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:
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.