The PetroDollar R.I.P.

With great sorrow, we announce the death of our dear friend and colleague, the PetroDollar. Petro passed from this financial plane on June 9th,2024, at just 51 years of age.

Petro will be sorely missed.

Signed,
Wall Street, USA

Although tongue-in-cheek, this reflects the feelings of many on Wall Street, who have already figured out what the loss of the PetroDollar will mean to America’s finances.

The PetroDollar was an agreement between the United States and Saudi Arabia to trade oil in US Dollars. It was signed just over a year after the Saudi-led Organization of Petroleum Exporting Countries (OPEC) sent the US Economy into a tailspin when it “embargoed” (reduced supply/increased price) oil to America.

President Nixon bargained with the Saudi King to sell their oil only in US Dollars. In return, Saudi Arabia promised to keep the price of oil reasonable, and the US promised military and financial support. It was a win-win agreement. Saudi Arabia strengthened its military and financial situation, while the US would not have to face the devastating effects of another embargo.

There was one other benefit for the US that would ultimately prove even more valuable than steady oil prices. The Saudis helped create a financial model where not only oil but nearly all international settlements would be made in US currency. Although the US Dollar had been the World’s reserve currency since the 1944 Bretton Woods Agreement, this new Saudi-US PetroDollar Agreement confirmed the Dollar’s preeminent position 30 years later.

The Dollar was literally at the top of the financial World. For the next half-century, roughly 80% of all international transactions (trade) were in Dollars.

In practice, this meant that the nations of the World would expedite their trades by first purchasing US Treasury Securities so that they had them on hand when they needed to trade with another country. This created an instant demand for US Bonds, Notes, and Bills. That might not have been such a big deal when America had minimal debt, but as our national debt grew, this became a more important component in financing that debt. 

Even more subtly, this dominance in world finance gave US Securities instant credibility, and as any securities salesman will tell you, credibility is the number one attribute for any financial asset. In short, every nation in the World knew precisely what a US Treasury Security was and how it could be utilized to trade.

Although it’s difficult to get a precise estimate of the total size of US Debt held internationally, we do know that the Federal Reserve holds $8 trillion on deposit for foreign countries — nearly a quarter of the current US Federal Debt.

https://fred.stlouisfed.org/series/FDHBFIN 

It’s not a bad deal when you think about it. The country that likes to spend the most (the US) has other countries lend them the money. For about half a century, this arrangement worked like a charm for the US.

However, the Dollar’s preeminent position worldwide changed when Biden became president. Reacting to the Russian invasion of Ukraine, Biden slapped a series of sanctions on Russia. Russian sanctions were nothing new; the first sanction on Russia went back to President Obama signing Executive Order #13660 in March 2014.

https://www.state.gov/ukraine-and-russia-sanctions/

This sanctions package, and the others that grew from it, were designed by the US State Department to target specific individuals, companies, or organizations and prohibit travel and commerce with these entities. Obama would go on to sign six more such sanctions against Russia.

President Trump would continue utilizing these narrowly defined sanctions against Russia; in all, Trump would sign 52 Russian Sanctions.

But things changed when President Biden came into office. On February 24, 2022, Russia invaded Ukraine in what was described as a Special Military Operation (SMO). In response, the Biden Administration set out on two tracks to punish Russia. First, Biden promised to supply military and financial aid to Ukraine for “as long as it takes…” A virtually unlimited promise to back the Ukrainian government.

Additionally, the Administration began instituting a new type of sanction that went well beyond the limited scope sanctions of the prior Administrations. Most startling, the Administration prohibited certain major Russian Banks (later expanded to virtually all Russian Banks) from using the SWIFT International Settlements System. Designed to be a knockout blow to Russia’s international trade, especially its oil sales, this was the first time the American-led, non-partisan banking system was used as a financial weapon. 

The assumption was that by removing Russia from SWIFT, it would not be able to sell its oil overseas. Biden would have cut off the chief source of Russian international trade and finance. However, ultimately, Biden shot at the Russian oil trade and hit the PetroDollar instead.

Meanwhile, Crown Prince Mohammed bin Salman saw it all: how the Biden Administration first cut off all Russian oil sales and then tried to ruin all of Russia’s trade financing. MBS had to wonder if America would do this to OPEC’s number two oil supplier, Russia, would they do it to Saudi Arabia?

In the end, what the Biden Administration failed to see was that both China and India would line up on Russia’s side and become its most significant customers. Swift and PetroDollar instantly lost 20–40% of their customer base, while Russia went on to sell its oil to the Global South.

It is reported that 82 countries in the Global South are lining up to join the BRICS association. Those nations originally included Brazil, Russia, India, China, and South Africa. Far from breaking Russia, Biden has strengthened BRICS and crushed the Dollar. By embarking on these unique financial sanctions, the Biden Administration put the PetroDollar and the Dollar’s reserve status on the line.

At the very least, American leaders should have realized that they transformed the internationally traded US Dollar from a non-partisan, neutral trading vehicle into a financial weapon. Once that line was crossed, there was no going back.

Yesterday, the 50-year PetroDollar Agreement expired. It was part of the complex web of global finance that supported the Dollar’s preeminent position as the Reserve Currency. Not a word was heard from either Saudi Arabia or the United States, the two signatories. Perhaps it's an indication of how far the Dollar has already fallen.