The Attack on the Petro-Dollar
The Attack on the Petro-Dollar
On Saturday, September 14, 2019, Houthi fighters claimed to attack two Saudi oil processing facilities in Saudi Arabia.
“Following what Yemen's Houthis claimed was their own successful targeting of Saudi Arabia's second largest oil field in the Khurais, as well as the sprawling Abqaiq oil processing facility in Buqyaq- described by Aramco as ‘the largest crude oil stabilization plant in the world’- the Saudi company acknowledged it was forced to slash its output by half, equal to about 5% of world supply, specifically 5.7 million barrels a day of oil production lost.”[1]
This could, obviously, raise the price of oil (and the prices of things that are transported) and influence the Federal Reserve’s decision to raise or lower interest rates on Wednesday, Sept 18.[2]
The price of gold was below $1,350 for the past 5 years, until June 18th. On that date, the Federal Reserve’s Federal Open Market Committee (FOMC) announced they were not raising interest rates. Gold climbed further to $1,500 after July 31st when the FOMC cut interest rates.[3][4]
The reason is that keeping interest rates from rising requires the Fed to print money to artificially increase the demand for loans. Low interest rates prop up asset bubbles in stocks, housing, cars, bonds, and most everything. Printing money increases the price of gold too, which is an inflation hedge.
While a member of the FOMC in 2012, current Chairman of the Federal Reserve, Jerome Powell said,
“Second, I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.”[5]
On August 15, 1971, President Nixon announced that the dollar (Federal Reserve Note) was no longer convertible into gold.[6] In 1974, the petro-dollar was born.[7] Since the dollar was already the world’s reserve currency per the Bretton Woods agreement of 1944 and everyone had dollars that were no longer convertible into gold, OPEC, and specifically Saudi Arabia in exchange for weapons and defense, agreed to sell their oil exclusively for dollars.
Ever since then, the dollar has been printed into oblivion. Interest rates since the Great Recession (Dec 2007) have been suppressed by central banks printing money. The USA no longer produce as much as they used to, compared to the rest of the world, compared to 1944 and 1971. While the USA are the largest exporters of oil in the world today, the continuous money printing has caused nations and central banks to turn to gold as a reserve currency.[8]
Since 2015, Saudi Arabia has invaded and bombed Houthis during Yemen’s civil war.[9] Saudi Arabia is armed by the USA. The Houthi’s are armed by Iran and nominally backed by Russia and China, who are seeking to use the petro-yuan[10] and gold to end their reliance on the dollar.[11]
The attack on Saudi oil production was an attack on the petro-dollar. If the FOMC raises interest rates on September 18, the everything bubble could pop. If they keep interest rates the same or lower interest rates, the gold price could go higher, weakening demand for the dollar.
Watch the markets this week.
[1] https://www.zerohedge.com/energy/aramco-could-face-weeks-restoring-full-production-capacity-specter-100-oil-looms
[2] https://www.cnbc.com/2019/09/05/the-fed-will-cut-rates-by-a-quarter-point-this-month.html
[3] https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
[5] https://www.federalreserve.gov/monetarypolicy/files/FOMC20121024meeting.pdf
[6] https://www.federalreservehistory.org/essays/gold_convertibility_ends
[7] https://www.bloomberg.com/news/features/2016-05-30/the-untold-story-behind-saudi-arabia-s-41-year-u-s-debt-secret
[8] https://www.cnbc.com/2019/01/31/world-gold-council-central-banks-buy-most-gold-since-1967-.html
[9] https://www.nytimes.com/interactive/2018/10/26/world/middleeast/saudi-arabia-war-yemen.html
[10] https://www.cnbc.com/2017/10/24/petro-yuan-china-wants-to-dethrone-dollar-rmb-denominated-oil-contracts.html
[11] https://www.bloomberg.com/news/articles/2018-06-20/russia-dumps-treasuries-for-gold-in-pivot-after-sanctions-scare