As
Doug Casey has correctly noted, the prime directive of any organism—whether
it’s an amoeba or a person or a corporation or a government—is to survive.
That’s
why the US government protects the petrodollar so zealously. It needs the
system to survive.
World leaders
who have challenged the petrodollar recently have ended up dead…
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Why Everyone Uses
the US Dollar… for Now
In the 1970s, the
US government struck a series of deals with Saudi Arabia, creating the
petrodollar system. The US promised to coddle and protect the Saudi kingdom.
And, in exchange, Saudi Arabia would use its dominant position in OPEC to
ensure that all oil transactions happened in US dollars.
Until recently,
virtually anyone who wanted to import oil from any country
needed US dollars to pay for it.
The dollar is just
a middleman here. But countries and businesses use it in countless
transactions amounting to trillions of dollars that have nothing to do with
US products or services.
Plus, if foreign
countries are already using dollars for oil, it’s just easier to use the
dollar for other international trade. That’s why, in addition to oil sales,
the US dollar is used for about 80% of all international transactions.
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Take
Saddam Hussein and Muammar Gaddafi, for example. Each led a large oil-producing
country—Iraq and Libya, respectively. And both tried to sell their oil for
something other than US dollars, before US military interventions led to their
deaths.
In
October 2000, Saddam had started to sell Iraqi oil for euros only. Iraq
said it would no longer accept dollars for oil because it did not want to deal
“in the currency of the enemy.”
A little over
two years later, the US invaded. Immediately after Baghdad fell to US forces,
all Iraqi oil sales were switched back to dollars.
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Thanks
to WikiLeaks’ release of
Hillary Clinton’s emails, we know that protecting the petrodollar—not
humanitarian concerns—was a primary reason for overthrowing Libya’s Gaddafi.
According
to her leaked emails, the US (and France) feared that Gaddafi would use Libya’s
vast gold reserves to back a pan-African currency. This gold-backed currency
would have been used to buy and sell oil in global markets. Also, it would have
likely displaced a version of the French franc that’s used in Central and
Western Africa.
The
US and France backed a rebellion, both militarily and financially, that
overthrew Gaddafi in 2011.
After
Gaddafi’s death, plans for the gold-backed currency—along with Libya’s 4.6
million ounces of gold—vanished.
Of
course there were other reasons the US toppled Saddam and Gaddafi. But
protecting the petrodollar was a serious consideration, at the very least.
Putin Is a Tougher Adversary
The
dollar’s special status gives Uncle Sam tremendous leverage. So it’s no
surprise that Russia wants to undermine the petrodollar system.
Russian
President Vladimir Putin summed it up this way:
Russia shares the BRICS
countries’ concerns over the unfairness of the global financial and economic
architecture, which does not give due regard to the growing weight of the
emerging economies. We are ready to work together with our partners to promote
international financial regulation reforms and to overcome the excessive
domination of the limited number of reserve currencies.
Essentially,
Putin is saying they all want to ditch the dollar.
That’s
largely because the US uses the dollar as a political weapon. For example, the
US tried to sanction Russia for its actions in Crimea and Ukraine. These
sanctions made it harder for Russia to access the US dollar–based financial
system. So of course Russia is going to push for an alternative.
Shortly
after the sanctions, Russia struck a massive deal to sell oil and gas to China
for yuan. The deal totally bypassed the US financial system… and any sanctions.
China’s Permanent Bypass Around the US Dollar
Russia
is the world’s largest energy producer. China is the world’s largest energy
importer. Normally, they would trade with each other exclusively in US dollars.
But,
as I’ve told you in recent weeks, China is now introducing a more permanent way
around that.
I call it
China’s “Golden Alternative” to the petrodollar. It’s a streamlined way for
Russia and everyone else to sell oil to China for yuan—or effectively gold.
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China’s “Golden
Alternative” to the Petrodollar
China is launching
a practical and attractive alternative to the petrodollar system. It will
allow anyone in the world to trade oil for gold. It will also totally bypass
the US dollar.
Here’s how it will
work…
The Shanghai
International Energy Exchange (INE) is introducing a crude oil futures contract
denominated in Chinese yuan. It will allow oil producers to sell their oil
for yuan.
Of course, China
knows most oil producers don’t want a large reserve of yuan. So producers
will be able to efficiently convert it into physical gold through gold exchanges
in Shanghai and Hong Kong.
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Bottom
line, two of the biggest players in the global energy market are totally
bypassing the petrodollar system.
Informed
observers say Russia is already converting a large portion of its yuan earnings
to gold.
Of
course, other countries are interested in sidestepping the US financial system
and US sanctions, too. China’s Golden Alternative will give anyone the
option to do just that.
This
will make the US dollar a much less effective political weapon.
Other
countries on Washington’s naughty list are enthusiastically signing up. Iran,
another major oil producer, is accepting yuan as payment. So is Venezuela,
which has the world’s largest oil reserves.
I
think others will soon follow. From the perspective of an oil producer, it’s a
no-brainer.
With
China’s Golden Alternative, an oil producer can participate in the world’s
largest market and try to capture more market share. It can also easily convert
and repatriate its proceeds into gold, an international form of money with no political
risk.
But this doesn’t
apply to one critical holdout… Saudi Arabia.
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Twisting the Saudis’ Arm
Saudi
Arabia is the world’s largest oil exporter. A lot of that oil goes to China,
the world’s largest importer.
Beijing
still reluctantly pays for Saudi crude in US dollars. The Saudis won’t have it
any other way, at least for now.
This
bothers China. It can only import Saudi crude by obtaining and then using US
dollars. And that, of course, means it has to stay in Washington’s good graces.
Trump’s
Treasury secretary really drove this point home recently. He threatened to kick
China out of the US dollar system if it didn’t crack down on North Korea.
China
would rather not depend on an adversary like this. This is one of the main
reasons it’s launching the Golden Alternative.
Saudi Arabia,
however, refuses to participate. It won’t sell its oil in anything but US
dollars because that would break its longstanding petrodollar agreement with
the US.
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When China, Russia,
and others trade oil for yuan, it’s a significant blow to the petrodollar.
But if Saudi Arabia switched to yuan, it would take out the petrodollar… and
cause an immediate financial panic in the US.
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The
truth is selling oil for yuan would cost Saudi Arabia a whole lot.
It
would immediately lose American diplomatic and military protection. Then the
media and think tanks would quickly start pounding the table for the US
military to force democracy on Riyadh.
Last
year Trump said, “If Saudi Arabia was without the cloak of American protection,
I don’t think it would be around.”
He’s
absolutely correct.
Of
course, the Saudis know all of this. So they’ve been on a short leash… until
recently.
In
a surprise move, Saudi King Salman recently became the first sitting Saudi
monarch to ever visit Russia.
Until
recently, the visit would have been unthinkable. Saudi Arabia has been one of
the US’ closest allies since the petrodollar system started in the 1970s.
Meanwhile,
Russia and Saudi Arabia have been enemies for decades. Most recently, the
Saudis and Russians have been on opposite sides of the Syrian Civil War.
That’s
why King Salman’s historic visit to Moscow is so remarkable. The Saudis are
clearly hedging their bets against the US and the petrodollar system.
Saudi
Arabia is now drifting closer to Russia.
The
Saudis have committed to invest up to $10 billion in various Russian sectors.
But, even more significantly, they’ve agreed to buy the S-400 missile system,
Russia’s top line air defense system, as part of a $3 billion weapons purchase.
This
deal signals a geopolitical earthquake. The Saudis have never bought
Russian military equipment before.
Ever
since the birth of the petrodollar, the Saudis have depended on American
military protection. After all, it’s what they get in return for pricing their
oil in dollars.
The
S-400 system deal suggests the Saudis are hedging their bets. First, they’re not
buying an American system. Second, they’re buying a Russian system
that’s capable of deterring an American attack.
Saudi
Arabia is making significant moves to give itself alternatives to American
protection.
At
the same time, China is cutting back on Saudi crude.
A
few years ago, Saudi oil made up over 25% of Chinese oil imports. They were
Beijing’s No. 1 supplier. Today, the Saudis’ market share has dropped below
15%.
In
other words, the Saudis are losing massive market share and getting pushed out
of the biggest oil market in the world. This is mainly because they refuse to
sell oil to China in yuan.
China
has made itself clear. It’s willing to expand business with anyone who will
accept yuan as payment.
Today,
Russia has overtaken Saudi Arabia as China’s top supplier. Its share of the
lucrative Chinese market has grown from 5% to over 15%.
Russia’s
enthusiastic acceptance of yuan as payment is the main reason for this shift.
In
the meantime, Angola, an African oil producer, has also come on board. The country
now accepts yuan as payment for its oil exports to China. It even made the
Chinese yuan its second legal currency in 2015.
Chinese
imports from Angola have shot up since. It’s now China’s No. 2 supplier, after
Russia.
None
of this bodes well for the petrodollar system.
The
Saudis have two choices… rip up the petrodollar or get shut out of the world’s
most lucrative oil market.
One
way or another—and probably soon—the Chinese will find a way to compel the
Saudis to accept yuan. The sheer size of the Chinese market makes it impossible
for Saudi Arabia to ignore China’s demands indefinitely.
What to Watch For…
China
might not convince the Saudis to ditch the petrodollar system tomorrow. But
it’s making significant progress.
A
few months ago, Saudi Arabia announced it was willing to issue Panda bonds to
finance its government spending deficit. (Panda bonds are yuan-denominated
bonds from non-Chinese issuers that are sold in China.)
This
is remarkable. The Saudis’ currency is pegged to the US dollar. Up until this
point, they’ve exclusively used US dollars for all of their major financial
initiatives.
Issuing
debt in yuan—instead of US dollars—is a significant move. It means Saudi Arabia
is drifting closer to China.
Also,
the Saudis recently inaugurated the massive Yasref refinery in the Saudi city
of Yanbu. The refinery is an $8.5 billion joint venture between Saudi Aramco
and China’s Sinopec.
These
are noticeable steps. But the Saudis still haven’t given China what it really
wants—oil for yuan.
However,
it could happen soon…
The Largest IPO in History
In
the coming months, the Saudis plan to float a 5% stake in Saudi Aramco, the
state oil company.
Saudi
Aramco is the most valuable company in the world. It will likely be the biggest
equity offering ever. It could triple, or even quadruple, Alibaba’s current
record initial public offering (IPO) of $25 billion.
The
IPO’s success will depend on Saudi Arabia recruiting big cornerstone investors.
But so far, Western investors haven’t shown a lot of enthusiasm.
For
China, however, it could be the perfect opportunity to buy political influence
in Saudi Arabia.
If
China bought a large stake in the Aramco IPO, it would help cement its
relationship with Saudi Arabia. It would also put more distance between the
Saudis and the Americans.
And
critically, it would give the Chinese more leverage to compel the Saudis to
accept yuan for oil.
China
is in the process of negotiating not just a 5% stake, but potentially a larger
one.
Bottom
line…the Saudis haven’t made a clean break with the US yet. However, they are
drifting toward China financially and Russia militarily.
The
Saudis are clearly setting up the option to dump the petrodollar.
If
the Saudis sell oil to China in yuan, it would kill the petrodollar overnight.
However, short of that, things still look very dire for the petrodollar.
The
petrodollar system is facing serious erosion, thanks in large part to China’s
Golden Alternative. That’s already baked into the cake.
And
with that, severe inflation in the US is a certainty.
This
will likely be the tipping point…
After
the collapse of the petrodollar, the US government will be desperate enough to
implement capital controls, people controls, nationalization of retirement
savings, and other forms of wealth confiscation.
I urge
you to prepare for the economic and sociopolitical fallout while you still can.
Expect bigger government, less freedom, shrinking prosperity… and possibly
worse.
It’s
probably not going to happen tomorrow. But we know where this trend is headed.
It’s
possible that one day soon, Americans will wake up to a new reality. Once the
petrodollar kicks the bucket and the dollar loses its status as the world’s
premier reserve currency, you will have few, if any, options.
The
sad truth is, most people have no idea how bad things could get, let alone how
to prepare…
Yet
there are straightforward steps you can start taking today to protect your
savings and yourself from the financial and sociopolitical effects of the
collapse of the petrodollar.
We recently
released a special Guide to Surviving and Thriving During an Economic
Collapse. Click here to download the PDF now.
Nick Giambruno
Nick is
Doug Casey’s globetrotting companion and is the Senior Editor of Casey
Research’s International Man. He writes about
economics, offshore banking, second passports, value investing in crisis
markets, geopolitics, and surviving a financial collapse, among other topics.
He is a CFA charterholder. In short, Nick’s work helps people make the most of
their personal freedom and financial opportunity around the world. To get his
free video crash course, click
here.