The beginning of the end for the PetroDollar?

Petrodollars are crude oil export revenues denominated in U.S. dollars.

The term gained currency in the mid-1970s when soaring oil prices generated large trade and current account surpluses for oil-exporting countries. Oil sales and the resulting current account surpluses were denominated in dollars because the U.S. dollar was and remains by far the most widely used currency.

The U.S. dollar's global popularity does not depend on the goodwill of oil exporters. It is based on the U.S. status as the world's largest economy and goods importer, with deep, liquid capital markets backed by the rule of law as well as a military power.

But today this status is changing, with more and more countries challenging the dollar financial hegemon, we might be witnessing the beginning of the end of the Petrodollar as we know it today.

Historical background

After World War 2, the US had the largest gold reserves in the world. Along with winning the war, this let the US reconstruct the global financial system around the dollar. The new system, created at the Bretton Woods Conference in 1944, tied the US dollar to gold at a fixed rate of $35 per ounce. The dollar was said to be “as good as gold.”

The Bretton Woods system made the US dollar the world’s premier reserve currency. It forced other countries to store dollars for international trade or to exchange with the US government for gold.

Runaway spending on warfare and welfare caused the US government to print more dollars than it could back with gold at the promised price. By the late 1960s, the number of dollars circulating had drastically increased relative to the amount of gold backing them. This encouraged foreign countries to exchange their dollars for gold, draining the US gold supply.

President Nixon “temporarily” suspended the dollar’s convertibility into gold in 1971. This ended the Bretton Woods system and severed the dollar’s last tie to gold.

What do the Saudis have to do with it?

The US handpicked Saudi Arabia because of the kingdom’s vast petroleum reserves and its dominant position in the global oil market.

The petrodollar system was an agreement that the US would guarantee the House of Saud’s survival and protection from domestic and foreign threats. In exchange, Saudi Arabia would do three things.

First, it would use its dominant position in OPEC to ensure that all oil transactions would only happen in US dollars.

Second, it would recycle hundreds of billions of US dollars from annual oil revenue and buy US Treasuries. This lets the US issue more debt and finance previously unimaginable budget deficits.

Third, it would guarantee the price of oil within limits acceptable to the US and prevent another oil embargo.

What is changing?

With the ongoing war in Ukraine and U.S sanctions on the Russian finance and energy sectors, Moscow has implemented many new alternatives for payments for its oil and natural gas exports.

The first of which is the use of the Rubble Russian government-issued currency for settling transactions with what it deems unfriendly countries. Those are mostly countries that are openly supporting Ukraine and supplying it with money or military equipment.

Russia also added that it will also accept cryptocurrency payments with Bitcoin or stablecoins from friendly countries or even currency issued by the country in question. Russia has been accepting the Chinese Yuan for the past year, and according to U.S intelligence reports may be moving forward with the acceptance of Emirati currency as soon as the start of next year.

Other Countries that use other currencies for oil:

Iran: In 2003, Iran has required payment in euros for exports to Asia and Europe.

Venezuela: The petro, launched in February 2018, is a cryptocurrency developed by the government of Venezuela. Announced in December 2017, it is claimed to be backed by the country's oil and mineral reserves.

China: In March 2018, China opened a futures market denominated in Yuan which could encourage the use of its currency as a Petro currency.

it's worth noting that all of those countries are under U.S sanctions in one form or the other.

Recent OPEC+ meeting:

On the 5th of October OPEC+ met in Vienna, Austria in light of the uncertainty that surrounds the global economy and oil market outlooks, and the need to enhance the long-term guidance for the oil market. Also, they declared their initiative to reduce oil production by 2 million barrels a day.

This news comes after oil surged to a new all-time high at the start of the year as the conflict in Ukraine started unfolding, and countries realized the critical energy threat coming their way.

U.S president Joe Biden denounced this action and requested to delay the production reduction until at least the midterm election. He also added that this kind of action is a clear sign of Russian and Chinese alienation.

The Biden administration has been using the U.S strategic oil reserve to try to lower gas prices. But the U.S strategic reserves are currently at a dangerously low level so they won't probably be able to maintain it until December.

The white house threatened to act by passing antitrust legislation or removing military assets from Saudi Arabia. While both courses of action would send a clear message, they could backfire for both the U.S. and crude prices.

Recently the prince of Saudi Arabia announced his interest in joining the BRICS an economic alliance made up of Brazil, Russia, India, China, and South Africa. The BRICS countries are working on establishing a new reserve currency to better serve their economic interests and currently, this might be the biggest threat to the PetroDollar with Saudi Arabia joining them things can get really bad for the Dollar.

Conclusion

Today the U.S still has a massive advantage on the international scene and will still be able to project its influence everywhere as the only world superpower for many decades to come. But the decline we are witnessing in real-time can be accelerated by foreign efforts and domestic turmoil.

We can clearly see that countries have been slowly moving away from the U.S Dollar for alternative means of payment in the past two decades. And almost exclusively in countries targeted by U.S sanctions. So we can start questioning sanctions' efficacity and impact in the long run because it seems to harm the U.S Dollar based system by incentivizing countries to break out of it and find or create their own alternative.

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