Yesterday, the “impossible” happened. Oil traded below $0. In fact, not by a little, but by up to $40 dollars. Not only is oil now cheaper than water, but it is so cheap, producers are having to pay people to take it. The energy markets are imploding. Obviously, this isn’t a sustainable situation and horrific for anyone invested in the energy market. However, while all the talking heads are focused on the immediate problems this creates, a far bigger financial storm is brewing that no one in the mainstream media (MSM) dares to discuss. This financial storm has a very real potential of spiraling out of control and destroying the reserve status of the U.S. Dollar by disrupting, if not destroying, the Petrodollar. The impact would not be some distant crisis in the Middle East, but would be the destruction of the standard of living every America has come to know and expect.
Many have heard the term “Petrodollar,” but few understand what it represents and how critical it is to America’s global dominance. Here are two links to help: https://internationalman.com/articles/timing-the-collapse-ron-paul-says-watch-the-petrodollar/; https://www.investopedia.com/terms/p/petrodollars.asp The very simplified explanation is that almost all commodities (wheat, hogs, gold, oil, etc.) are traded and settled globally in U.S. Dollars. This represents the broader application of the term Petrodollar, which was originally used to denote just the purchase of oil. This means countries must purchase dollars to trade. This arrangement is critical for the United States and came out of the post-World War II Bretton Woods financial agreement that established the U.S. Dollar as the world’s reserve currency. At the time, the U.S. controlled most of the gold in the world and the dollar was backed by gold and redeemable for gold. During the Nixon era, the U.S. announced it no longer would back its dollars with gold, which significantly decreased demand for dollars. To protect the dollar’s reserve status post-Gold Standard, the Petrodollar system was established. The system created a reliable buyer of our debt by Middle Eastern oil producers. Since then, the U.S. has allowed the dollar’s value to float in order to finance trillions of dollars in subsequent debt spending. This has led to a steady devaluation of the dollar. In spite of this, the dollar is still the best bet in town and countries continue to use it as the primary means of settling trade and storing wealth. The Petrodollar arrangement, in effect, has allowed the U.S. to create and spend enormous sums of money without massive inflation since there has been a large and reliable source of buyers for our debt in the form of U.S. Treasury Bonds and users of the U.S. Dollar for trade. Note that treasury bonds are the biggest category of U.S. debt and are backed by the U.S. government’s ability to tax in order to pay back the debt issued through the bonds. Up until now, this has generally worked since the demand for dollars has counterbalanced the supply of dollars, which has maintained a reasonable stasis in currency value. However, we have just experienced the most destabilizing impact in modern history on this relationship.
Specific to the Petrodollar, the U.S. has had a longstanding deal with the major Middle Eastern oil producers to buy their oil in dollars in exchange for them to use our dollars to buy massive amounts of our treasury bonds (our debt). To maintain this relationship, we have “looked the other way” and provided significant political and military protection to these countries; despite the fact they are brutal totalitarian monarchies and about as un-American as it gets. Now, as oil demand continues to plummet and global commerce vapor locks, much as predicted in previous articles, this is creating a situation where no one has the ability to buy our treasury bonds (our debt). Simultaneously, the use of U.S. Dollars drops off a cliff. Compounding that situation is the need for nations holding our treasury bonds (our debt) to cash out their holdings to finance covering the cost of their economic losses incurred as the pandemic spreads across the globe. This is occurring just as the U.S. is creating massive amounts of additional dollars (more debt), which it needs to sell in the form of treasury bonds to finance its domestic bailouts. This is creating a perfect storm.
Remember, the purchase of our debt by Middle Eastern oil producers has been a critical cornerstone of the dollar’s survival since the currency was removed from the Gold Standard. Ultimately, there are only two ways this debt is paid for. It is either paid back by higher taxes or by creating more money and additional debt, which causes inflation and then hyperinflation if no one is able or willing to buy the debt. The latter appears to be what is developing as the big buying oil producers go broke and no politician in Washington is ready to roll out a huge tax hike on Americans. Historically, when presented with this situation, governments have opted for printing cash and obliterating the value of their currency. This has always led to a currency crisis. Once the stability of a currency is in question, people abandon its use. For the U.S. Dollar, this would mean its use as a reserve currency would end or be heavily diminished. This is why the crisis could be catastrophic and no one from the MSM is willing to touch the subject.
Make no mistake, we are still early in this crisis. The global impacts are only just beginning to be felt and much is still unknown. The crisis this pandemic has initiated (I say initiated since the U.S. economy was already in a massive bubble and primed to collapse) will persist for months and years, not weeks. The economic consequences may well last decades and lead to a total reset. In addition, few have attempted to recognize the grim reality for what it is and think through the catastrophic consequences of how the collapse of the Petrodollar could play out. The dominoes have begun to fall and where they lead is truly scary.
So, what could this domino effect look like? At minimum, the major oil producing countries in the Middle East are facing a legitimate crisis that is likely to topple some, if not most, of their monarchies if the depressed oil prices persist another six to twelve months. Remember, these dictatorships have used their oil revenue to maintain power through brutal oppression and paying off their populations by generous welfare systems. Without oil money, these hated regimes will fall and fall fast, which is one of the few silver linings of this unholy alliance with dictatorships. With them will fall the Petrodollar. Without the Petrodollar system, the U.S. will be facing staggering levels of inflation and the dollar’s status as the reserve currency will not only be jeopardized, but most likely lost. This leads to even higher levels of inflation and a rapid collapse in the standard of living. At this point, the U.S. government will be incapable of funding social welfare programs and sustaining the massive bureaucracy it created. This leads to an endgame reset with social unrest and political upheaval. Let’s hope this chain of events can be stopped, but the reality is at best, with close to $30 trillion in rapidly growing debt, the crisis can be only temporarily interrupted and delayed. The endgame is now set.
Note: I am far from the first to point out the issues with the Petrodollar or suggest the system is or will collapse. However, I believe that unlike previously, we are in a situation where the reality is more likely than ever before. See: https://peakoil.com/business/the-coming-collapse-of-the-petrodollar-system; https://www.sovereignman.com/podcast/the-petrodollar-is-collapsing-and-its-one-of-the-biggest-opportunities-in-the-world-right-now-14975/; https://www.sovereignman.com/trends/the-last-time-this-happened-the-us-went-to-war-to-defend-its-interests-14979/; https://nationalinterest.org/feature/the-end-the-petrodollar-25002
By Guiles Hendrick
April 19, 2020
