Thread by @MYC_006

What is the petrodollar and what it means for the changing world order.

Many know the importance of the US$ and how it confers a massive advantage to the US. This #thread explores the drivers of the petrodollar and how they will impact and shape the future as we know it. #myc

It is an open secret that the US and Saudi Arabia have a mutually beneficial relationship which stretches back decades.

This started in 1973, when Arab countries attacked Israel and sparked what is now known as the Yom Kippur war.

In an attempt to diffuse the situation, the US acted as an intermediary for diplomacy and supplied Israel with weapons and supplies.

In retaliation, OPEC countries triggered an oil price increase from $3/ barrel to as high as $17 and chose to reduce oil production by 25%.

This resulted in high inflation and caused the US to enter the worst recession since world war 2, continuing into the early 1980s.

Just prior to these events in 1971, Nixon had famously cancelled the convertibility of the US$ to gold.

These combined events, drove the price of gold from $33 to $100+ in 1973.

Not surprisingly; the US$ was seen as an unattractive holding by OPEC.

OPEC countries were as a result, motivated to push up the price of oil and this contributed to a world economic crisis.

According to official documents; the US prepared a range of actions including a possible invasion of Saudi Arabia to prevent disruption of oil supplies.

This was to prevent any attempt to change the current world monetary system and stop the Soviets from taking advantage.

In 1974, the US sent a delegation on a secret mission to convince the Saudis to finance the increasing US deficit with oil profits. The deal was simple, the Saudis would agree to price oil in dollars and to reinvest the dollars received into US treasuries.

In exchange, the US would stabilise the exchange value of the US$ and sell advanced weapon systems to the Saudi kingdom.

Weapons which were a result of overproduction from the Vietnam war and the US was eager to sell.

There was another important detail to this deal; US banks would use these petrodollars as loans to emerging markets in Latin America, South Asia and Africa.

In turn, these countries would purchase US, Euro and Japanese exports thus stimulating world growth.

This was a win win solution for all parties involved except for many of the debtor countries as they spent more than they earned and sunk deeper into debt.

One of the results of this, was the constant reduction of interest rates for US debt which caused asset prices to soar in developed markets as it made it cheaper to finance purchases and speculative investing.

This deal was agreed to be kept secret for over 40 years until May 2016 when the US treasury revealed the size of Saudi US treasury holdings and the details of this deal was discovered.

This deal has remained strong until recent years as the amount of money the US has printed has deflated the value of US treasury holdings and caused real value loss for OPEC countries.

Combined with the rise of BRIC+ countries, namely Brazil, Russia, India and China plus other emerging countries, these countries are increasingly looking to diversify away from US treasury holdings and build out their own productive capacities leading to less imports.

There has also been political pressure from voices in the US to stop supplying weapons to the Saudis; not understanding the real dynamics of the previously struck deal.

Also, with the current Russian and Ukraine crisis, severe supply issues from embargoes have created an opening and incentives for BRIC+ countries to settle oil and other essential commodities in non US$ trade.

With the recent US pivot to restore manufacturing yet due to poor economics such as the productivity of labour; the only option had been to cheapen the currency, and a worldwide currency war has ensued.

Saudi and US relations have deteriorated considerably in recent days.

Several OPEC countries are now allowing oil transactions to be settled in other currencies.

All of the conditions that gave rise to the petrodollar are now under duress.

What does this mean for the world and the future?

If the dynamics do not reverse, we will see far more global polarisation.

BRIC+ countries will also be incentivised to push their own currencies as settlement for goods, services and commodities.

Crypto has risen as a potential solution, however it is far from certain that countries will allow their sovereign currencies to be undermined or replaced by such digital assets in the long term.

Interest rates could remain higher for longer as the US will not be able to finance its deficit spending from other countries buying its debt.

The US$ is still the dominant reserve currency of the world and will remain so for many years to come.

However, there can be no doubt there will emerge new challengers to US$ status in the future.

If you’ve enjoyed this; I would encourage you to watch Ray Dalio’s seminal video, “The Changing World Order”

Would also appreciate likes and retweets.