Gold Standard Oil
All/Most oil in the world has been sold in dollars since 1974 (the petro dollar). If the Fed cannot inflate the price of oil, it could be the death of the petro dollar and oil could be sold for gold.
Oil plunged last Monday, April 21st to multi-decade lows and is still near the lows.[1]
On Monday, May futures for WTI Crude with a May delivery date was -$40!!! Negative! There is not enough storage space for the oil! It cannot be unloaded![2]
Today WTI CRUDE oil is down to $15.46 from being between $30-$60 for the past 5 years.[3]
Brent Crude oil is $22.95 and is down from $30-$70 over the past 5 years.[4]
The oil price plunge can be explained by a collapse in demand from the quarantines while there was already an increase in oil production.
However, oil prices will again increase either because of price inflation from nations and companies selling their US bonds because of the inflation from the Fed printing money to buy US bonds or because oil producing nations and companies with dollar-denominated debts realize that they could pay off more of their debts by selling oil for gold if gold continues to go up priced in dollars, than if they could if they keep selling oil for dollars at these low prices (the petro-dollar).[5]
“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” -Former Federal Reserve Chairman Alan Greenspan, Meet the Press, August 7, 2011.
The Federal Reserve sets interest rates through the Federal Open Market Committee (FOMC). Specifically, they set the Federal Funds Rate which influences all interest rates in the world. They keep rates low by printing money and adding US gov bonds and other securities to their assets. [6]
The FOMC kept the Federal Funds Rate at 0-0.25% today and stated,
“The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. The disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit to U.S. households and businesses.
The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.
[…]
To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.[6]
If the Fed cannot inflate the price of oil, then it could be the death of the petro dollar because oil producing nations and companies with dollar-denominated debts realize that they could pay off more of their debts by selling oil for gold if gold continues to go up priced in dollars, than if they could if they keep selling oil for dollars at these low prices
If they do inflate oil prices by supporting the flow of credit to households and businesses by continuing to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to make the Fed feel confident that the economy has weathered recent sharp declines in economic activity and a surge in job losses, it could be the death of the US bond market from hyperinflation and thus the end of the petro dollar as oil is sold for gold to protect from hyperinflation.
Both are bad for the dollar holders and good for gold holders.
“Gold is a currency. It is still by all evidences the premier currency where no fiat currency, including the dollar, can match it.” - Alan Greenspan, in an interview for the Council on Foreign Relations, Nov 2014
[1] https://www.zerohedge.com/markets/historic-oil-crash-sends-canadian-oil-prices-negative
[3] https://www.bloomberg.com/quote/CL1:COM
[4] https://www.bloomberg.com/quote/CO1:COM
[5] https://www.zerohedge.com/news/2016-05-31/secret-story-how-saudi-petrodollar-deal-was-born
[6] https://www.hamiltonmobley.com/blog/iorr-ioer-and-ffr
[7]https://www.federalreserve.gov/newsevents/pressreleases/monetary20200429a.htm