Petrodollar and WWIII

pmbug

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Food for thought:
... Relations between Saudi Arabia and the U.S. have deteriorated sharply over the course of the Obama administration. The primary cause was the Iran-U.S. nuclear negotiations and what amounts to the U.S. recognizing Iran as the leading regional power.

In the past months, the U.S. ended the secrecy surrounding Saudi ownership of U.S. Treasury securities (in place since 1975). The U.S. also released a formerly top secret 28-page section of the 9/11 Commission Report that clearly reveals links between members of the Saudi royal family and the 9/11 hijackers and Al Qaeda.

The Saudis have threatened to dump their U.S. Treasury securities in response to the release of the secret report, but so far that threat has not materialized.

Saudi Arabia is dealing from a position of weakness in relation to the U.S. Saudi Arabia is now running a fiscal deficit rather than a surplus, so the issue of where to invest reserves is moot. In fact, Saudi has been selling its reserves, mainly U.S. Treasuries, to cover its fiscal deficit.

The U.S. is no longer dependent on Saudi Arabia for energy supplies. It has become a net exporter of energy and has the largest oil reserves in the world. All of the conditions that gave rise to the petrodollar now stand in the exact opposite position of where they were in 1975.

Neither the U.S. nor Saudi Arabia have much leverage over the other, in contrast to 1975 when each side held powerful trump cards.

This does not mean that oil will be priced in a currency other than dollars tomorrow. It does mean that a new pricing mechanism is possible and no one should be surprised if it happens.

Saudi Arabia could easily price oil in yuan, then swap the yuan for Swiss francs or SDRs, and use the proceeds to add to its reserves or buy gold. Saudi Arabia could also price oil in SDRs or gold and hold those assets or swap them for other hard currencies to diversify away from dollars.

The possibilities are numerous. The conversion of oil prices away from dollars to some alternative is just a matter of time.
...
More: http://dailyreckoning.com/petro-sdr-world-money/
 

11C1P

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Food for thought:

"The U.S. is no longer dependent on Saudi Arabia for energy supplies. It has become a net exporter of energy and has the largest oil reserves in the world."
N.D. says you're welcome! :pffftt: We've got energy coming out our ass. We've got hydro power with Garrison dam, we've got coal plants, we've got a ton of the big windmills (we're the saudi arabia of wind!) and more going up, now they are adding a huge solar array near the N.D./S.D. border, that's all in addition to the oil and nat. gas we've been shipping out in huge quantities. It's not as busy as it was, but still producing ~ 1mil barrels of oil/day. Thats with the rig count WAY down. :flushed:
 

pmbug

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Decent summary of the petrodollar system and the various variables at play:

... Today, however, this immense growth in debt levels makes the US regime more sensitive to changes in demand for US debt, and this has made the US regime ever more reliant on foreign demand for both US debt and US dollars. That is, in order to avoid a crisis, the US must ensure that interest rates remain low and that foreigners want to acquire both US dollars and US debt.

Were petrodollars and petrodollar recycling to disappear, it would have a twofold effect on US government finances: a sizable decline in petrodollar recycling would put significant upward pressure on interest rates. The result would be a budget crisis for the US government, as it would have to devote ever-larger amounts of the federal budget to payments on the debt. (The other option would be to have the US central bank monetize the debt by purchasing ever-larger amounts of it to make up for a lack of foreign demand. This would lead to growing price inflation.)

Further, if participants began to exit the petrodollar system (and, say, sell oil in euros instead) demand for dollars would drop, exacerbating any scenarios in which the central bank is monetizing the debt. This would also generally contribute to greater price inflation, as fewer dollars will be sucked out of the US by foreign holders.

The result could be ongoing declines in government spending on services, and growing price inflation. The US regime's ability to finance its debt would decline significantly, and the US would need to pull back on military commitments, pensions, and more. Either that, or keep spending at the same rate and face an inflationary spiral.
https://mises.org/wire/huge-debt-got-us-hooked-petrodollars-—-and-saudi-arabia

Two points:
  1. The Fed is already (indirectly) monetizing the debt.
  2. The author didn't consider another possible consequence of financial distress - war.
 

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OPEC+ has fallen apart. The Saudis and Russia are in a full on oil price war - ramping up production and selling oil well below production cost.

What does that mean for the petrodollar? Less international demand for dollars. Less international demand for US Treasuries ... to support the oil trade anyway. There is an increase in safe haven demand as financial markets are crashing, but that should reach an equilibrium at some point, shouldn't it?

... the key question is just how long can the world's three biggest producers - shale, Russia and Saudi Arabia...

... sustain a scorched-earth price war that keep oil prices around $30 (or even lower).

While we hope to get an answer on both Saudi and US shale longevity shortly, ... moments ago we got the answer as far as Russia is concerned, when its Finance Ministry said on Monday that the country could weather oil prices of $25 to 30$ per barrel for between six and 10 years.

The ministry said it could tap into the country’s National Wealth Fund to ensure macroeconomic stability if low oil prices linger. As of March 1, the fund held more than $150 billion or 9.2% of Russia’s growth domestic product. ...
https://www.zerohedge.com/energy/russia-says-it-can-weather-25-oil-10-years
 

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Saudi Arabia said on Tuesday it would boost its oil supplies to a record high in April, raising the stakes in a standoff with Russia and effectively rebuffing Moscow’s suggestion for new talks.
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Moscow said Russian oil companies might boost output by up to 300,000 bpd and could increase it by as much as 500,000 bpd, sending the Russian rouble and stocks plunging.
...
Saudi Arabia needs an oil price of around $80 to balance its budget, but has cash reserves and the ability to borrow to deal with a price plunge for now. Russia needs about $42 to balance its books and also has hefty cash reserves it can draw on.

Iraq and some other OPEC nations, with more meager financial resources to cope with a dramatic drop in oil revenues, called for action to shore up prices.

Ratings agency Fitch said a sustained sharp drop in oil prices would hit the sovereign ratings of those exporting countries with weaker finances, particularly those with exchange rates pegged to the dollar.

But even Saudi Arabia, with its hefty financial reserves and sovereign wealth fund, did not have “infinite leeway” to support its A (stable) rating, Fitch analyst Jan Friederich said.
...
https://www.reuters.com/article/us-oil-opec-saudi-idUSKBN20X13Q
 

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Abu Dhabi National Oil Co. will boost crude supply to more than 4 million barrels a day next month as the United Arab Emirates joins a battle for market share triggered by Saudi Arabia and Russia.

To pump this amount, Adnoc would need to add more than 1 million barrels a day to the quantity that the U.A.E. produced in February, according to data compiled by Bloomberg. While the target for April is higher than what the International Energy Agency estimates the country has the capacity to produce, Energy Minister Suhail Al Mazrouei said his country can achieve it.
...
Abu Dhabi holds most of the oil deposits in the U.A.E., which ranks as the third-largest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia and Iraq.

Government-runAdnoc can also draw on reserves it stores in the emirates of Abu Dhabi and Fujairah as well as outside the U.A.E. It has around 8.2 million barrels of oil storage capacity at Kiire in Japan and 5.9 million barrels of capacity in Mangalore, India.
...
https://www.msn.com/en-us/money/new...utput-boost-to-join-the-price-war/ar-BB112clb

Oil is going to be dirt cheap for a while it seems.
 
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