This One Event Signals the End of the Petrodollar Arrangement

Economics, Geopolitical, Premium POM

But the US Dollar is Alive and Well

By JC Collins

Over the last few years there has been a lot of talk about the end of the petrodollar and the relevance of OPEC.  Every time an energy deal was signed between Russia and China, or China and Saudi Arabia, or Russia and India, where the US dollar was not being used to balance the trade, it was considered another nail in the coffin of the petrodollar.

Many of these proclamations took the conclusions a step further and stated that the end of the petrodollar would be the death of the US dollar itself.  This is in fact not the case.  But the petrodollar arrangement is coming to end.

Outside of the vast energy deals and currency swap agreements, the balance of power in the Middle East is shifting.  This geopolitical transition, which is taking place ultimately between Iran and Saudi Arabia, are the surface signs that something fundamental has changed in the underlying monetary arrangements.  But another more obvious and overt event just took place which clearly signals that the petrodollar arrangement has in fact just been ended.

Forty years ago when the petrodollar arrangement was implemented, there was something else which happened.  The US Congress enacted a trade restriction on itself by banning crude exports.  The reasons for such a self-imposed trade restriction are obvious when we consider the larger picture which surrounds the petrodollar is considered.

This article assumes that the reader already understands the petrodollar arrangement as the monetary, geopolitical, and military alliance between the United States and Saudi Arabia, to ensure all crude sales were completed using US dollars.

As a part of the arrangement, the US agreed to place the ban on domestic crude exports in return for the assurance that all other oil exporters would use the dollar.  This clause was Saudi Arabia’s guarantee that the US would not increase its own crude exports and slowly chip away at the Kingdoms market share.

Considering the gradual move away from the USD in recent energy deals, and the growing relationship between Saudi Arabia and China, the US is now in a position to lift the crude exporting ban and attempt to grab some of the international market share away from other OPEC producers.

This could even single the end of OPEC, which is something I first wrote about back in May, 2014.  In that piece I stated the following:

“The level of sovereign debt, driven for the most part by a process of deflecting U.S. dollar inflation, coupled with the modernization of the emerging economies, are the two runaway factors which will soon collide and push the world into the well planned multilateral system.”

“Debt creation and modernization aside, the birth of the new system will change some fundamental aspects of the international commodities markets.  Everywhere in the world today where there is a geopolitical crisis, is an area that is directly or indirectly involved in the energy markets of the world.”

“It could be reasoned that when the renminbi is included in the SDR basket along with the dollar, euro, yen, and pound, and the dollar is removed as the primary reserve currency, other currencies will de-peg from the U.S. dollar and float or fix to the strong regional currencies.”

This information is as relevant today as it was when it was written 20 months ago.

The recent lifting of the crude exporting ban was not a sudden decision.  In fact, companies involved with building pipeline infrastructure and terminal facilities to support American crude exports have been busy for over a year now.  This is a clear signal that the multilateral monetary transition which we constantly discuss is moving forward by design as laid out here on POM.

This change on crude exports will also directly affect the mining industry I work in here in Canada.  Investment in the Oil Sands began to increase in the 1970’s around the same time the petrodollar was created and the US crude exporting ban was imposed.

This was not a coincidence.

What concerns me today is now that the crude ban has been lifted, and we are in an environment of low crude prices, even more investment will leave Alberta.  But after some further consideration, there may be a silver lining here for the Oil Sands.

It is expected that US crude exports will create a domestic shortage and price increases at the pumps.  This may happen.  If so, the US market would seek increased imports of Canadian oil to fill the shortage.  The pipeline politics surrounding oil producing and refining is outside of the scope of this piece, but it’s something worth keeping in the back of our minds.

Though it’s not being announced on the evening news, the world in which we have been living for the last forty years is now changing.  The status and role of the US dollar is evolving along with the geopolitical dynamics in Eastern Europe, the Middle East, and the South China Sea.

Up until now I have been hesitant to signal the end of the petrodollar arrangement.  With this recent move by the US to lift the ban on crude exporting, I feel comfortable in stating that the petrodollar arrangement (not the US dollar itself) is now dead.

Saudi Arabia could end the dollar peg as a response to this move by America.  – JC