The Death of the Petro-Dollar
Saudi Arabia is looking to sell their oil to China in exchange for the Chinese Yuan. Combined with US sanctions on Russian oil and banking, that would be the death of the petrodollar and the post WWII world order.
The petrodollar was born in 1974 when the USA and Saudi Arabia agreed that Saudi Arabia would only trade their oil for dollars. This effectively backed the dollar with oil- solving the inflationary problem of the dollar effectively being unbacked by gold on August 15, 1971 when president Nixon “temporarily” abandoned the gold standard.
According to Andrea Wong writing for Bloomberg,[1]
“The basic framework was strikingly simple. The U.S. would buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries and finance America’s spending.”
Since the Bretton Woods Agreement in 1944, the US dollar had been the world’s reserve currency. The major Western Empires of the world (and Japan) had either used gold to buy military equipment from the USA for the Second Thirty Years War (1914-1945) or had been conquered by the USA. To escape the threat of Soviet invasion during the Cold War (1945-1991), their leftover gold was transferred to the protection of the USA. Then the USA printed more dollars than gold to pay for big government and Nixon temporarily abandoned the gold standard in 1971.[2]
Now, Saudi Arabia is reportedly looking to sell their oil to China in exchange for the Yuan. This will reduce demand for both dollars for trade and investment in US debt. Combined with US sanctions and rumors of sanctions on both the trade of Russian oil for dollars and Russian banking in dollars, this could kill half of the value of the petrodollar- buying oil.[3][4]
The other half of the value- being able to buy products from the USA- has already been largely replaced. America is not the economic power house of 1945. Since Nixon’s 1972 trip to China, businessmen have progressively exported productive jobs to China to escape the ever progressive taxes and regulations of the USA.[5][6]
Dollar prices will continue to inflate higher. Anectdotle evidence for this is the fact that the London Mercantile Exchange (LME) has capped price fluctuations at 15%. Considering the weakening demand for the dollar for oil trades, the Fed’s policy of printing trillions of dollars, and the price action of nickel last Monday, March 7,2022, the author does not think that the LME is worried about many 15% moves down.[7]
Saudi Arabia is looking to sell their oil to China in exchange for Yuans. Combined with US sanctions on Russian oil and banking, that would be the death of the petrodollar and the post WWII world order.
[2]https://www.hamiltonmobley.com/blog/r9tu385c22azkxuycdia7o3kludljh
[4]https://www.hamiltonmobley.com/blog/swift
[5]https://www.hamiltonmobley.com/blog/august-15-1971
[6]https://www.history.com/this-day-in-history/nixon-arrives-in-china-for-talks
[7]https://www.reuters.com/business/lme-imposes-price-limits-first-time-after-nickel-crisis-2022-03-15/ “The LME decided that price limits on nickel were needed to maintain stability after wild swings last week, when the price jumped more than $18,000 on Monday and then over $50,000 a day later, triggering the suspension in trade.” Nickel was only about $28,000 per ton on March 7 and had only breached $20,000 a few times before January 2022.