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The Collapse of the Petrodollar

Politics
#1

This has been happening at breathtaking speed in recent days, and it’s a tectonic shift in global politics that will have major ramifications.

The war in Ukraine means that Russia has now completely cut itself off from the American empire. This means that Russia will no longer sell its oil and gas in US dollars. Both Russia and China have long prepared for this day and have developed their own SWIFT systems (SWIFT is intimately connected to the petrodollar, yet it’s a separate strand that I might get into another time).

We had this rather unbelievable headline this week…

I know financial stuff makes a lot of people’s eyes glaze over (mine included), yet I’m going to try and give a concise as possible explanation - for those not familiar with this stuff - of why the above news story is quite mind blowing:

Gross domestic product (GDP) is a monetary measure of the value of all final goods and services produced within a state in a given year. Here’s the top 10 countries in terms of GDP, with the European Union shown first, because as an economic block it has the highest GDP in the world. The figures shown are in millions of US dollars (ie, trillions):

European Union $18,527,116

  1. United States $17,348,075
  2. China $10,356,508
  3. Japan $4,602,367
  4. Germany $3,874,437
  5. United Kingdom $2,950,039
  6. France $2,833,687
  7. Brazil $2,346,583
  8. Italy $2,147,744
  9. India $2,051,228
  10. Russia $1,860,598

Source

You might notice that the GDP of the United States is not that far behind the GDP of the European Union. The US has a large population and a lot of natural resources; but there again, so do China, Brazil and Russia. So why is US GDP so disproportionately high…? One word: petrodollars (although some will no doubt argue with me on this). To explain petrodollars you have to go back to the Bretton Woods Agreement, in 1944, which established the US dollar as the world’s reserve currency, backed by US gold reserves. However, by the end of the 1960s, expenditures on the Vietnam war made it apparent to many countries that the US was printing far more money than it had gold. Nations began to panic and demanded that the US give them gold for their dollars. The situation came to a head in 1971 when France attempted to exchange its dollars for US gold and President Nixon refused.

This default on the gold standard led to a rapid decline in the value of the US dollar. Uncle Sam needed to do something about it, and so in the early 1970s one of the strangest, most bizarre financial deals ever was struck between the USA and Saudi Arabia. It’s called the ‘petrodollar’, and it meant that Saudi Arabia, followed by the other OPEC states, would only sell oil for US dollars, and they would invest any excess oil profits in US Treasury bonds, notes, and bills. In return, Saudi Arabia and the Gulf states would be protected by the US military (most notably from Israel).

The petrodollar agreement was struck between President Nixon and King Faisal of Saudi Arabia in 1973. For the US it was a ‘Died and gone to Heaven’ kind of deal. With all the world’s oil now being sold in US dollars it created a strong demand for the currency, pushing up its value immensely. As the printer and issuer of the dollar, the US was effectively able to buy oil for nothing. All OPEC profits went into the US financial system. As a result of all this the US economy soared. If you’ve ever wondered how on Earth the US (and UK) can have such close relations with totally vile regimes like Saudi Arabia, there’s the answer.

There was a downside to the petrodollar, though. Countries now needed dollars to buy oil. There were two ways of getting them: either buy them from the US, at a mark up, or else manufacture goods and export them to the US in exchange for dollars. As a result, the US was flooded with cheap imports (remember all those Japanese cars, for instance) and a huge number of manufacturing jobs were lost in the US.

With the collapse of the Soviet bloc in the early 1990s the US became the sole superpower (in money terms, not in terms of nuclear weapons) and instead of embracing a new era of peace it aggressively defended its hegemony, including the petrodollar. In 2000 the Iraqi president, Saddam Hussein, started making noises that in future he would sell Iraqi oil in Euros (prompted by France and a few other EU members). In 2001 we had 9/11. In 2002 Iraq started selling its oil in Euros. In 2003 the US invaded Iraq on the flimsiest of pretexts. One of the first things the American occupiers and their puppet government did was to bring back the petrodollar. At the time the Euro was relatively strong against the dollar, and by selling its oil in dollars Iraq was losing 20% of the value of its oil.

Also during the early 2000s countries such as Russia, Iran, Indonesia and Venezuela were talking about abandoning the petrodollar. This slide was halted by using sanctions and threats of freezing assets, and of course the example of Iraq. When it comes to wars in the Middle East, “It’s all about oil” is an often heard refrain. As far as the USA goes, it’s not about oil per se (with fracking the US is now self-sufficient in energy), it’s about the currency that oil is sold in, and the free ride that the petrodollar gives the US. Look at Libya, an oil rich country and its biggest producer in Africa. In 2010 Colonel Gaddafi started selling oil for gold instead of petrodollars. We all know what happened to Gaddafi, and although Libya is now in chaos it will come as no surprise that the country’s oil is now being sold in petrodollars again.

This brings us on to the present, where countries such as Russia, China and India have recently abandoned the petrodollar and are now selling oil in their own currencies. This is mega stuff, because unlike Libya, et al, these countries are too big/powerful to be pushed around by the USA and its totally corrupt/incompetent war machine. This means the end of the petrodollar and US world hegemony; and the 64,000 petrodollar question is, how will the USA react to this? Well, thesedays the USA is largely run by batshit crazies backed-up by a totally presstitute news media, so I’m afraid that things do not bode well. What’s going on in Syria right now is a good example of this (Syria is an oil producer which also wants to abandon the petrodollar). The key here is the total disconnect between reality and what the public in the West are told by politicians and presstitutes, such as this total bullshit.

During the collapse of the Soviet Union in the late 1980s and early 90s the world went through a very dangerous period, that thankfully didn’t lead to major war and conflict. Now, with the imminent collapse of the United States of America, arguably the most corrupt and violent nation that’s ever existed, the world is going through a crisis of historic proportions. Let’s just hope that sane heads prevail in Moscow and Beijing. There’s certainly no sane heads in Washington at the moment.

NB: I wrote the bulk of this piece back in 2016, and as a result a lot of the links I give will have gone down the Memory Hole (Winston is kept very busy thesedays). It still stands-up to give some idea of what’s happening in 2022.

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#2

Hi @RobG , thanks for your post this is the first time I have seen such a good account!

Cheers

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#3

One small refinement to the above excellent clear lay-person’s brief, Rob: The US isn’t exactly self-sufficient in oil, which is why it’s been importing from - erm - Russia (sic!) recently.

Before the fracking ponzi was wound up to full blast, in 2005 the world went through what - with hindsight - seems to have been the historic peak of production of the most favoured form of oil: SLEG: sweet, light, easy-get crude: The sort that’s most easy to refine into actually-useful products such as motor fuel, and which historically has offered the best energy-return-on-energy-invested to produce it: EROEI.

Fracking mostly produces an overly-light oil, which needs - for example - Venezuelan extra-heavy, tar-like oil to blend with it, for useful final products, chiefly diesel (petrol being more of a waste product, in reality).

Moreover, fracking being intensely expensive to do, both in money and energy costs, it’s never been viable on its own. Also, whilst it’s true that the total number of barrels of oil produced globally by adding on the fracking boom did top the number produced in 2005 (briefly!), the key factor which governs its value is not so much the brute volume as the total energy content of each barrel; less for fracked than for SLEG. The actual net energy available to the world since '05 hasn’t really grown, so much as dragged along on that briefly-famous ‘bumpy plateau’ which was so much discussed by the peak-oiler commentariat. And now it’s beginning to ease into its irreversible, finally-conclusive downward ebb-tide (Power of Siberia notwithstanding…).

With the US fracked-oil ponzi now on its last legs (always destined to be a flash-in-the-pan, with both money and energy profits essentially net-negative overall) the US is in fact in deep shit over its energy budget. Especially now that - cutting off its nose to spite its face - it has thrown its Russian oil imports out of the pram in a tantrum over its helplessness to do anything effectual at all about Russia’s special cleansing operation in the Ukraine.

The whirligig of time has brought in its revenges: In the '80s, the US manipulated the price of oil down to around $20/bbl - sic! Imagine that! - thus to floor finally the staggering Soviet Union. The US itself now finds itself accelerated into its own symmetrical time of collapse by the oil/gas energy price soaring way past its inherent economically-viable maximum, and by USAmerica’s own actual lack of sufficient appropriate oil/gas products to fuel all its own wants. (Not needs; none of us actually need the amount of excess energy which we now indulge in splurging - temporarily…)

As you suggest, Rob, the US, at least in the successive governments of its ruling ‘elite’, is probably the worst gangster outfit in human history. I have no confidence at all that the now-rising Russian and Chinese empires will always behave meticulously well, and never indulge in the kind of mafioso villainies which have always characterised US global policies. But for the moment they are both, quite evidently, pursuing much more statesmanlike lines of policy, and are thus a very much better bet for the good of the world than the rotten and - thank god! - finally collapsing Anglozionist empire.

Nevertheless, before too long, EROEI is coming to get them too; first China, then Russia. Even by the collapse of - always-transient - empires, The Limits To Growth are not gainsaid…

#4

PS: Some years back, when the Peak Oil meme was getting its most recent iteration, and when Mike Ruppert was still alive, he said in one of his articles: “If Ghawar has peaked, the world has peaked!”

That insight has since been comprehensively rubbished and buried, by the apostles of ‘No problems with oil supply! Onward and upward into growthforever!!’

Yet already, a few years before now, it was quietly admitted by the al Saud gang in Arabia that Ghawar’s production now - or rather then, when the admission was made - was about 7 percent oil and 93 percent sea-water: injected into the Ghawar oil-dome because it had long since ceased to be a gusher, and needed sea-water injection just to flush out what was still left.

In other words, for years now, the largest oil-dome ever discovered (so far) has been producing slightly oil-contaminated salt water; and even that only with a whole lot of pump-in-pump-out energy expenditure on what is basically useless ballast. And every single new oil discovery since Ghawar’s eclipse has been hugely more capital and energy expensive to produce - even when it’s possible to get at it at all. And new discoveries have lagged consistently behind increasing demand for many years now.

America surely screwed up royally when it tied its non-gold-backed, fiat paper currency to the global oil trade: collapse of the petrodollar simply guaranteed somewhere just a little south of the all-time peaking of global oil production.

But sure: there’s no Peak; there’s no problem. Let’s all whistle a happy tune…

#5

Good reading by both RobG and Rhis, thanks to both of you.

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#6

Thanks all for your interest and replies.

Rhis, I did try to allude that I’m not an expert on this stuff. It is a very complex subject, and most times articles about it are overly long.

I came across this vid tonight, which explains how the present sanctions will impact the (already devastated) airline industry. It’s not directly related to the petrodollar, yet it does show how things are interconnected in ways that most of us don’t know about. The video is 11 minutes long and is by a well-known YouTuber…

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#7

It is a great summary, thanks @RobG

#8

A quick question: if GDP measures the value of final goods, and those goods are overpriced so as to produce lovely fat profits, is that measure not defective? The biggest rentier gets to have the best balance sheet?

Whether or not that is accurate I don’t know, but the measuring of US might in terms of military spending has the weakness of factoring in the obscene profit margins. I’m sure we’ve all heard the stories of the $25 per rivet invoices. Not so hard to spend Megabucks, for the greater glory of Lockheed Martin, when the product is so mad expensive. I guess this holds true for all economies **, but when the measuring is all done in $…

** Economy is just an abstraction, of course, so that the cost accountants get to use their skills

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#9

Karen, the reason I usually avoid economic stuff is because it’s even more subjective than poetry (?!).

An example of this is Craig Murray, who always says…

The Russian economy is about the size of the Spanish economy

But Spain does not supply the world with a huge amount of oil and natural gas, not to mention humungus other resources (including uranium).

I believe the old saying goes (and I’m probably mangling it), you can take a man out of the Foreign Office, but you can’t take the Foreign Office out of a man, or something like that.

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#10

Hi @Kieran_Telo , gdp is a political number that can be used by governments to justify any policy and gives no indication of where real money is made and who ends up getting most of it. This is the bibic’s definition of how it is calculated:
“ How is it measured?

GDP can be measured in three ways:

  • Output: The total value of the goods and services produced by all sectors of the economy - agriculture, manufacturing, energy, construction, the service sector and government

  • Expenditure: The value of goods and services bought by households and by government, investment in machinery and buildings - this also includes the value of exports, minus imports

  • Income: The value of the income generated, mostly in terms of profits and wages.

In the UK, the Office for National Statistics (ONS) publishes one single measure of GDP, which is calculated using all three measurements. But early estimates mainly use the output measure.

The ONS collects data from thousands of UK companies to use in its calculations.”

So whenever we have to pay more for increased costs of services and utilities this increases gdp but of course the real money disappears from our pockets into companies which,if owned by foreigners, then disappears overseas! All governments say it’s no problem about foreign dividends because it encourages investment in the uk- tell that to P&O workers!

cheers

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#11

That about sums it up lol. I did two years of Economics at undergrad level but not much of it stuck because essentially every theory would start with some assumptions and build from there. None of which was credible. The jewel in the crown of market theory is the “invisible hand”? Essentially witchcraft, no?

If the only measure of value is the price ticket then I think my original cackhanded comment was close enough.

To paraphrase Charles Fort: one measures a circle starting anywhere.

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#12

The full quote:

If there is an underlying oneness of all things, it does not matter where we begin, whether with stars, or laws of supply and demand, or frogs, or Napoleon Bonaparte. One measures a circle, beginning anywhere.

From “Lo!”

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