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How The Petrodollar Quietly Died, And Nobody Noticed
by Tyler Durden on 11/03/2014 23:42
Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.
The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements, leading to, among other thing, such discussions as, in today’s FT, why China’s Renminbi offshore market has gone from nothing to billions in a short space of time.
And yet, few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico’ed both itself, and its closest Petrodollar trading partner, the US of A.
As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their “petrodollars” out of world markets this year, citing a study by BNP Paribas (more details below). Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.
A consequence of this year’s dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed.
This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.
But no more: “this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations.”
In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.
According to BNP, Petrodollar recycling peaked at $511 billion in 2006, or just about the time crude prices were preparing to go to $200, per Goldman Sachs. It is also the time when capital markets hit all time highs, only without the artificial crutches of every single central bank propping up the S&P ponzi house of cards on a daily basis. What happened after is known to all…
“At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out,” said David Spegel, global head of emerging market sovereign and corporate Research at BNP.
Spegel acknowledged that the net withdrawal was small. But he added: “What is interesting is they are draining rather than providing capital that is moving global liquidity. If oil prices fall further in coming years, energy producers will need more capital even if just to repay bonds.”
In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.
Which is hardly great news: because in a world in which central banks are actively soaking up high-quality collateral, at a pace that is unprecedented in history, and led to the world’s allegedly most liquid bond market to suffer a 10-sigma move on October 15, the last thing the market needs is even less liquidity, and even sharper moves on ever less volume, until finally the next big sell order crushes the entire market or at least force the [NYSE|Nasdaq|BATS|Sigma X] to shut down indefinitely until further notice.
So what happens next, now that the primary USD-recycling mechanism of the past 2 decades is no longer applicable? Well, nothing good.
Here are the highlights of David Spegel’s note Energy price shock scenarios: Impact on EM ratings, funding gaps, debt, inflation and fiscal risks.
Whatever the reason, whether a function of supply, demand or political risks, oil prices plummeted in Q3 2014 and remain volatile. Theories related to the price plunge vary widely: some argue it is an additional means for Western allies in the Middle East to punish Russia. Others state it is the result of a price war between Opec and new shale oil producers. In the end, it may just reflect the traditional inverted relationship between the international value of the dollar and the price of hard-currency-based commodities (Figure 6). In any event, the impact of the energy price drop will be wide-ranging (if sustained) and will have implications for debt service costs, inflation, fiscal accounts and GDP growth.
Have you noticed a reduction of financial markets liquidity?
Outside from the domestic economic impact within EMs due to the downward oil price shock, we believe that the implications for financial market liquidity via the reduced recycling of petrodollars should not be underestimated. Because energy exporters do not fully invest their export receipts and effectively ‘save’ a considerable portion of their income, these surplus funds find their way back into bank deposits (fuelling the loan market) as well as into financial markets and other assets. This capital has helped fund debt among importers, helping to boost overall growth as well as other financial markets liquidity conditions.
Last year, capital flows from energy exporting countries (see list in Figure 12) amounted to USD812bn (Figure 3), with USD109bn taking the form of financial portfolio capital and USD177bn in the form of direct equity investment and USD527bn of other capital over half of which we estimate made its way into bank deposits (ie and therefore mostly into loan markets).
More ( here )
And so on, but to summarize, here are the key points once more:
- The stronger US dollar is having an inverse impact on dollar-denominated commodity prices, including oil. This will affect emerging market (EM) credit quality in various ways.
- The implications of reduced recycled petrodollars has significant ramifications for financial markets, loan markets and Treasury yields. In fact, EM energy exporters will post their first net drain on global capital (USD8bn) in eighteen years.
- Oil and gas exporting EMs account for 26% of total EM GDP and 21% of external bonds. For these economies, the impact will be on lost fiscal revenue, lost GDP growth and the contribution to reserves of oil and gas-related export receipts. Together, these will have a significant effect on sustainability and liquidity ratios and as a consequence are negative for dollar debt-servicing risks and credit ratings.
Energy Markets Are On The Brink Of Crisis
The multitudes of people, especially Americans, who view U.S. government activity in a negative light often make the mistake of attributing all corruption to some covert battle for global oil fields. In fact, the average leftist seems to believe that everything the establishment does somehow revolves around oil. This is a very simplistic and naïve view.
Modern wars are rarely, if ever, fought over resources, despite what the mainstream gatekeepers might tell you. If a powerful nation wants oil, for instance, it lines the right pocketbooks, intimidates the right individuals, blackmails the right officials or swindles the right politicians. It has no need to go to war when politicians and nations are so easily bought. Modern wars, rather, are fought in order to affect psychological change within a particular country or population. Wars today are fought to cover up corrupt deals and create desperation. Oil is used as an all-encompassing excuse for war, but it is never the true cause of war.
In reality, oil demand has become static and is even falling in many parts of the world, while new oil and gas-producing fields are discovered on a yearly basis. Petroleum is not a rare resource — at least, not at the present. And the propaganda surrounding the “peak oil” Armageddon scenario is pure nonsense. Oil prices, unfortunately, do not rise and fall according to supply – instead they rise and fall according to market tensions and, most importantly, the value and perceived safety of the U.S. dollar. Supply and demand have little to do with commodity values in our age of fiat manipulation and false investor perception.
That said, certain political and regional events are currently in motion that could, in fact, change investor perception to the negative, and convince the world of a false fear of reduced supply. While supply is more than ample, the expectation of continued supply can be jilted, shocking commodities markets into running for the hills or rushing into mass speculation, generally resulting in a sharp spike in prices.
A very real danger within energy markets is the undeniable threat that the U.S. dollar may soon lose its petrodollar status and, thus, Americans may lose the advantage of relatively low gas prices they have come to expect. That is to say, the coming market crisis will have far more to do with the health of the dollar than the readiness of supply.
In the span of only a few years, as the derivatives crisis took hold and the fed began its relentless bailout regime, petroleum costs have doubled. It wasn’t that long ago that someone could fill his vehicle’s tank with a $20 bill. Those days are long gone, and they are not coming back. The expectation has always been that prices would recede as the overall economy began to heal. Of course, our economy will not be healed until it is allowed to crash, as it naturally should crash. And as it crashes, because of our currency’s unique place in history, the price of oil will continue to climb.
The petrodollar has always been seen as invincible — a common denominator, a mathematical constant. This is a delusion propagated by a lack of knowledge and common sense amongst establishment economists.
As I have covered in great detail in numerous articles, the U.S. dollar’s world reserve status is nearing extinction. Multiple major economies now trade bilaterally without the use of the dollar; and with foreign conflicts on the rise, this trend is going to become the norm.
In the past week alone, Putin adviser Sergey Glazyev recommended to the Kremlin that a coalition of nations be formed to end the dollar’s reserve status and initiate a form of economic warfare to stop “U.S. aggression”. Of course, anyone familiar with the escapades of international banking cartels knows that it is the money elite that dictate U.S. aggression, just as they dictate the policy initiatives of Russia. I would note that there is only ONE currency exchange structure that could be used at this time to shift global forex reserves away from the dollar system, and that is the IMF’s Special Drawing Rights.
The argument has always been that the IMF is a U.S. controlled institution, however, this is a faulty assumption. The IMF is a GLOBAL BANKER controlled institution, a front organization for the Bank of International Settlements, which is why the recent refusal by the U.S. Congress to vote on new capital allocations for the IMF has resulted in the world’s central bank threatening to remove U.S. veto power. Globalists have no loyalty to any single nation, and the reality is, the fall of the dollar actually benefits these financiers in the long term.
Russia’s historic oil and gas deal with China, just signed weeks ago, removes the dollar as the petroleum reserve currency.
Russia’s largest gas company, Gazprom, has all but excluded the dollar in all transactions with foreign nations. In fact, nine out of 10 of Gazprom’s foreign clients were more than happy to buy their products without using dollars. This fact cripples the arguments of dollar cheerleaders who have always claimed that even if Russia broke from the dollar, no one else would go along.
Gazprom and the Russian government have followed through with their threats to cut off gas pipelines to Ukraine, and now, some analysts fear this strategy may extend to the EU, in which many countries are still 30% dependent on Russian energy.
China is currently striking oil deals not only with Russia but also with Iran. New oil deals are being signed even after a $2 billion agreement fell through this spring. And, despite common misinformation, it was actually China that was reaping the greatest rewards through the reopening of Iraqi oil fields, not the U.S., all while U.S. military assets were essentially wasted in the region.
Now, any U.S. benefits are coming into question as Iraq disintegrates into chaos yet again. With the speed of the new Islamic State of Iraq and Syria (ISIS) insurgency growing, it is unclear whether America will have ANY access to Iraqi oil in the near future. If ISIS is successful in overrunning Iraq, it is unlikely that Iraqi oil will ever be traded for dollars again. Unrest in Iraq has already caused substantial market spikes in oil prices, and I can say with considerable confidence that this trend is going to continue through the rest of the year.
Interestingly, mainstream news sources suggest that Saudi Arabia has been a primary funding source for the ISIS movement. It is true that the Saudis have warned for years that they would fund and arm Sunni insurgents if America ever pulled out of the country. But, I would point out that the U.S. has also been covertly supporting such extremist groups in the Mideast for quite some time, and this is not discussed at all in the MSM storyline. The mainstream narrative is painting a picture of betrayal by the Saudis against the U.S. through subversive groups designed to break the foundations of nations opposed to its policy views. When, in fact, the destabilization of Iraq has been nurtured by money and weapons from both America and Saudi Arabia.
It was the CIA which trained ISIS insurgents secretly in Jordan in preparation for their subversive war in Syria. It was an agreement signed by George W. Bush and delegated under Obama’s watch that allowed ISIS leader, Abu Bakr al-Baghdadi, to be set free in 2009. Saudi Arabia has been openly arming the Sunni’s for years with the full knowledge of the U.S. government. So then, why is the narrative being created that America and Saudi Arabia are at odds over ISIS?
Such a development would place the U.S. squarely in conflict with the Saudi government, our only remaining toehold in the global oil market. Without Saudi Arabia’s patronage of the dollar, most OPEC nations will follow (including Kuwait), and the dollar WILL lose its petrodollar status. Period.
In the past few days, Saudi Arabia has demanded that the foreign interests refrain from any military intervention in Iraq. While Barack Obama has repositioned an aircraft carrier, armed troops, and special forces in the area.
Now, my regular readers understand that this was going to happen eventually anyway. The Federal Reserve’s quantitative easing bonanza has destroyed true dollar value and spread unknown trillions of dollars in fiat across the planet. The dollar’s death has been assured. It has been slated for execution. This is why half the world is positioning to dump the currency altogether. My regular readers also know that the destruction of the dollar is not an accident; it is part of a carefully engineered strategy leading to the centralization of all economic power under the umbrella of a new global currency basket system controlled by the International Monetary Fund.
I believe Saudi Arabia may be a near term trigger in the next great shift in petroleum markets away from the dollar. Renewed U.S. involvement in Iraq, diplomatic tensions over ISIS, and more lucrative offers from Eastern partners have been edging Saudi Arabia away from strict petrodollar ties. This shift is also not limited to Saudi Arabia.
“Abu Dhabi, the most influential member of the United Arab Emirates,” has suddenly ended its long-standing exclusive relationship with Western oil companies and has signed a historic deal with China’s state-owned China National Petroleum Corporation (CNPC).
Russia has formed the new Eurasian Economic Union with Belarus and Kazakhstan, two countries with freshly discovered oil fields.
On the surface, it appears as though the world is huddling itself around oil resources in an environment of East versus West conflict. However, these changes are not as much about petroleum as they are about the petrodollar. The reality is the dollar’s reserve-status days are numbered and this is all part of the plan.
What does this mean for us? It means much higher gas prices in the coming months and years. Is $4 to $5 per gallon gasoline a burden on your pocketbook? Try $10 to $11 per gallon, perhaps more. Do you think the economy is straining as it is under the weight of current gas prices? Imagine the earthquake within our freight-based system when the cost of trucking shipments triples. And guess who will end up paying for the increased costs? That’s right: you, the consumer. High energy prices affect everything, including shelf prices of retail goods. This is just the beginning of what I believe will be ever expanding inflation in oil prices, leading to the end of the dollar’s petroleum reserve status, then it’s world reserve status by default, and the introduction of a basket currency system that will ultimately benefit a select few global financiers while diminishing the quality of living for millions, if not billions, of people.
After Iraq, Libya, Iran now Russia wages Petrodollar War
April 29, 2014
The Ministry of Finance (MoF) on President Putin’s order yesterday accelerated the opening of the St. Petersburg Exchange (SPE), where prices for Russian oil and natural gas will be set in rubles instead of US dollars.
Putin’s order regarding the SPE was in direct response to the US placing sanctions yesterday upon Igor Sechin the CEO of the Russian energy giant Rosneft and a nominated board member of the SPE, and of which Deputy Minister for foreign relations, Sergey Ryabkov, had warned: “A response of Moscow will follow, and it will be painfully felt in Washington DC.”
Sechin, was directly threatened by the Obama regime earlier this month due to his October 2013 remarks at the World Energy Congress in Korea where he called for a “global mechanism to trade natural gas” and went on suggesting that “it was advisable to create an international exchange for the participating countries, where transactions could be registered with the use of regional currencies”.
Sechin, as one of the most influential leaders of the global energy trading community now has the perfect instrument to make this plan a reality with the SPE where reference prices for Russian oil and natural gas will be set in rubles instead of US dollars and could literally destroy the petrodollar.
As we reported earlier already Russia and India are planning to remove the Dollar, meanwhile many speculators believe that the Yuan may already have become a de facto reserve currency. Also to be noted is the epic $30 Billion Oil Pipeline undertaken by Russia, India, China that could shift the Geopolitical balance.
The use of this “Financial Nuclear Weapon” (the sale of oil in a currency other than the US dollar) which was previously deployed by Saddam Hussein, resulted in the total destruction of Iraq, but it failed to deter other countries angry with the highhandedness of the US.
Libya made another attempt and it resulted in the destruction of the country and the brutal murder of its leader Muammar Gaddafi.
Next was Iran. The US and the global financial war party found it much more difficult to isolate and annihilate Iran, even when it was threatened with outright nuclear attack by US and Israel. And in spite of unprecedented sanctions against Iran (which constitute economic warfare and are war crimes in itself), Iran stood defiant.
The leading members of BRICS (Brazil, Russia, India, China and South Africa) Russia and China restrained themselves so as to preserve global stability.
However, the war party faction of the US took such restraint as weakness and went on a spree of regime change throughout the world to undermine the growing strength of BRICS.
The “straw that broke the camels’ back” was the unbridled and reckless coup against the elected President of Ukraine by US and NATO and orchestrated by the US State Department and led by the war-monger Victoria Nuland, who openly admitted that the US had disbursed through such organizations as the National Endowment for Democracy (NED) over $5 Billion to facilitate the coup. Further to this just a couple of days back as reported by Bodhita US backed elite ‘Rape-Murder’ Alpha Squads were captured in Ukraine.
Critical to understand about the current Ukrainian Crisis, is that it has “absolutely nothing” at all to do with either Ukraine or its people, but should be understood for what it really is…a “sledgehammer” the US is attempting to use against Russia to prevent the opening and expansion of the SPE.
By perpetually expanding the US money supply, it’s important to note, America’s standard of living for its elite classes increases as well. The only problem with this situation is that the only way that it can be sustained is if the demand for the dollar and for US debt securities remains consistently strong.
Grasping this last point is extremely important. For if the artificial global US dollar demand, made possible by the petrodollar system, were ever to crumble, foreign nations who had formerly found it beneficial to hold US dollars would suddenly find that they no longer needed the massive amounts that they were holding.
This massive amount of dollars, which would no longer be useful to foreign nations, would come rushing back to their place of origin… America.
Obviously, an influx of dollars into the American economy would lead to massive inflationary pressures within their economic system and collapse it, along with that of the EU too.
It is difficult to overstate the importance of this concept as the entire American monetary system literally hinges on this “dollars for oil” system. Without it, Washington would lose its permission slip to print excessive numbers of dollars.
With thousands of NATO-backed Romanian troops now moving to the Ukraine border, along with British and French fighter jets now being deployed to Lithuania and Poland to join their recently arrived US military allies, it cannot be ruled out that the US will attempt to start a war with Russia in order to protect their petrodollar scheme.
In spite of the fact that all Russian military forces have returned to their permanent bases and Minister of Defense Sergei Shoigu assured his US counterpart Secretary of Defense Chuck Hagel yesterday during an hour long phone conversation that Russia had no intention of invading Ukraine, Moscow has become increasingly “alarmed” by the combined US-NATO military buildup on its borders that Minister Shoigu called “unprecedented”.
As for the Ukrainian people themselves being used as pawns by the US against Russia in this “petrodollar war”, their lives are quickly turning from despair to outright misery as they are forced to swallow the “bitter pill” being forced upon them by the International Monetary Fund (IMF) which is forcing their fuel and energy costs to skyrocket and taxes being raised on everything from alcohol to tobacco, not to mention the tens-of-thousands of public jobs being made redundant (layoffs and firings) and the nearly 5% cut in payments to pensioners.
Even worse for these “US Pawns”, wages now in Ukraine are, as a rule, not enough to feed a family, and the devaluation of their currency will make it totally impossible for these people to absorb these costs.
It is critically important to note that back in 2008, when the US brought the world to the very brink of total economic collapse, then Deputy Prime Minister Dmitry Medvedev warned that Russia should seize opportunities created by the weak US dollar. “Today, the global economy is going through uneasy times,” he said. “The role of the key reserve currencies is under review. And we must take advantage of it.”
Six years later that is what Putin is doing…nobody can say that they weren’t warned.
US Threatens Russia Over Petrodollar-Busting Deal
On the heels of Russia’s potential “holy grail” gas deal with China, the news of a Russia-Iran oil “barter” deal, it appears the US is starting to get very concerned about its almighty Petrodollar
- *U.S. HAS WARNED RUSSIA, IRAN AGAINST POSSIBLE OIL BARTER DEAL
- *U.S. SAYS ANY SUCH DEAL WOULD TRIGGER SANCTIONS
- *U.S. HAS CONVEYED CONCERNS TO IRANIAN GOVT THROUGH ALL CHANNELS
We suspect these sanctions would have more teeth than some travel bans, but, as we noted previously, it is just as likely to be another epic geopolitical debacle resulting from what was originally intended to be a demonstration of strength and instead is rapidly turning out into a terminal confirmation of weakness.
As we explained earlier in the week,
Russia seems perfectly happy to telegraph that it is just as willing to use barter (and “heaven forbid” gold) and shortly other “regional” currencies, as it is to use the US Dollar, hardly the intended outcome of the western blocakde, which appears to have just backfired and further impacted the untouchable status of the Petrodollar.
…
“If Washington can’t stop this deal, it could serve as a signal to other countries that the United States won’t risk major diplomatic disputes at the expense of the sanctions regime,”
And here is Voice of Russia, “Russia prepares to attack the Petrodollar“:
The US dollar’s position as the base currency for global energy trading gives the US a number of unfair advantages. It seems that Moscow is ready to take those advantages away.
The existence of “petrodollars” is one of the pillars of America’s economic might because it creates a significant external demand for American currency, allowing the US to accumulate enormous debts without defaulting. If a Japanese buyer want to buy a barrel of Saudi oil, he has to pay in dollars even if no American oil company ever touches the said barrel. Dollar has held a dominant position in global trading for such a long time that even Gazprom’s natural gas contracts for Europe are priced and paid for in US dollars. Until recently, a significant part of EU-China trade had been priced in dollars.
Lately, China has led the BRICS efforts to dislodge the dollar from its position as the main global currency, but the “sanctions war” between Washington and Moscow gave an impetus to the long-awaited scheme to launch the petroruble and switch all Russian energy exports away from the US currency .
The main supporters of this plan are Sergey Glaziev, the economic aide of the Russian President and Igor Sechin, the CEO of Rosneft, the biggest Russian oil company and a close ally of Vladimir Putin. Both have been very vocal in their quest to replace the dollar with the Russian ruble. Now, several top Russian officials are pushing the plan forward.
First, it was the Minister of Economy, Alexei Ulyukaev who told Russia 24 news channel that the Russian energy companies must should ditch the dollar. “ They must be braver in signing contracts in rubles and the currencies of partner-countries, ” he said.
Then, on March 2, Andrei Kostin, the CEO of state-owned VTB bank, told the press that Gazprom, Rosneft and Rosoboronexport, state company specialized in weapon exports, can start trading in rubles. “ I’ve spoken to Gazprom, to Rosneft and Rosoboronexport management and they don’t mind switching their exports to rubles. They only need a mechanism to do that ”, Kostin told the attendees of the annual Russian Bank Association meeting.
Judging by the statement made at the same meeting by Valentina Matviyenko, the speaker of Russia’s upper house of parliament, it is safe to assume that no resources will be spared to create such a mechanism. “ Some ‘hot headed’ decision-makers have already forgotten that the global economic crisis of 2008 – which is still taking its toll on the world – started with a collapse of certain credit institutions in the US, Great Britain and other countries. This is why we believe that any hostile financial actions are a double-edged sword and even the slightest error will send the boomerang back to the aborigines,” she said.
It seems that Moscow has decided who will be in charge of the “boomerang”. Igor Sechin, the CEO of Rosneft, has been nominated to chair the board of directors of Saint-Petersburg Commodity Exchange, a specialized commodity exchange. In October 2013, speaking at the World Energy Congress in Korea, Sechin called for a “global mechanism to trade natural gas” and went on suggesting that “ it was advisable to create an international exchange for the participating countries, where transactions could be registered with the use of regional currencies “. Now, one of the most influential leaders of the global energy trading community has the perfect instrument to make this plan a reality. A Russian commodity exchange where reference prices for Russian oil and natural gas will be set in rubles instead of dollars will be a strong blow to the petrodollar.
Rosneft has recently signed a series of big contracts for oil exports to China and is close to signing a “jumbo deal” with Indian companies. In both deals, there are no US dollars involved. Reuters reports, that Russia is close to entering a goods-for-oil swap transaction with Iran that will give Rosneft around 500,000 barrels of Iranian oil per day to sell in the global market. The White House and the russophobes in the Senate are livid and are trying to block the transaction because it opens up some very serious and nasty scenarios for the petrodollar. If Sechin decides to sell this Iranian oil for rubles, through a Russian exchange, such move will boost the chances of the “petroruble” and will hurt the petrodollar.
It can be said that the US sanctions have opened a Pandora’s box of troubles for the American currency. The Russian retaliation will surely be unpleasant for Washington, but what happens if other oil producers and consumers decide to follow the example set by Russia? During the last month, China opened two centers to process yuan-denominated trade flows, one in London and one in Frankfurt. Are the Chinese preparing a similar move against the greenback? We’ll soon find out.
Finally, those curious what may happen next, only not to Iran but to Russia, are encouraged to read “From Petrodollar To Petrogold: The US Is Now Trying To Cut Off Iran’s Access To Gold.”
Petrogold: Are Russia And China Hoarding Gold Because They Plan To Kill The Petrodollar?
By Michael, on February 12th, 2013
Will oil soon be traded in a currency that is thousands of years old? What would a “gold for oil” system mean for the petrodollar and the U.S. economy? Are Russia and China hoarding massive amounts of gold because they plan to kill the petrodollar? Since the 1970s, the U.S. dollar has been the currency that the international community has used to trade oil around the globe. This has created an overwhelming demand for U.S. dollars and U.S. debt. But what happens when the rest of the globe starts rejecting the increasingly unstable U.S. dollar and figures out that gold can be used as a currency in international trade? The truth is that it doesn’t take a lot of imagination to figure that out. Demand for the U.S. dollar and U.S. debt would fall off the map and there would be a rush into gold unlike anything we have ever seen before. So are Russia and China accumulating unprecedented amounts of gold right now because they eventually plan to cut the legs out from under the petrodollar and they want to gobble up huge stockpiles of gold before the cat is out of the bag? Of course they will never admit this publicly, but there are rumblings out there that this is exactly what is happening.
Not that you can really blame any nation that wants to get into gold right now. News outlets all over the globe are telling us that we are in the midst of a “currency war” as central banks all over the planet race to devalue their currencies.
So why would anyone want to be in paper in such an environment?
And of course the Federal Reserve is one of the biggest offenders. The Fed has been printing money like it is going out of style, and nobody at the Fed or in the U.S. government really seems too concerned that all of this money printing could be endangering the petrodollar.
But the truth is that the Fed is endangering the petrodollar. Just read some foreign news stories about the U.S. dollar. They mock us for our reckless money printing.
In the end, our recklessness will make it very easy for the rest of the world to ditch the U.S. dollar.
At some point, it will happen. In fact, there are persistent rumors that Russia and China actually intend to make it happen.
Many believe that this is the reason both nations have been hoarding so much gold recently.
Just check out how much gold Russia has been accumulating. The following is from a recent Bloomberg article…
When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he’s not just talking. He’s betting on it.
Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.
“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.
And Russia’s gold hoarding appears to have accelerated last year. According to one recent report, Russia added 3.2 million ounces of gold to their reserves in 2012 alone.
But of even greater concern is China. Nobody really knows how much gold China has, because they do not tell us, but all indications point to the fact that Chinese gold hoarding has gone into overdrive. The following is from a Zero Hedge article from a few months ago…
Because while earlier today we were wondering (rhetorically, of course) what China is doing with all that excess trade surplus if it is not recycling it back into Treasurys, now we once again find out that instead of purchasing US paper, Beijing continues to buy non-US gold, in the form of 68 tons in imports from Hong Kong in the month of June. The year to date total (6 months)? 383 tons. In other words, in half a year China, whose official total tally is still a massively underrepresented 1054 tons, has imported more gold than the official gold reserves of Portugal, Venezuela, Saudi Arabia, the UK, and so on, and whose YTD imports alone make it the 14th largest holder of gold in the world. Realistically, by now China, which hasn’t provided an honest gold reserve holdings update to the IMF in years, most certainly has more gold than the IMF, and its 2814 tons, itself. Of course, the moment the PBOC does announce its official updated gold stash, a gold price in the mid-$1000 range will be a long gone memory.
As I wrote about the other day, nobody produces more gold than China does, and nobody imports more gold than China does.
Everyone agrees that China seems to have an insatiable appetite for gold, but nobody can agree on exactly how much gold they actually have. One recent estimate put China’s gold reserves at more than 7,000 tons of gold, but it could even be much higher than that. Nobody really knows.
So what are Russia and China up to?
Well, for a long time both nations have expressed displeasure with the fact that the U.S. dollar is the de facto currency of the world. Leaders from both nations have suggested the possibility of adopting a new global reserve currency, but up to this point no real contenders have emerged to dethrone the U.S. dollar.
So for now, the U.S. dollar reigns supreme in international trade. Sadly, even though most Americans greatly benefit from the petrodollar, most of them do not even know what it is. For those that do not fully understand the petrodollar, the following is a good explanation of the petrodollar from a recent 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.
And all of this has worked out very nicely for the United States. It has created a massive demand for U.S. dollars and U.S. debt.
But what would happen if the rest of the world rejected the petrodollar system and adopted a “petrogold” system instead?
A recent article by Jim Willie discussed how a petrogold system might work…
The crux of the non-US$ trade vehicle devised as a USDollar alternative will be the Gold Trade Note. It will enable peer-to-peer payments to be completed from direct account transfers independent of currency, and most importantly, not done through the narrow pipes and channels controlled by the bankers with their omnipresent SWIFT code system among the world of banks. The Gold Trade Note will act much like a Letter of Credit, serve as a short-term bill, and maybe even push aside the near 0% short-term USTreasury Bills that litter the banking landscape. Any bond or bill earning almost no interest is veritable clutter. The zero bound USTreasurys open the door in a big way for replacement by a better vehicle. The new trade notes will involve posted gold as collateral, whose entire system for trade usage will bear a massive gold core that also will include silver and platinum, maybe other precious metals. The idea is to avoid the FOREX systems, to avoid the USDollar, and to avoid the banks as much as possible in a peer-to-peer system that can be executed between parties holding Blackberry devices or simple PC to complete the payments on transactions. If Gold is ignored by the corrupt bankers, then Gold will be the center of the new trade system and the solution in providing a globally accepted USDollar alternative.
And Russia and China would greatly benefit from a petrogold system.
Today, Russia is the number one oil exporter on the planet.
China is the number two consumer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.
Does it make sense that they should remain locked into a system that forces them to use U.S. dollars for all of their oil transactions?
And now Russia even has the number one oil company in the world. The following is from a recent article by Marin Katusa…
Exxon Mobil is no longer the world’s number-one oil producer. As of yesterday, that title belongs to Putin Oil Corp – oh, whoops. I mean the title belongs to Rosneft, Russia’s state-controlled oil company.
Rosneft is buying TNK-BP, which is a vertically integrated oil company co-owned by British oil firm BP and a group of Russian billionaires known as AAR. One of the top-ten privately owned oil producers in the world, in 2010 TNK-BP churned out 1.74 million barrels of oil equivalent per day from its assets in Russia and Ukraine and processed almost half that amount through its refineries.
With TNK-BP in its hands, Rosneft will be in charge of more than 4 million barrels of oil production a day. And who is in charge of Rosneft? None other than Vladimir Putin, Russia’s resource-full president.
And Russian gas giant Gazprom supplies a huge percentage of the natural gas that Europe uses…
Gazprom, the Russian state gas company, already has Europe wrapped around its little finger. Russia supplies 34% of Europe’s gas needs, and when the under-construction South Stream pipeline starts operating, that percentage will increase. As if those developments weren’t enough, yesterday Gazprom offered the highest bid to obtain a stake in the massive Leviathan gas field off Israel’s coast.
Gazprom in control of Europe’s gas, Rosneft in control of its oil. A red hand stretching out from Russia to strangle the supremacy of the West and pave the way for a new world order– one with Russia at the helm.
Russia and China have a tremendous amount of leverage when it comes to energy. What if they got together with a bunch of oil producing nations in the Middle East and decided to set up a system where oil is traded for gold? Would not much of the rest of the world go along with such a system?
Of course if that happened the U.S. financial system would crash. We would no longer be able to export our inflation to the rest of the globe and prices would rise dramatically. Demand for U.S. government debt would go through the floor and interest rates on that debt and on everything else in our economy would skyrocket. Economic activity would grind to a standstill and the financial markets would collapse.
And that would just be for starters.
Most Americans simply don’t understand that Russia and China have the power to collapse the U.S. economy by going to a gold for oil system. All they have to do is pull the trigger.
The other day I wrote an article entitled “Show This To Anyone That Believes That ‘Things Are Getting Better’ In America” which discussed all of the reasons why the U.S. economy is already collapsing. But as bad as things are now, this is nothing compared to what things will be like when the petrodollar dies.
So pay keen attention to anything in the news about Russia or China suggesting that oil should be traded for gold. When Russia and China pull the trigger, things will get messy very quickly.
Continents of the World
Mb50's "Liquid Mud" Rant 