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Is the PetroDollar System Ending?

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Neal
@nealmcspadden
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2 min read

So Saudi Arabia and China just announced that basically they will be swapping oil for Chinese RMB. This is a huge nail in the petrodollar coffin.

What is the PetroDollar?

Back in the 1970s, the USgov went around to up and coming oil producers (primarily Saudi Arabia) and made a deal:

You guys sell your oil on the world market for USD and USD only. In exchange, USgov will provide you with security. Both from external threats (remember Iraq's horizontal drilling?), and with weapons and training to defend your regime against internal threats.

You might ask why bother doing that. Money is money, and most of this oil trade is not actually with the US anyways. The US mostly gets its oil from Western Hemisphere sources.

The answer is inflation. This was the 70s. The last remnants of the gold-backed dollar had just been abandoned. Inflation was raging as more and more money was printed for war and social programs.

Enter the petrodollar. It creates demand for more USD by anybody who buys oil, which is pretty much everyone.

More demand, more ways to soak up that inflation so it isn't felt (as much) at home. Voters really don't like high inflation and tend to vote out politicians.

So What Now?

This has pretty much been the operating state of the world for the last 50 years. And now it seems to be ending as major oil players are jumping ship.

All of these things take years to play out, so it's not like the system will fall apart tomorrow.

And countering that force is that the USD is the cleanest dirty shirt in the currency laundry. Central banks around the world have shown that they'd rather hold USD than EUR, JPY, RMB, etc.

And besides, does the Biden admin have the balls to cut off the Saudis? Trump threatened MbS personally and the Saudis backed down. Personally, I don't think the current (or even next) administration will follow through.

So it's a mixed bag, like most things.

What we do know is that USD will continue to get printed, at varying rates over time. It will continue to lose purchasing power. The questions about whether the petrodollar system fails or if central banks make up the slack are just about how sudden this devaluations happen.

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