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The Rise and Fall of the World's Reserve Currency: the Petrodollar


SECTION 1: INTRODUCTION


In 280 BC, Rome was just a small state, one of the many small states inhabiting

the Italian Peninsula and arguably there were more Greeks there than Romans.

This was why when the small Greek city-state of Tarentines requested aid

from King Pyrrhus of Epirus against the encroaching Romans, he was happy

to oblige. Pyrrhus arrived on the shores with an army of 20,000 infantry, 3,000

cavalries, 2,000 archers, 500 slingers, and 20 war elephants.


Estimates vary, but in his first battle with the Romans, it’s been said he lost

about 25% of his army, including some of his best men. But luck would have

it that other Greek city-states would join him. Reinforced and confident in

victory, he decided to attempt the takeover of several small cities but failed

before marching on Rome, only to find out it was too well-defended.


After resting and regrouping, King Pyrrhus set out again in 279 BC to try to

finish his campaign. However, this time, the Roman soldiers met him near the

city of Asculum. Until this point, the Roman Legions were apprehensive about

facing the Greeks after their crushing defeat. But now, they were left with no

choice as King Pyrrhus was threatening their critical cities along the Aegean

Sea. The Romans faced off with about 40,000 legionaries, 5,000 cavalries, and

300 chariots designed to face the war elephants against the Greek king’s 38,000

infantry, 5,000 cavalries, and 19 war elephants.


When the 2 armies finally confronted one another, neither side could get a

decisive edge over the other. The Romans sent soldiers behind the Greek lines

to burn and loot their encampment. When the Greeks and their allies saw their

camps looted and destroyed behind them, the Romans gained an edge and the

Greeks began to break rank. With his line in danger of collapse, King Pyrrhus

rushed to plug the gap with his elite cavalry. Next, his war elephants finally

managed to break the stalemate with the chariots and charged the flanks of the

Romans. After facing another crushing defeat, the Romans were left with no

choice but to retreat.


However, after this battle, King Pyrrhus surveyed the losses and said, “If we

are victorious in one more battle with the Romans, we shall be utterly ruined.”

After several more years campaigning in southern Italy and losing more and

more of his best men, finally, King Pyrrhus was faced with a much larger and

reorganized Roman Legion. In the end, after all his victories, he was obligated

to retreat once and for all back to Epirus in Greece, leaving the Greek city-states

to their own devices.


We remember this battle courtesy of the annals of Plutarch titled: The Life of

Pyrrhus. This famous battle is where we got the term “Pyrrhic victory” from,

which refers to a success that incurs such staggering losses to all sides that it

cannot be considered a victory at all. A Pyrrhic war is a war that drains both

sides with a battle of attrition that no sane person would call worthwhile; yet

time after time, this option is chosen.


Today, we are witnessing Russia and Saudi Arabia, 2,300 years later, embark on

a Pyrrhic war against the American energy sector. These countries have decided

to flood the oil markets with record levels of supply in a time when demand is

diminishing. To capture a more significant market share and bankrupt the

American shale industry, the Russians, and Saudis have been forced to dig deep

within their cash reserves to balance their budgets.


Meanwhile, the already unprofitable shale oil sector in the U.S. is forced to shut

down wells and go into bankruptcy, because around the world, we are running

out of places to store crude. This has sent oil prices tumbling to record lows,

even trading in negative figures, destroying the profitability of an already

increasingly tricky market.


While the costs of storage are skyrocketing to historic highs, the oil war cannot

go on forever as both nations’ economies are heavily reliant on the energy

sector, respectively. But as the shipments of oil keep coming, we are left

wondering: What we are going to do with all this crude oil?



SECTION 2: COLLAPSE OF THE OIL INDUSTRY


“Across the country, people are willing to tighten their belts and

sacrifice. The president should ask the oil industry to do the same.”

John Salazar, former United States congressman.


On March 10, 2020, Russia and Saudi Arabia went to war with the American

energy sector. To crush the competition, they flooded the market with cheap

oil, causing prices to plummet to all-time lows. According to a post from The

Guardian, on April 20, 2020, U.S. benchmark West Texas Intermediate (WTI)

closed oil as low as -$37.63 USD, leading to the first time in history that

suppliers (theoretically) need to pay consumers to take their oil. The U.S. oil

revolution was crushed, along with prices, leading to a lack of storage. Producers were forced to shut down their wells, which could lead to a decrease in production in the future.


While many producers are faced with a mountain of debt and bad loans, many

are and will be forced into bankruptcy and government bailouts. With oil

consumption at record lows due to mass quarantines and restrictions, it seems

this could not have come at a worse time for U.S. energy producers. American

energy consumption is at levels not seen since the 1970s. 1 Economists have

often used oil consumption as an indication of a nation’s state in terms of the

Gross Domestic Product (GDP). As global oil consumption rapidly declines,

the effects of the economy will be profound.


Trading Economics estimated that Russia had amassed foreign exchange (FX)

reserves totaling $570 billion USD, including a National Wealth Fund at $150

billion USD which they can use to offset low oil prices. Financially, the Russian

economy relies on energy sales and would need a crude price of $40 USD to

balance its 2020 budget. In recent years, Saudi Arabia has been investing heavily

in future megaprojects to shift their dependence away from their energy sector.

However, as reported by Reuters on March 20, 2020, in an article titled Russia vs. Saudi, how much pain can they take in oil price war? Saudi Arabia needed closer to $80 USD to balance its 2020 budget.


As oil producers increase production in an environment with limited demand,

it is quickly turning out to be a race to the bottom, which is terrible for any

business model. It is even worse when you think that nation-states rely on these

energy revenues for their budgets. According to the Organization of the

Petroleum Exporting Countries’ (OPEC) official data from 2018, OPEC

nations possessed 79.4% of the world’s proven reserves. OPEC+ is the

meeting of OPEC nations, with the addition of 10 new exporting countries,

including Russia, one of the most influential oil producers.


The Russians, by making a deal with the devil, were betting that they could

outlast both the Saudis and the American energy sectors as they are in a well-established supplier position in Eurasia and can use their FX reserves to budget

their economy. Regardless of whether they can cut a deal or not, it will take

time, and lower oil prices will continue for the near term.


The Real Investment Advice article, written by Lance Roberts on April 24, 2020,

revealed the revolutions in fracking technology that led to a transformation of

the industry and the American energy sectors. When oil prices hit all-time highs

in 2008, in some cases near $150 USD a barrel, unviable technology such as

fracking, and previously unprofitable energy developments, suddenly became

profitable.2


In a rush from Wall Street to find new forms of investment, the industry was

flooded with wave after wave of investment capital over the following years.

These were the golden days of the fracking industry where everyone and their

grandmother were making a fortune. With interest rates at record lows, any

debt was seemingly good debt. However, oil prices began to decline in 2014

and the profitability of these start-ups came into question. Instead of cutting

production, OPEC+ increased production to increase market share and push

out North American and Iranian oil producers. Pippa Stevens of CNBC

reported on March 8, 2020, that as a result of this action, Brent crude prices fell

dramatically from $112 USD a barrel to $32 USD a barrel in January of 2016.


But as CNN’s Matt Egan reported on September 12, 2018, recent data showed

that American crude oil producers were still able to overtake their Russian and

Saudi counterparts in February 2018. But now, hundreds of billions of dollars

in bad debt has come up for renewal, with no way to pay it.


For the first time, according to an Oil Price report on April 3, 2020, titled Has

Russia Reached Its Limit In the Oil Price War? We saw seemingly wealthy nations like Saudi Arabia increasing their taxes, and lowering the benefits and services for their citizens. Furthermore, the Americans would be forced to bail out their failing energy sector in one form or another.


The outbreak of COVID-19 came with many geopolitical implications. Not

only were its effects medical, but it had also created issues in the political and

economic spheres. The coronavirus pandemic has given rise to new threats of

poverty and brought political instability throughout the world. The oil price in

the past often declined in the crude markets but this time, it was different.


Currently, the oil price fell due to oversupply and a rapid decline in the demand, both domestically and internationally. This plummeting demand came in the wake of the response to COVID-19, which shuttered significant components of the economy, a slowdown in all sorts of commercial enterprises, and supply chains. Notably, there was a sharp decrease in commuting through automobiles.


In a report from The Guardian on April 20, 2020, titled COVID-19 Crisis Will

Wipe Out Demand for Fossil Fuels, Says IEA, several analysts estimated that fossil fuel demand had plummeted by 80% in the past few months, mostly because of the COVID-19 pandemic. As spreads inverted and inventories started to pinnacle across the fuel distribution and retail community, refinery closures

could be required for the export markets.


One silver lining was the diesel market, which was experiencing notably much

less-severe demand declines (nearer to 20%). Organizations and supply chains

in that region remained open for critical offerings, in addition to industrial and

retail groups, which were less exposed to the financial outcomes of the

COVID-19 pandemic.


Lockdown estimates set up to contain the spread of COVID-19 spoke to an

exceptional stun to worldwide oil demand. According to The International

Energy Agency (IEA) in their April 2020 report, the drop in global interest in

April 2020 was as much as 29 million barrels a day, year-on-year (around 30%

of market share). This drop was trailed by another critical year-on-year fall of

26 million barrels/day in May. The world had returned to oil levels not seen in

decades. Because of this remarkable fall, oil storage facilities in the U.S. had

topped off rapidly at a rate of 16 million barrels for each week during April

2020.


According to Noah Browning of the Financial Post, on April 27, 2020, the

excess of oil was additionally apparent in Cushing, Oklahoma, a significant

logistical exchanging hub for U.S. raw petroleum and where U.S. oil is

delivered. With an absolute oil stockpiling limit of 80 million barrels, Cushing

presently had just 20 million barrels of the free stockpiling left which was

currently wholly reserved and liable to be used before the end of May 2020.

For the first time in history, crude oil values were trading in negative figures.

These negative figures came about because of a progression of events directly

targeting the U.S. oil industry, leaving room for economic instability in the

future.


While the WTI for May contract sank to -$37 USD a barrel, 3 the July WTI kept

on exchanging at about $20 USD, and the October WTI exchanged at about

$30 USD. Be that as it may, a circumstance like April 20 may be rehashed in

the near term (this agreement is as of now under extreme tension in the

market), and significantly after if the oil request does not recoup. What oil markets are encountering is physical pressure emerging from unprecedented low-interest rates, increasing debt, and constrained stockpiling limit. This will

continue to worsen the situation for energy markets unless there are drastic

measures taken.


The unexpected spread of COVID-19 had plunged a significant number of the

world’s oil production sites in limbo, with terminations and vulnerability in

China driving the way. As indicated in a report by Carbon Brief on February

19, 2020 titled Analysis: Coronavirus temporarily reduced China’s CO2 emissions by a quarter, the level of petroleum processing plants active in the Shandong region tumbled from 71.4% in December 2019 to 38.9%, 2 months after the fact. This reduction was a breakdown of a substantial portion representing a more extensive, abrupt mechanical blackout. Thus, government figures indicated a 3.3% decrease in unrefined petroleum handling in the initial 2 months of the year, contrasted with a similar period in 2019, and a 6.6% fall in the creation of refined oil.


The spread of COVID-19 represented a critical danger to the worldwide oil

and the gas industry. The actions taken to decrease the spread of the infection

hampered a significant number of the division’s key procedures: specialists

needed to adjust in keeping up social separation while at the same time confined

in living and working spaces; travel bans and isolation hindered organizations’

capacity to travel and lead gatherings, and the vulnerability experienced through the pandemic did nothing to console a truly unpredictable industry.


The IEA, in a February 2020 report, highlighted the 2003 SARS pandemic as

an equivalent to the current situation, yet the part played by China had changed

drastically over the past 2 decades. The report detailed that since 2013, China

had taken a central role in global supply chains and contributed enormously to

global travel. With how much easier this virus spread than SARS, travel

restrictions became the key focus. Furthermore, in 2019, China represented

three-quarters of the global oil demand growth, a figure which had been on the

rise over the last decade.


This issue goes past the U.S. and concerns the entire world. Free worldwide

stockpiling limits are presently evaluated at 500-600 million barrels, which

could be used up by June. As reported by The Wallstreet Journal on March 4,

2020 by Joe Wallace and Benoit Faucon, we saw cruise liners being converted

into makeshift tankers due to the surging record-high costs of transporting and

storing crude oil. This was the motivation behind why, after the WTI drop,

Brent (the primary worldwide oil value benchmark, covering 66% of

internationally exchanged raw petroleum) saw a boost from President Trump’s

tweet on April 22, 2020, compromising of military action against Iranian

gunboats in the Persian Gulf.


To forestall such a situation, as reported by CNBC’s Natasha Turak on April

15, 2020, the world’s top oil producers, the OPEC+ coalition, on April 12

pulled off a notable arrangement to cut worldwide oil production by almost

10%. Beginning May 1, this ended an oil war that was activated only a month

before by Saudi Arabia. Still, it included Russia’s refusal to mutually reduce oil

production and adjust the pandemic’s impact on demand. Nonetheless, the

latest improvements unmistakably indicated that the degree of the unbalance

in the oil markets was well past flexibility to cut an understanding.


The Trump administration was putting pressure on its Middle Eastern allies,

Saudi Arabia, and the United Arab Emirates, to decrease oil production since

it could lead to an increase and stabilization in prices. They had even gone so

far as to threaten the security agreement between the Arab countries and

America. According to a report published on Bruegel by Simone Tagliapietra,

on April 23, 2020, domestic organizations such as ConocoPhillips and

Continental Resources said they will close 25%-30% of their oil production,

and all US producers were compelled to take similar measures. U.S. oil creation

remained at 13 million barrels a day in February 2020, according to IHS Markit,

a research firm with over 5,000 analysts and specialists in a May 21, 2020 article,

and to drop by 2.9 million barrels a day before the year’s past, due to the

decrease in demand.


Be that as it may, sudden shutdowns can cause catastrophic harm to oil fields,

and restarting them once they request returns will take a long time and hamper

their future capabilities. When an oil well is shut down, there is no guarantee it

can ever open again.


To forestall harm to the U.S. oil industry, President Trump may need to seek

different measures. For example, they can rescue American oil producers by

presenting taxes on foreign oil imports, opening capacity limits, or, in any event,

purchasing oil that makers leave on the ground until costs recuperate.

In the meantime, the OPEC+ union has been forced to scale-down production

and cut an understanding in an urgent endeavor to add to a rebalancing of the

market. But the progress of cuts will have little effect upon oil prices and

revenues until the significant glut in oil consumption is cleared. In short, people

are consuming far less than the producers could viably reduce.


According to the U.S. Energy and Information Administration (EIA), the GDP

of a nation is proportional to oil consumption. 4 Every part of the economy

consumes fossil fuels and there is a cost associated with its production,

transportation, and use. Goods and services would not arrive at your doorstep

via Amazon if it were not for the massive amounts of fossil fuels consumed

each day. Therefore, we see supply chains break down when there are mobility

restrictions put in place. The effect the oil industry has and will have upon the

economy is profound.


According to Sunny Oh of MarketWatch, on April 21, 2020, the American

energy industry accounted for 12% of the overall American junk bond market.

These companies suffered from an already abysmal credit score which could

be worsened by lower oil prices, as well as the structural inefficiency and

inabilities to pay back the debt. Many of these companies had not been

economically viable in a long time, if ever.


Instead of letting the free market take its course and allowing these inefficient

businesses to go bankrupt, we see politics dictate the market. The oil industry

has become a highly politicalized sphere of influence, which is setting itself up

for a major failure. A failure in one primary American industry will inevitably

influence other major American industries, leading to a chain of developments.

Major banking and financial institutions' bailouts mean the American public will

ultimately be left holding the bag when the American energy industry collapses.

Every one of the current measures to mitigate the harm to the U.S. and

worldwide oil makers will affect the market. However, it is not sensible to

expect that this oil emergency will, at last, be tackled by pent up demand in

worldwide oil when lockdowns are lifted, and the economy is restarted. That

is, COVID-19 is prompting a breakdown of oil markets and they will have

fewer options for profitability in the near term. Government bailouts and

taxpayer-funded loans may be the only way to save these sinking ships that

never should have sailed in the first place.


The option to go back to a “new normal”, since harm may be enduring, when

the infection is vanquished is fading with each passing day. Lockdowns and

restrictions are being given extensions on top of extensions with no glimmer

of hope upon the horizon. The everyday citizens are left to shoulder the burden

of an uncertain future. While the government continues to push a narrative that

there is “pent-up demand” and “green shoots” are ready to sprout in the

economy, they are characteristically ignoring the truth which is staring at us in

the face: there is no going back to normal. We have only begun to feel the

effects of what has and will come.



SECTION 3: THE PETRODOLLAR


“My grandfather rode a camel, my father rode a camel, I drive a

Mercedes, my son drives a Land Rover, his son will drive a Land Rover,

but his son will ride a camel.”

Rashid bin Saeed Al Maktoum, the Emir of Dubai.


Following World War II (WWII), the Bretton Woods Agreement solidified the

U.S. dollar as the world’s reserve currency. But the recent collapse in oil prices,

coupled with foreign policy choices, has put this into question.


In 1944, nearing the end of WWII, the Bretton Woods Agreement was set up

as a new system of regulations and procedures for the major economies of the

world. The goal was to promote economic stability, the crucial factor in peace,

prosperity, and growth. The International Monetary Fund and the World Bank

were created to promote peace and prosperity, as the U.S. was the only major

nation that was not reeling from WWII. And the country held most of the

world’s gold supply; the world had been on a gold/silver monetary standard

before the war, so the U.S. economy was the most stable.


When countries decided to peg their new currencies to the dollar, due to the

gold standard, their currencies would be redeemable via the U.S. dollar in gold.

Most oil-exporting nations had nationalized oil industries, leaving their

economies vulnerable to price fluctuations. Therefore, the U.S. dollar peg

created better stability for them.


The petrodollar refers to any U.S. dollar paid to oil-exporting countries in

exchange for oil. The American agreement with Arab counties stipulated that

all fuel sold must be priced in dollars, solidifying the U.S. dollar as the world’s

reserve currency. Once these nations receive dollars for their oil, they reinvest

their dollars into American goods and services. If the price of the dollar’s value

fall, so does their domestic services and products. This is a way to avoid large

swings in deflation or inflation. However, this type of monetary policy, while

very fiscally responsible, does not allow for rapid debt creation or an increase in the money supply without increasing gold reserves. Currently, we are witnessing

the gradual replacement of the petrodollar as the world’s reserve currency, as

nations step up against American hegemony.


On February 14, 1945, President Franklin D. Roosevelt entered an alliance with

Saudi Arabia. At the time, most of the Arab nations were reeling from

Ottoman, British and French occupation in the early 20th century and were

relatively undeveloped. At the time, the U.S. was both the most significant oil

consumer and producer in the world, with the oil market being dominated by

a group of multinational companies known as the “Seven Sisters.” This

economic and military agreement with the Americans allowed for the creation

of the oil-rich Gulf states today, along with their rapid development. This was

when the petrodollar was born. Each nation required oil at this stage, and this

made the U.S. dollar the best choice.


In September of 1960, several vital oil-producing countries sat down, and, thus,

the OPEC was born. The 5 founding members were Iran, Iraq, Saudi Arabia,

Kuwait, and Venezuela. OPEC sought to stabilize the price of oil, and knowing

the non-renewable nature of their resource, they sought to increase market

shares and profits. While OPEC nations wanted high oil prices to increase their

profits, their consumers wanted lower oil prices to keep costs down instead.

After the Yom-Kippur War, the U.S. utilized the U.S. dollar position and

remade its ties with Saudi Arabia. Thus, the “petrodollar union” was formed.

In return for American military and political support to the Saudis, the Arab

Kingdom would utilize its influence in OPEC to guarantee all oil exchanges

would come in U.S. dollars. It would then reinvest its petrodollars in U.S. items

and administrations, manage value levels, and forestall any oil ban from

occurring.


Thus, all oil-exporting countries must get paid in U.S. dollars, making their

national salary reliant upon the U.S. dollars’ value. If the U.S. dollar falls, so

does their nation’s income. If the oil merchants are to, in some way or another,

sabotage the U.S. dollar, such as making their oil less expensive, the providers

will need to respond regardless of whether a lower price will be helpful or

hurtful. It may appear to be monopolistic and unfair, yet this framework does

some fantastic things.


Oil-trading countries get dollars for their goods, not their currency. That makes

their national income subject to the dollars’ worth. On the off chance that it

falls, so does their government’s revenue. Most oil-exporting nations had

nationalized oil industries, leaving their economies vulnerable to fluctuations in

price. As a result, these oil exporters decided to peg their currencies to the

dollar, for more excellent stability.


Petrodollar recycling occurs when the dollars received by oil-producing nations

are used by their Sovereign Wealth Funds to reinvest in American companies

outside of the oil industry, leading to a decreased dependence on oil revenues. 5

However, by 1971, the American economy was feeling the effects of the long

and drawn-out Vietnam War.


Another war of attrition took place between the major powers of America and

its allies versus the Soviet and Chinese blocks. The U.S. was facing stagflation

and had a run on the dollar as people rushed into relatively safe assets such as

gold to protect their purchasing power. Many countries asked to redeem their

U.S. dollars for gold, which led to a decrease in the U.S. gold reserves. To

protect the gold reserves, President Richard Nixon famously took the U.S. off

the gold standard in 1971, stunning the world. This was the start of profound

impacts upon the economic and financial well-being of the world. 6


As a result of the U.S. dollar not being backed by gold, it fell to a free market

equilibrium price, thus making American goods and services cheaper for the

rest of the world and increasing demand and revenues for American

companies. However, a falling dollar hurt the oil-exporting countries because

their contracts were priced in U.S. dollars. So, they saw a decrease in revenues

and an increase in import costs.


Following the Arab-Israeli wars and the oil embargo on Western nations, the

United States and Saudi Arabia sat down to negotiate a new deal. In 1979, the

Arabian Joint Commission on Economic Cooperation was established. This

was when they remade the dollars for an oil deal, agreeing to recycle them back

to the U.S. through contracts with U.S. companies to improve Saudi

infrastructure and technology transfer. This deal would, in turn, boost wages,

increase imports, and help the economy. So now, the U.S. could seek any

number of expansionist approaches and maintain a strategic distance from the

reactions as nations are required to hold and use U.S. dollars, essentially

financially backing the U.S.


During the most recent times, we had witnessed history in the making, when

the cost of unrefined petroleum dipped below 0 to -$40 USD per barrel, and

over the long haul, numerous experts think the worst is yet to come. After WTI

oil-based agreements evaporated for May, contracts for June crumbled by 45%.

Economic analyst Kimberly Amadeo for The Balance wrote a report on April

8, 2020 titled Petrodollars and the System that Created It: Will the Petrodollar Collapse?, she wrote that the oil issues were not going away any time soon and we could see the U.S. dollar’s eventual demise. Since 1944, the U.S. dollar was propped up by the petrodollar plot but with oil costs below 0, the dollar could

undoubtedly crumble or lead to a decoupling of the petrodollar. The U.S.

utilized petrodollars to authorize its international strategy.


For instance, Amadeo stated the U.S. punished Iran for refusing to end its

advancement of potential atomic weapons by restricting access to U.S. dollars

for trade. Similarly, it hit Russia with exchange embargoes for invading Crimea

and causing a state of emergency in Ukraine. This had led China to seek a

substitute to the U.S. dollar as a worldwide currency, with their recently issued

digital yuan.


Still, ironically, according to official U.S. Treasury data, China is one of the

largest foreign holders of the dollar. However, China insists on pegging the

yuan to the dollar. In any case, numerous nations are not satisfied with the

current situation and are actively seeking other options. Without access to

dollars for trade and debt settlement, a nation or organization is isolated and

with limited options. Furthermore, a dollar reserve currency forces the U.S. to

run trade deficits with the rest of the world while gaining access to plentiful

cheap goods which artificially inflates the lifestyle of its citizens.


A petrodollar is a U.S. dollar acquired through the offer of unrefined

petroleum. For example, it is a term made to depict the circumstance of the

OPEC nations where the offer of this product permits these countries to thrive

and reinvest its U.S. dollars in the countries which buy it. It is one of those

simple aphorisms over which the world’s energy, geopolitical, monetary, and

financial frameworks are formed. The purchasing power of the petrodollar

relies heavily on the value of the U.S. dollar and any shift to renewable

resources can have profound effects. Changes to the system will produce huge

impacts and costs in the geopolitical and monetary levels. Some excuse these

impacts as a small probability while others guarantee them to be calamitous.

Likely, the reality lies somewhere in the middle.


Over the past few years, the Saudis have been saber-rattling about dumping

U.S. treasuries if the Americans continue to pursue them for their involvement

in the September 11, 2001 (9/11) attacks. On April 5, 2019, Tom Luongo

published an article titled The Ultimate Pivot: Saudi Betrayal of the Petrodollar

detailing how the Saudis warned the Obama Administration that they would

sell off hundreds of billions of dollars in U.S. assets. This would be in retaliation

if Congress passed a bill that would allow the Saudi government to be held

responsible in American courts for any role in the 9/11 attacks. While chances

of the bill being passed were slim, the Saudis were heavily exposed to any

fluctuations in U.S. dollar value and were seeking ways to become less reliant

on it. Unsurprisingly, according to Statista, from 2009–2018, Saudi Arabia was

by far the largest arms importer of American weapons. 7


Lately, according to an article published by Simon Watkins on April 27, 2020

titled Trump Could Use “Nuclear Option” to Make Saudi Arabia Pay for Oil War,

Saudi Arabia was threatening to drop the U.S. dollar as a medium of exchange

for their oil. The Americans had countered them with a No Oil Producing and

Exporting Cartels Act (NOPEC) bill and anti-trust legislation which could hold

them accountable and block imports from OPEC countries. Also, there had

been threats to remove American troops and military protection from the gulf.

NOPEC was first introduced in 2000 and aimed to remove sovereign

immunity from U.S. antitrust law, paving the way for OPEC states to be sued

for curbing output in a bid to raise oil prices. This bill was yet made into law

despite numerous attempts but had recently become more popular under the

Donald Trump Administration.


According to an article by Eli Okun in Politico on April 22, 2019, back in 2011,

Trump declared that he supported NOPEC but was incredibly quiet since

gaining office. Instead, he pushed for even closer relations with the Gulf states,

especially Saudi Arabia, choosing to ignore the brutal killing of American-Saudi

journalist Jamal Khashoggi. If the Saudis move forward with this plan, and

would inevitably have to, there would be a lot of support amongst non-OPEC

oil-producing nations like Russia, most especially with the significant consumer

markets of China and the European Union.


According to a Peak Oil report titled The Death of Petrodollars & the Coming

Renaissance of Macro Investing on October 15, 2017, these markets had shown

strong support to move away from the dollar and to diversify global trade in a

bid to dilute U.S. influence and hegemony over the world economy. Russia was

one of several nations facing sanctions at the hands of the Americans that

began selling oil in euros and yuan. Other nations included Iran and Venezuela

that were under strict sanctions in their bid for regime change had diversified

to several other kinds of oil swaps. However, when taken in the scheme of the

global oil market, these were very insignificant and did little to threaten the

dominance of the U.S. dollar.


For most people alive today, the dollar’s dominance seems as natural as English

as the unofficial second language of the world. But this has not always been the

case. Cullen Roche brought forward a thought-provoking article titled How

Much Longer Will the Dollar Remain the Reserve Currency of the World? According to him, if we go back to 1450, the Portuguese ruled the world as the global reserve currency where much of this was funded through colonialist expansion in Africa and Asia. 8


But after only 80 years, in 1530, the Spanish overtook them, thanks to their

massive holdings in the New World and abroad. It was not until 110 years later,

in 1640, that the Netherlands began their rise as the world’s reserve currency,

but this only lasted for 80 years. In 1720, France rose to prominence, helped

by several factors including colonization, but was replaced by the British after

only 95 years. From 1815–1920, the world witnessed for the first time an

empire where the sun never set. Indeed it was the first global empire, and during

that time, it was also the world’s reserve currency. However, following WWI

and going into WWII, a massive shift took place where, for the first time in a

long time, a global power outside Europe had taken the helm.


Since 1921 we have been under the leadership of the Americans as the world’s

reserve currency, which can be considered an extension of the British. Indeed,

we have been in an Anglo-dominated world going back just over 200 years and

eventually, like all things, this will have to come to an end. The average lifespan

of a reserve currency is about 110 years and we are quickly approaching that

time now for the U.S. dollar. When you are at the top, there is only one place

you can go from there.


There are numerous different ideas about how the U.S. dollar will eventually

collapse. Still, history has shown, unlike the sudden collapses of Zimbabwe,

Venezuela, Argentina, or Germany, etc., global reserve currencies tend to go

softly into the night. Over time, their dominance gently erodes and is replaced

not in one piece but in sections.


The most probable threat to the U.S. dollar is the dual-threat of high inflation

and high debt. If rising consumer prices force the Fed to hike interest rates

sharply, this will dramatically affect the short-term instruments such as

adjustable-mortgage rates. Furthermore, if the U.S. government is forced to

default on its interest payments, foreign creditors could start dumping dollars.

While some critics would be quick to blame the current Trump Administration

for the massive increase in debt load, it would be wise to remember that under

the Obama Administration, the U.S. doubled its debt by $10 trillion USD.


Moving forward, given the massive stimulus needed by the government, the

government’s choice to increase spending year over year, coupled with its

inability to downsize, it became clear that, whether a Republican or Democrat

takes office in 2020, more spending and more debt are on the way.


If the U.S. enters a prolonged recession or depression, it will influence the

petrodollar. Nations like Russia and China, along with central banks, have been

stockpiling gold and silver over the last decade, with rumors swirling of a

commodity-based standard making a return. Even if this is true, it will not

necessarily collapse the dollar as foreign exporters like China and Japan enjoy

the benefits of American consumers. Also, for any currency to be backed by

gold and/or silver, such as a gold yuan or silver ruble, a massive global

revaluation of the commodity will be needed.


One popular theory put forth by Brent Johnson, the CEO of Santiago Capital,

a wealth fund manager specializing in gold, is “The Dollar Milkshake Theory.”

According to him, since the 2008-2009 financial crisis, central banks had

teamed up to inject liquidity into the system through low rates, special purpose

vehicles, asset purchases, quantitative easing, and money printing. All this

liquidity came in many different forms and many different directions, frothing

the financial markets and increasing stock valuations. But recently, the U.S. had

inserted a proverbial straw into the milkshake of the world’s markets and

started to suck the liquidity out.


While the Fed hikes interest rates and reduces its balance sheet, central banks

keep on pouring in liquidity. In a modern globalized world, capital can freely

travel like people to where they are treated best. In Europe, Japan, and England,

the central banks are running printing presses and devaluing their currencies

while the U.S. dollar increases in purchasing power and leaves American

investors at an advantage. While gold barely beat an all-time high in 2020, in

the U.S. dollar, it has been on a moon shot for the past few years for almost all

other currencies—an ominous sign of what investors have seen coming.


The Dollar Index, a basket of currencies priced against the dollar, was on a tear

for the past decade, with no weakness insight. Outside of the U.S., there is over

$11 trillion USD in debt that must be repaid by foreign companies that have

borrowed in dollars and need to pay it back at much higher rates. What is worse

is if any of these nations, like the recent case in Lebanon, end up defaulting on

their loans, it would destroy the currency and decrease the monetary supply,

leading to even more weakness against the dollar.


The U.S. dollar has not been this strong since the 1980s, which was stopped by

the Plaza Accord, whereby France, Japan, West Germany, U.K., and the U.S.

got together to devalue the dollar. The increased likelihood of this happening

again is getting louder as we get nearer to this stage of dollar strength.


Simon Watkins put forth that, currently, the Saudis were hemorrhaging money.

Their 2018 budget deficit was around 7% of GDP and since the 2014 oil price

crash, they had gone from zero to $180 billion USD in debt to finance its

budget or approximately 22% of GDP. He said that back in October 2016, the

country’s Deputy Economic Minister, Mohammed Al Tawaijri announced, “If

we [Saudi Arabia] don’t take any reform measures, and if the global economy

stays the same, then we’re doomed to bankruptcy in three to four years.”


In March of 2020, Saudi Arabia’s central bank depleted its foreign reserves at

rates not seen since 2000. In that month alone, foreign reserves fell by 5%, or

$27 billion USD, reaching the lowest level since 2011. It was left with just $164

billion USD in “fighting reserves” to utilize, with the other $300 billion USD

was used for maintaining the peg to the U.S. dollar. Recently, the Saudis were

forced to slash social welfare funding, triple the VAT, and stop monthly

payments to their citizens. The citizens had begun to bear the burden for their

government’s fiscal adventurism—a situation which is not too far from the

American citizen’s future.


We are witnessing the slow replacement of the petrodollar as the world’s

reserve currency and, thus, American hegemony over the world’s economies.

The adversaries of Western dominance have become more vocal and have

taken new steps to outdo the American policy in every corner of the world. In

the past, nations had to be invaded, wars had to be fought, and populations

need to be swayed. In the brave new world which we live in, these actions

have become covert and coordinated while people are blissfully unaware of

their impending doom.


As citizens, we have put our financial security in the hands of governments

that can make and break agreements at will. As oil prices become increasingly

unstable, we see the economic and political fragility of the world around us start

to crack. We have been born into this Anglo-hegemonic system, and it is easy

to forget that the way things are has not always been the way things were.


Whether the dollar is crushed, devalued, or grows so strong it takes the world

down with it, we will witness the end of the petrodollar as the world’s reserve

currency. These issues are set to continue as low oil prices mixed with high

fiscal spending will endure for the near term. The economic crisis of today has

its roots going back to 1971. When the U.S. removed the gold standard, the

decline began but has since accelerated. We are seeing more debt and money

being created this year in the U.S. than throughout its entire history. When we

start to add up the unfunded liabilities, there is simply not enough to go around,

which means that printing cannot slow down. It needs to speed up. If we look

at historical examples, we will see that this has never ended well.


If you enjoyed this passage from the new book, Cold War 2.0: Dawn of the Asian Millenium, by Andranik Aghazarian, then I encourage you to pick up a copy available in paperback or Kindle versions on Amazon:

https://www.amazon.com/Cold-War-2-0-Asian-Millennium/dp/B08N2H72ND/ref=sr_1_1?dchild=1&keywords=andranik&qid=1611806031&sr=8-1



1 https://www.economist.com/briefing/2020/04/08/an-unprecedented-plunge-in-oil-demand-will-turnthe-industry-upside-down

2 https://www.macrotrends.net/1369/crude-oil-price-history-chart

3 https://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart

4 See the figures of the U.S. Energy and Information Administration (EIA) Oil & Gas General/GDP VS OIL CONSUMPTION 2017

5 https://peakoil.com/publicpolicy/the-death-of-petrodollars-the-coming-renaissance-of-macro-investing

6 The website www.wtfhappenedin1971.com, has some interesting charts for further reading.

7 https://www.statista.com/chart/9509/saudi-arabia-is-the-biggest-buyer-of-us-arms/

8 https://twitter.com/100trillionusd/status/1243115218043047938



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