Is the Petrodollar system collapsing?
https://finfoc.com/are-we-seeing-the-collapse-of-the-petrodollar-system/amp/
This really sets up a good reason for proxy wars against China and Russia. Let he who has ears hear…
Excerpt:
Advantages and Disadvantages of the Petrodollar
Advantages:
The petrodollar greatly helped to elevate the U.S. dollar's standing in the financial markets, as the price of the most important commodity in the world, oil, was linked to the dollar. This has partly aided the dollar in being the world's most dominant currency, which allows the dollar to continuously finance its account deficit by issuing dollar-denominated assets at very low rates. This has also allowed the U.S. to wield significant control economically over the globe. Furthermore, for the US it means an inflow of foreign capital through petrodollar recycling.
Petrodollar recycling means that oil-producing countries end up with surpluses of US currency that need to be “recycled” back into the economy. Petrodollar recycling can involve channelling these dollars back into their own domestic economies or investing them in the US economy as stipulated by Tony Robbins.
Disadvantages:
On the downside, however, the U.S. is the world's reserve currency. Meaning it has to run account deficits to fulfil reserve requirements in a global economy that is continuously expanding. If these deficits were stopped then the lack of liquidity would lead to an economic decline. Despite this, if these deficits continue, then other countries will lose faith in the dollar, possibly leading it to lose its status as the world's reserve currency. This is known as the Triffin Dilemma.
The petrodollar system also created significant stress on Russia (formerly USSR), which was now faced with an increasingly dollarized world market, where the U.S. could print money to buy oil, but it had to dig oil out of the ground. Only heightening tension between the two hegemons.
Emerging markets, such as Mexico, created swathes of dollar-denominated debt that these countries found difficult to repay, in a system that caught them in a web that prioritised dollar accumulation over domestic investment.
Countries' need for US dollars exposes them to US sanctions, this is seen by many, as threatening. This is because of the political clout and authority it equips the US with, meaning anyone who thinks or behaves in a way that the US deems as wrong can be subject to expulsion from SWIFT, just ask Venezuela, Iran or Russia. Hence why, Luke Gromen calls the petrodollar system a “company town,” (Gromen, 2020) one in which the US asserts its dominance through coercion and violence.
Lastly, one of the most significant consequences of the petrodollar system is the steady growth of the oil and fossil fuels industries at the expense of nuclear power and regional energy independence.
The Collapse of the Petrodollar System?
The Journal of International Economics in a 2020 study, discussed four potential future monetary outcomes for the world: continued dollar hegemony, competing monetary blocs and an international monetary federation (where at the top of the international hierarchy stands an organisation like the IMF and their special drawing right, SDR).
With the decline in the purchasing power of the US dollar, some nations have developed a new narrative surrounding the benefits of the petrodollar system.
Countries like China, Iran, Russia, Saudi Arabia, and India have considered shifting the base value of their exports to their own currency rather than the U.S. dollar. This would be a move towards the monetary outcome of competing for monetary blocs.
Strikingly, the recent geopolitical events in Ukraine have evidenced an increasingly likely end to the US monopoly in global affairs. As a consequence of the development of a more assertive Eurasian hegemony between Russia and China. Is the end of Fukuyama’s ‘End of History’ (1989) (an assertion by Fukuyama of the universalisation of western liberal democracy) insight? In 2015, 90% of Russo-China bilateral transactions were conducted in dollars (D'Antona Jr, 2020). By Q1 2020, 46% of their bilateral transactions were conducted in dollars.
Notably, Russia’s central bank also revealed that it had slashed its dollar holdings by $101 billion, with the yuan increasing its share of Russia’s foreign exchange reserves jump from 5% to 15%. This de-dollarization has resulted in a de-facto alliance. Evidenced in June 2019 by Xi and Putin’s decision to conduct all transactions between the nations in their native currencies. Moreover, as China seeks to purchase its oil in yuan rather than dollars, it is rumoured that they may have found another seller in Saudi Arabia. This is on the backdrop of an increasingly frayed Saudi-US relationship. The reality of Saudi Arabia’s oil for yuan bid may not fructify in the near future, as Saudi Arabia pegs its riyal to the dollar, meaning any blow felt by Saudi’s move towards the yuan will inadvertently hurt its own currency. However, the talks between the two nations, highlight growing momentum for de-dollarization.
The de-dollarization is truly in full swing as western sanctions on Moscow spur trade deals that exclude the use of the dollar. In March, several Chinese firms used yuan to purchase Russian coal, which will begin arriving this month. Furthermore, Russian oil purchased in yuan will arrive at Chinese refineries in May. Aleksandar Tomic (2022) has stipulated that “countries’ need for dollars exposes them to the US financial sector… and gives the US political leverage.” Consequently, other nations see this as a warning to reduce their reliance on the dollar. Evidence of this is most glaring with India’s exploration of reinstating the cold-war era rupee-rouble ledger. Despite India’s interest in this, one of the biggest stumbling blocks to the implementation of the rupee-rouble ledger would be how to decide upon a rate of exchange against the Russian rouble that has been so volatile since the beginning of the war. It is not viable to peg the rouble and the rupee, even against a third currency. Secondly, despite India remaining neutral, the extent to which India will be willing to engage with Russia before the US objects remain to be seen.
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It’s all about the Benjamins.
