04/08/2022
4/8/2022
“Did you Hear?...
Many global powers are working towards moving away from the oil backed dollar, or “Petro Dollar”, as the worlds reserve currency. With the sanctions handed down to Russia by President Joe Biden disrupting supply chains, limiting trade, and forcing countries to scramble to make up for the resources lost by these sanctions, it seems this will have severe negative effects on the Dollar and the American economy. It will raise inflation, fed rates, and possibly cause the Petro-Dollar to lose its role as the world’s dominant currency.
For decades the dollar has been the preeminent global currency. As a result, most international transactions, including oil, are priced in dollars. Oil-exporting nations receive dollars for their exports, not their own currency. Most oil-exporting nations own their own oil industries. That makes their national income dependent on the value of the dollar. If it falls, so does their government's revenue. To helps these countries avoid wide swings in inflation or deflation, they peg their currency to the US dollar. This way, if the dollar’s value falls, so does the price of all their domestic goods and services.
But how did the US Dollar become the world’s most dominant currency?
Soon after World War II, the US held most of the world's gold supply. The US agreed to redeem any U.S. dollar for its equal value in gold with the stipulation that other countries pegged their currencies to the dollar. During the Bretton Woods Conference of 1944, officially known as the United Nations Monetary and Financial Conference, delegates from 44 nations met from July 1-22, in Bretton Woods, New Hampshire, to agree upon a series of new rules for the post-WWII international monetary system. The two major accomplishments of the conference were the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). The IMF was charged with the maintenance of a system of fixed exchange rates centered on the U.S. dollar and gold. The IBRD, meanwhile, was responsible for providing financial assistance for the reconstruction of war-ravaged nations and the economic development of less developed countries. From then until 1971 the US Dollar was backed by the “Gold Standard”.
On February 14, 1945, President Franklin D. Roosevelt initiated an alliance with Saudi Arabia. He met with Saudi King Abd al-Aziz, and solidified alliance that was so critical that it has survived subsequent years of differences of opinion between the two nations. Namely, over the Arab-Israeli conflict. The 1945 agreement between the United States and Saudi Arabia cemented the relationship between the dollar and oil. From this, the petrodollar was born.
Presidential initiatives has brought the gold standard into its current chapter. After Roosevelts move away from gold, a stockpile began to grow at Fort Knox. But by 1971, this stockpile had dwindled down to almost nothing after decades of international trade. US “stagflation”, which is the combination of high interest rates, high inflation, and high unemployment, prompted runs on the dollar. Many countries asked to redeem their U.S. dollars for gold. But, to protect the remaining U.S. gold reserves, President Richard Nixon removed the dollar from the gold standard.
This move caused the value of the dollar to plummet. But it also helped the U.S. economy as its export values also decreased, making them more competitive. The falling value of the dollar hurt oil-exporting countries because contracts were priced in U.S. dollars. Their oil revenue dropped along with the dollar, and the cost of imports, denominated in other currencies, increased.
In 1973, Nixon requested military aid from Congress for Israel as they fought in the Yom Kippur War. The newly formed Organization of the Petroleum Exporting Countries (OPEC) halted oil exports to the United States and other Israeli allies. The OPEC oil embargo quadrupled the price of oil in six months. As a result, gas prices in the US were crippling American citizens at the pump. Prices remained high even after the embargo ended.
In 1979, the United States and Saudi Arabia negotiated the United States-Saudi Arabian Joint Commission on Economic Cooperation. They agreed to use the U.S. dollars for oil contracts. The Dollars would be recycled back to America through contracts with U.S. companies. These companies would then improve Saudi infrastructure through technology transfer. All Oil-exporting countries would come to use petrodollars to fund domestic consumption. This would prove to increase imports, provide higher wages for government employees, and boosts the local economy. The rest would be used to improve the nations' finances. They recycled their petrodollars through sovereign wealth funds, and use these funds to invest in non-oil related businesses. The profits from these businesses would make them less dependent on oil prices.
Unfortunately, the US government and politicians have used the power of the petrodollar to enforce its foreign policy. Some larger powers do not like the prospect of being subject to U.S. policies when they transact in dollars. When the U.S. dollar is used or transactions are cleared through an American bank, entities are subject to U.S. jurisdiction — even if they have nothing to do with the U.S.. Sanctions on countries like Iran, for refusing the nuclear deal, or Russia for Crimea and Ukraine, and Venenzuela have made many nations wary of continuing down the path of the petrodollar. But some countries don’t fight back. They are afraid it would mean the collapse of the petrodollar system and damage their economy. But this desire to move away from the US dollar is not new. It takes on a new dimension with the war in Ukraine because it draws a fault line between Western countries and emerging countries. Even if countries don’t approve of the Russian invasion, the emerging countries are reluctant to align themselves with the position of the United States... Even some European nations.
Saudi Arabia has been a large, long standing ally for the US and their petroleum trade since 1979. Though there have been some diplomatic bumps in the road, they have held strong with their trade relationship, until recently. There are now signs showing that trust has been lost, and the relationship is becoming strained. The Saudi kingdom feels less and less a part of a system put in place by President Nixon. In exchange for security guaranteed by the United States, the Gulf oil monarchies agreed to denominate their transactions in dollars. In doing this, the oil-producing countries accumulated foreign exchange reserves in dollars, and the oil-consuming countries had to purchase dollars to buy oil, reinforcing the role of the greenback as a reference currency. But feelings have changed between the two nations. Why?
Crown Prince Mohammed bin Salman, the Saudi regime’s strongman, was publicly ostracized by the Biden administration. President Biden had accused him of instigating the assassination of dissident journalist Jamal Khashoggi in Turkey on October 2, 2018. Since then, relations between Washington and Riyadh have become more distant. Riyadh also criticizes the United States for not supporting the coalition formed with the United Arab Emirates, which has been bogged down since 2015 in the civil war in Yemen where it is fighting a Houthi rebellion, supported by Iran. The war has claimed 377,000 lives, 150,000 of which were due to the fighting, the rest due to famine and disease. In addition to the human cost, it has a financial cost for Saudi Arabia that amounts to tens of billions of dollars.
This descent has found Saudi Arabia forming new friendships with China, a major foe of the US in terms of politics and trade. China has openly called for a replacement of the U.S. dollar as a global currency. Ironically, it is one of the largest foreign holders of the dollar. China influences the U.S. dollar by pe***ng its currency, the yuan, to it. The sanctions against Russia have crippled the Russian economy and the Rupal, diminishing trade between Russia the US, EU, and NATO nations. The US continues to pressure other countries to halt trade with Russia, or also risk sanctions or being ostracized politically. But will this tactic work? The answer is no… By the US strong arming countries to go along with these sanctions, they are forcing the hands of many countries to find an alternative to the US dollar. Even some countries in the EU, who’s nations have been the strongest supporters of the sanctions, are reconsidering the dollars hold as the world’s global currency. Along with Russia and China, other countries like India and even Germany, France, and the United Kingdom are setting up swap lines which bypass the dollar and SWIFT, which is the dollar-based worldwide financial transaction system. Also taking into account that many countries are moving away from fossil fuels and petroleum and investing in cleaner, greener fuel alternatives, therefore diminishing need for petroleum products.
The evidence is shown in agreements between Russia and India, to trade oil in a currency exchange of Rupees and Rupals. This agreement has gotten India oil and gas from Russia at a discounted rate. “Russia is offering oil and other commodities at a heavy discount. We will be happy to take that. We have some issues like tanker, insurance cover and oil blends to be resolved. Once we have that we will take the discount offer,” one of the Indian government officials said. The US is now taking the opportunity brought by these sanctions, to ramp up oil production and take its place as the worlds #1 oil producer. Despite the stance the Biden Administration ran their election campaign to transition out of the oil industry by eliminating subsidies for oil companies and invest in renewable energy companies. The US has attempted to discourage India’s trade with Russia, and instead import oil from the US at a higher price. India refused.
In recent years, China has tried to internationalize the use of the yuan. Some actions included the introduction of yuan-denominated crude oil futures, and reports that China is preparing to pay for imported crude in its own currency rather than the U.S. dollar. Thus, creating a Petro-Yuan. Saudi Arabia in active talks with Beijing to price some of its oil sales to China in yuan, a move that would put a significant dent in the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter. Saudi Aramco Asia Company (SAAC), and China Petroleum & Chemical Corporation known as Sinopec, has entered a joint venture to develop a major refinery and petrochemical complex in Panjin, China in the northeastern province of Liaoning, expected to start operations in 2024. The Saudi group said the venture would capitalize on each company’s strengths and bolster their existing long-term relationship.
There is also an agreement between China, Russia, and other countries, ending the dollar's stranglehold over oil and how it is purchased. The past 14 months have seen a momentous rush towards setting up the infrastructure to replace the dollar completely in global transactions. China, along with the BRICs nations of Brazil, Russia, India and South Africa, loaned money to a new financial institution they established and labeled the BRICs bank. This bank was created with the intention of bypassing the dollar, allowing free trade to occur between nations without the need to trade for dollars first, as is the current format. In fact, the new BRICs bank will function both as a bank of international settlement, as well as a lender of last resort, eliminating the need for the BIS and IMF, which currently reside under Petrodollar dominion. With Saudi Arabia seemingly prepared to align itself with China, they too will be in the fold of countries turning their backs on the US and the reliance on the Dollar.
With Crypto and blockchain technology offering a digital, centralized and currently unregulated way of doing trade and business. Many more countries are either using, accepting, or even creating their own crypto currencies. Both Russia and China have created their own crypto currencies to off set the dollar. Russian Bank Sberbank created the sBercoin in March, but sanctions have stalled its growth. They are also developing a Putin commissioned cryptocurrency called CryptoRuble. It is different than normal crypto in that it will hold the same value as the ruble and will be government issued. China also has developed a crypto currency. The Digital-Yuan seems to be the world’s best bet to further the bolster the yuan as the top competitor to de-thrown the dollar. They have already begun using it in China successfully, by settling 3 large Construction deals. Any foreign businesses doing business in China, will need to convert to the China Yuan. This gains China economic clout, the #1 financial superpower by having the yuan the currency of choice, and the satisfaction of beating their global nemesis… The US.
The US Dollar is still the top choice of currency in the world for cross-border transactions. But the nations of the world are working hard to unseat the dollar and there seems to be no doubt that the decades long reign the US Dollar has had over the world markets will soon become something of the past. The sanctions, world advancement of cryptocurrency, political strife, and decisions and policies of President Joe Biden and the US government will put the US economy and the dollar into a tailspin. Some believe the fate will be worse than that of 2008, fearing the possibility of a nearly 100-year return to another US depression. High inflation, soaring federal rates, and the loss of value and status of the dollar as the worlds dominant currency, will have a detrimental effect on the US Economy and the American people that will last for years… I just hope we can recover.
***As with any post shared on the VeinteTres Productions page, all information has been researched and verified. Any portion of this article classified as a ‘theory’ was taken from sources or websites partial to that point of view. In no way is it the belief of the author, and or any other person or entity associated with VeinteTres Productions. We encourage you to take the time to research any information you have read above and come to your own educated conclusion. This article is for informational and entertainment purposes only.***
Sources:
- “Audio transcripts of Jamal Khashoggi’s murder revealed” Al Jazeera – Sept 10, 2019
- “Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales” by Summer Said and Stephen Kalin – WSJ
- “Saudi Arabia Mulls Accepting Yuan for China Oil Sales – WSJ c/o Asia Financial - March 15, 2022
- “Gold Standard: A currency's value in gold” – Corporate Finance Institute
- “The Bretton Woods Conference, 1944” Archive – US Department of State
- “Saudi Aramco to Build ‘Major’ Refinery Complex in China - March 11, 2022 – Asia Financial
- “India May Buy Discounted Russian Oil, Officials Say” - March 14, 2022 – Asia Financial
- “Sylvain Saurel
- “The End of the Petrodollar Era — China and Saudi Arabia Want To Replace the King Dollar With the Yuan: A new world monetary order is emerging.” – March 21, 2022 – Medium
- “Petrodollars and the System that Created It: Will the Petrodollar Collapse?” By Kimberly Amadeo - January 20, 2022 – The Balance
- “A ‘growing club’ of ‘very powerful countries’ is steering away from using the dollar” - Eustance Huang - WED, OCT 30 2019
- “23 Countries Now Abandoning US Dollar” – Truth in Action via Examiner .com
- “THE DIGEST: NO. 2, FEBRUARY 2007 – “The Impact of the Euro and Prospects for the Dollar” – National Bureau of Economic Research
- “World Moving Away From Dollar As Global Reserve Currency” By Scott Schaefer - Sep 22, 2017 – Global Trade Funding
