based on daily data.

US Imports of Crude oil

(1)

(2)

(3)

(4)

(5)

(6)

Year

Quantity (thousands of barrels)

Value (thousands of US dollars)

Unit price (US dollars)

Average daily US$ per € exchange rate

Unit price (euros)

2001

3,471,066

74,292,894

21.40

0.8952

23.91

2002

3,418,021

77,283,329

22.61

0.9454

23.92

2003

3,673,596

99,094,675

26.97

1.1321

23.82

We can see from column (4) in the above table that in 2001, each barrel of imported crude oil cost $21.40 on average for that year. But by 2003 the average price of a barrel of crude oil had risen 26.0% to $26.97 per barrel. However, the important point is shown in column (6). Note that the price of crude oil in terms of euros is essentially unchanged throughout this 3-year period.

As the dollar has fallen, the dollar price of crude oil has risen. But the euro price of crude oil remains essentially unchanged throughout this 3-year period. It does not seem logical that this result is pure coincidence. It is more likely the result of purposeful design, namely, that OPEC is mindful of the dollar's decline and increases the dollar price of its crude oil by an amount that offsets the loss in purchasing power OPEC's members would otherwise incur. In short, OPEC is protecting its purchasing power as the dollar declines.

The big question none seem to have an answer for is, if the US Dollar is no longer the petro currency, which currency will be the replacement.

China has tried this, but no country in their right mind trusts the ChiComs.

Until a viable replacement comes along the dollar will remain. I think the world is smart enough to know that nobama has only a few years remaining and as they watch the wheels come off the liberal’s agenda, the world also knows nobama’s ability to wreck much more is rapidly becoming unsupported by even his previous backers.

first of all, does the world need a replacement? All China, Russia, Iran, and saudi Arabia need to do is engage in petro trading in yuan amongst themselves and it’s kind of liking kicking over the first domino. Secondly, we have to remember that this is only about currency on the surface. Dig down deeper, and it’s about global power.

So the USA will no longer be exporting dollars.

The American way of life revolves around exporting those dollars. That is what allows us to run up a 17 trillion dollar debt and $125+ trillion in unfunded liabilities. Exporting dollars is a tax on every nation that is forced to use those dollars. Once we can no longer impose that tax, our options start to get limited as far as paying for our lifestyle. No amount of oil exports will allow the United States to maintain the level of spending it has become accustomed to thanks to the limitless credit card that is petrodollar recycling.

Further, if you’re watching the federal deficit is falling fast. If the rate continues—the federal deficit will be almost nothing in 3-5 years

yet, we're still $17 trillion in debt and still climbing. And we still have $125 trillion in unfunded liabilities and that is still growing as well. The falling deficit is primarily due to sequestration, militray budget cuts, and tax hikes btw. How long do we keep that up? That reminds me, the food stamp "cuts" go into effect today.

With the USA becoming an export driven economy with no federal deficits—the dollar will go up wildly.

There's no doubt that our domestic oil production and exportation will change a lot of things for a lot of people. I'm not sure it is a panacea however and it comes with its own set of problems. Nevertheless, "drill baby drill" seems like the only way forward for America.

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US Imports of Crude oil
(1)	(2)	(3)	(4)	(5)	(6)
Year	Quantity (thousands of barrels)	Value (thousands of US dollars)	Unit price (US dollars)	Average daily US$ per € exchange rate	Unit price (euros)
2001	3,471,066	74,292,894	21.40	0.8952	23.91
2002	3,418,021	77,283,329	22.61	0.9454	23.92
2003	3,673,596	99,094,675	26.97	1.1321	23.82