by Michael Snyder, The Economic Collapse Blog:
This month, rumors about the petrodollar have spread like wildfire all over the Internet. Some of what is being said is true, and some of what is being said is false. When other sources were reporting on “the death of the petrodollar”, I was asked why I was not writing about it. Well, the truth is that I was not writing about it because the petrodollar is not dead. It is certainly in trouble, but it is not dead. Today, most oil continues to be sold in U.S. dollars, and most global trade continues to be conducted in U.S. dollars. But that could change as other countries lose faith in our currency. In particular, we will want to carefully watch what the BRICS nations choose to do. 45 percent of the world’s inhabitants live in the BRICS nations, and they have been implementing strategies that are designed to promote their own currencies and reduce dependence on the U.S. dollar. As U.S. relations with leading BRICS nations continue to deteriorate, I would expect that trend to accelerate.
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So I am not optimistic about the future of the petrodollar at all.
But what some other sources reported about the petrodollar earlier this month was simply not accurate.
Let me start at the beginning. According to Investopedia, petrodollars are “simply U.S. dollars accepted as payment by an oil exporter”…
Petrodollars are oil export revenues denominated in U.S. dollars. Petrodollars are not a distinct currency; they are simply U.S. dollars accepted as payment by an oil exporter.
Global crude oil exports averaged approximately 88.4 million barrels per day in 2020. That pace would generate annual global petrodollar supply of more than $3.2 trillion a year, assuming an average price of $100 per barrel.
Petrodollars are the primary source of revenue and wealth for many members of the Organization of Petroleum Exporting Countries (OPEC) as well as non-OPEC oil and gas exporters including Russia, Qatar, and Norway.
The fact that so many other countries all over the globe use the U.S. dollar to buy and sell oil is a major advantage to us.
Earlier this month, there was a flood of reports that the “50 year petrodollar agreement” between the United States and Saudi Arabia had expired and that the petrodollar was now dead.
But that wasn’t true.
As Peter C. Earle has accurately pointed out, there never was a formal treaty, there never was a formal expiration date, and Saudi Arabia has been trading oil for other currencies for a very long time…
Last week several reports suggested the termination of a US-Saudi petrodollar agreement, and speculated a Saudi Arabian move to sell oil on world markets in various currencies, including the Chinese yuan. The accounts were rife with inaccuracies: the Saudis’ have transacted in non-dollar currencies for decades, and there has never been a formal treaty, much less with a specified expiration date, governing the loose arrangement that has come to be called the ‘petrodollar system.’
Unfortunately, many of the false reports went viral, and Google searches for “petrodollar” spiked to unprecedented levels…
Almost immediately, Google searches for the term “petrodollar” spiked to the highest level on record dating back to 2004, according to Google Trends data.
But as speculation about an imminent end to the U.S. dollar’s global dominance intensified, several Wall Street and foreign-policy experts emerged to point out a fatal flaw in this logic: The agreement itself never existed.
At least, not in the way it was being described in the posts that had gone viral on social media.
This is why I take my time and do my research before I report something.
It is so easy to be wrong, but it takes real work to develop a reputation for accuracy.
According to UBS Global Wealth Management chief economist Paul Donovan, the false story about the expiration of the petrodollar agreement “seems to have started in the crypto world”…
Paul Donovan, the chief economist at UBS Global Wealth Management, in a blog post said that the story had gained unexpected traction, serving as yet another example of the dangers of “confirmation bias.”
“The story seems to have started in the crypto world. Many crypto speculators desperately want to believe in the dollar’s demise,” said Donovan.
It is true that a “Joint Commission on Economic Cooperation” was established in 1974.
Originally it was only supposed to last for five years, but it was “repeatedly extended”…
The agreement referred to by Donovan is the United States-Saudi Arabian Joint Commission on Economic Cooperation. It was formally established on June 8, 1974, by a joint statement issued and signed by Henry Kissinger, the U.S. secretary of state at the time, and Prince Fahd, the second deputy prime minister (and later king and prime minister) of Saudi Arabia, according to a report found on the Government Accountability Office’s website.
The agreement, as initially envisioned, was intended to last five years, although it was repeatedly extended. The rationale for such a deal was pretty straightforward: Coming on the heels of the 1973 OPEC oil embargo, both the U.S. and Saudi Arabia were eager to flesh out a more formal arrangement that would ensure each side got more of what it wanted from the other.
At that time, the U.S. and Saudi Arabia very much needed one another.
Today, circumstances are quite different.
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