Currently, roughly 94 million barrels per day of oil are consumed. Even at $50 per barrel, that creates $4.7 billion of dollar demand in a day. Over the course of an entire year, that is $1.7 trillion of dollar demand.
At $100 per barrel, it is double that… $3.4 trillion!
Nixon made it so the U.S. dollar was supported by the planet’s incredible thirst for oil. The deal with the Saudis firmly established the U.S. dollar as the reserve currency for the world.
And allowed the United States and its citizens to create a much higher standard of living than would otherwise have been possible.
Let’s consider how America has benefited from the petrodollar…
Oil being priced in dollars creates an artificial demand for dollars. Additionally, because global oil demand increases each and every year, so too does the demand for dollars.
If demand for dollars increases, so too does the need for a greater supply of dollars.
Which is the real key to why the petrodollar has been so huge for America.
It provided the American federal government the green light to expand the money supply.
And do so without repercussions.
Every country with its own currency has the ability to increase its money supply. For most countries, though, printing money brings with it the major side effect of inflation.
More money in the system chasing the same assets drives up the price of those assets.
The petrodollar system allows the American government to get around this, because as it increases the supply of money, that money goes overseas to the foreign countries that need U.S. dollars to purchase oil.
By being able to spend more without fear of consequence, the U.S. obtained a big advantage. The standard of living for every American is higher as a result of this. The government can spend more on everything.
The might of the American military owes a debt of gratitude to the Nixon administration. As does each and every government program.
Most Americans think they pay too much in income tax. But it would be much worse without the ability of the country to continually increase the supply of money.
The petrodollar has also done wonderful things for asset prices in the United States.
With an ever-increasing quantity of dollars in circulation outside the country, many of them end up returning, bidding up the value of real estate, American stocks and bonds.
Instead of creating inflation in consumer items that only the American citizen purchases every day…
Most every American is richer on paper because of those inflated asset prices.
The demand for U.S. debt instruments is particularly inflated because of the petrodollar system.
With a constantly robust demand for U.S. government debt, the country has been able to maintain unusually low interest rates.
And spend, spend, spend…
Three news items in the past week are pointing to a quickly deteriorating relationship between Saudi Arabia and the United States:
Sign #1 — The U.S. Senate is considering a weapons export ban or limitation on Saudi Arabia — with bipartisan backing — this is a break from decades of support in this area.
Remember, it is military support that was the carrot that the U.S. dangled in front of the Saudis, which enabled the petrodollar in the first place. Without U.S. military support, what is holding the Saudis back from accepting the Chinese yuan for oil?
Sign #2 — A bipartisan bill is being considered in U.S. Congress that could prove a connection between Saudi Arabia and the 9/11 attacks. The Saudis have hundreds of billions of dollars in U.S. assets that could be exposed to liability stemming from this… so this is a very aggressive move. The Saudis can’t allow their assets to be frozen by U.S. courts.
Sign #3 — A meeting between Obama and the Saudi king to talk about “the economy.”
The timing is certainly interesting, to say the least. Saudi Foreign Minister Adel al-Jubeir last month took a message personally to Washington. That message was simple: If you continue down the road with this 9/11 legislative bill, then Saudi Arabia is going to pull its $750 billion in assets and turn your financial world upside down.
I don’t know how feasible such a mass liquidation would be, but if attempted, it would certainly be disruptive to markets and currencies, to say the least.
With the rise of China and India continuing in the coming years, the Saudis do have more options for protection than they did back in the Nixon/Kissinger era. And back then, the U.S. was the only real market for Saudi oil. Now all future growth in oil demand will be coming from Asia making the U.S. even less important in Saudi eyes.
We could very well be nearing the end of the 40-plus year run of the petrodollar. If we are, I would not want to be holding U.S. Treasuries… although with current interest rates I don’t want to be holding them anyway.
Negative interest rates, a near-decade of easy money fiscal experimentation and now this.My desire to hold hard assets is not diminishing…