The End Of The Petrodollar

The Saudis, New Chapter in Energy Economics, De-dollarization, and the American-Made Pressure Cooker

"Oil is too important a commodity to be left in the hands of the Arabs."

~ Henry Kissinger

Just last Sunday, one of the most significant economic deals of the century came to an end. The long-standing petrodollar agreement between Saudi Arabia and the United States officially expired on June 9th, 2024.

This system, which has been in place for 50 years, is now gone.

Despite what the mainstream media might have you believe, yes, it does point to a big change in global economics, and yes, it could seriously affect every American's life.

So this week, I want to break down exactly what's happening, why it's happening, and how it will impact us and generations to come.

But first, let’s set the stage with some context, because it’s crucial...

"Rise" of the Dollar

You've probably heard the saying, “The one with the gold makes the rules,” right?

This was the position the U.S. was in after World War II.

The U.S. had won the war and boasted the world's largest gold reserves. This allowed it to reshape the global monetary system around the dollar.

The new system, created at the Bretton Woods Conference in 1944, tied almost every nation's currency to the U.S. dollar at a fixed rate. It also pegged the U.S. dollar to gold at a fixed rate of $35 an ounce.

This arrangement made the U.S. dollar the world’s premier reserve currency, effectively forcing other countries to hold dollars for trade or redeem them with the U.S. for gold.

But, by the late '60s, splurging on welfare and the Vietnam War, along with printing money to cover the deficit, pumped tons more dollars into circulation compared to the gold reserves backing them.

Other countries weren't too thrilled about holding all these dollars, so they started cashing them in for gold, draining Uncle Sam's gold stash from 574 million to about 261 million ounces by 1971.

To stop the bleeding, President Nixon “temporarily” suspended the dollar's convertibility into gold in 1971. That move was the final nail in the coffin for the Bretton Woods system, severing the dollar's last tether to gold.

That's pretty much why the Fed can keep the printing presses running the way it does today (more on this below).

Yellow Gold Out, Black Gold In

The end of the Bretton Woods system had big effects on geopolitics. Mainly, it took away the main reason other countries hoarded loads of U.S. dollars and used them for international trade.

So, the U.S. government cooked up a new plan – the petrodollar system.

In 1974, U.S. President Richard Nixon sent his Secretary of State and National Security Adviser Henry Kissinger to Saudi Arabia, the dominant nation in the OPEC oil cartel, for a secret meeting. To make a long story short, Kissinger basically promised the King of Saudi Arabia weapons and protection, and guaranteed the survival of the House of Saud. In exchange, Saudi Arabia agreed to use its dominant position in OPEC to ensure that all oil transactions would only happen in U.S. dollars.

The deal between the U.S. and Saudi Arabia meant that if countries wanted to trade oil, they had to first get their hands on dollars.

It was pretty genius when you think about it.

Oil isn't just any raw material. It was the biggest and most important commodity in the world back in the 1970s, and it remains so today. As you can see in the chart below, it completely overshadows all the other major commodity markets combined.

That's because every country needs oil... in huge, never-ending amounts.

Understandably, this situation created a massive demand for U.S. dollars. And it allowed the U.S. to maintain dominance over global trade and kept the U.S. dollar as the world's reserve currency for over half a century.

A New Paradigm

But just this Sunday, the Saudi petrodollar agreement with the U.S. expired. The Crown Prince of Saudi Arabia, Mohammed Bin Salman, had not taken the necessary steps to renew it.

Yes, there were rumors going around on X (formerly Twitter) last week that the U.S. and Saudi Arabia might still renew their “contract.” But after digging into it, I couldn't find any solid evidence to back them up. So, for now, I'm just marking it down as potentially bad info on X until proven otherwise.

Now, if you've been with us for any amount of time, you'll know that this decision is part of a much bigger de-dollarization trend we've been observing for the past years.

And, as I'll discuss later this week, from Saudi Arabia's perspective, this isn't happening in isolation or on a single front. But, that's a conversation for another time.

For now, let's pause and consider the potential ramifications of this particular (non)move on the Saudis' part...

As you’re well aware, the petrodollar system has made other countries buy our dollars and debt. That's why Doug Casey has been saying since time immemorial that U.S. dollars are America’s main export. And because of that, the U.S. government and elites have been able to keep piling on debt and printing money without sending the whole country into bankruptcy.

It helps to think of the U.S. economy as a pressure cooker.

You have the Fed and government consistently adding more heat to it. The pressure builds. More and more consumers find themselves able to afford less with their dollar. But, hey, at least the pressure cooker is still intact. At least we don't have hyperinflation. Our economy isn't completely broken. And it's all thanks to an exit valve that helps release the pressure and dollars to the rest of the world… and the world absorbs them because it needs those dollars to buy energy.

But what happens if this release valve gets compromised?

Bad things. Without the valve, the pressure will continue to build until it becomes so unsustainable that the pressure cooker finally explodes, blowing up in everyone's face.

My point is, remove that valve, and the U.S. is basically on its way to becoming the next Argentina. And that's exactly where we’re headed with the petrodollar becoming a thing of the past.

Regards,

Lau Vegys