The Beginning Of The End Of The Petrodollar
When you think of the petrodollar inevitably you will think of Saudi Arabia and the agreement they made with the Nixon Administration to sell all of their oil in dollars. That's why what happened just two weeks ago is so significant.
China signed several memorandums of understanding and more than 40 new energy, security, technology, and bilateral investment agreements with Saudi Arabia and other Arab gulf states totaling more than $50 billion. The new deals will increase the Saudi-China trade to nearly $140 billion annually compared to $24.7 billion of Saudi-U.S. trade.
...During Chinese President Xi Jinping's speech on Friday, he stated he would work to buy oil and gas in Chinese Yuan. He stated China would use the Shanghai Petroleum and National Gas Exchange as a platform to carry out Yuan settlement of oil and gas trade.
When Iraq proposed selling oil in Euros, Washington escalated hostilities. The same is true for Libya a decade later.
Saudi Arabia is the market maker for global petroleum, while China is the globe's largest importer of oil, so this is a real threat to Dollar Hegemony. But if you thought that this was some sort of one-off, consider this.
In 2020, Saudi Arabia held $184.4B in U.S. Treasuries. Two years later, Saudi Arabia has reduced its Treasury holdings by 34.4% to $121B. Saudi Arabia is systematically de-dollarizing their economy and reducing Treasury holdings.
On top of that, the Saudis and China signed a military defense agreement.
‘The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency. If that block is taken out of the wall, the wall will begin to collapse.’
- Gal Luft, co-director of the Institute for Analysis of Global Security
When you think of de-dollarization, you normally think of Russia and China, who have been moving away from the U.S. dollar for many years. In 2015, 90 percent of bilateral trade between China and Russia was conducted in dollars, but by 2020 it fell below 50 percent.
You may be aware that Iran is also moving to de-dollarize as well.
What you are less likely to be aware of is that India is moving to de-dollarize their trade, and they are far from alone.
Smaller nations, including at least a dozen in Asia, are also experimenting with de-dollarization. And corporates around the world are selling an unprecedented portion of their debt in local currencies, wary of further dollar strength.
...Soon, the likes of Bangladesh, Kazakhstan and Laos were also stepping up negotiations with China to boost their use of the yuan. India began talking up more loudly the internationalization of the rupee and just this month, started securing a bilateral payment mechanism with the United Arab Emirates.
Even South America and Egypt are considering alternatives to the dollar. The dollar’s share of global foreign-exchange reserves fell below 59 percent for the first time in decades.
In addition to dozens of nations around the world looking to trade in something other than dollars, foreign holdings of U.S. Treasuries have peaked and began to decline, just as U.S. budget deficits have accelerated.
Exhibit 1 shows the U.S. Treasury had to issue $25.1T in securities during the 21 fiscal years ended September 30, 2022. In the last three years alone, the government had to issue $8.5T in additional debt.
For the 21 fiscal years ending in 2022, Treasury debt grew at a compound annual rate of 8.3%. During the same span, GNP grew at a compound annual rate of only 4.3%. The ratio of debt a GDP, therefore, increased from 54% to 120%.
Add in the fact that the Federal Reserve has been forced to dramatically raise interest rates, and an approaching recession, you have a scenario of huge budget deficits, more and more of the budget being used just to pay interest on the debt, and the rest of the globe not only disincline to lend us money, but actively looking to sell our dollars.
Other than the increasingly shaky financial footing for the U.S. economy, there are two reasons for this shift away from the dollar and the inevitable demise of American Hegemony. Both of these reasons are extremely popular in political circles.
The first reason is the over-use of economic sanctions.
With around one-quarter of the global population suffering from the direct impact of US-led economic sanctions, which invariably diminishes their ability to trade and perform other necessary economic and financial activities that are often priced using the dollar, it should perhaps come as no surprise that de-dollarisation has intensified across the world.
...“The destructive impact of said measures at the national level, plus their extraterritorial implication, together with the phenomenon of over-compliance and the fear for ‘secondary sanctions’, hinder the ability of national governments in procuring even basic medical equipment and supplies, including coronavirus test kits and medicine,” a joint March 2020 letter from the governments of China, Cuba, Iran, Nicaragua, North Korea, Russia, Syria and Venezuela—all bearers of US-led sanctions—to the Secretary-General of the United Nations, the Office of the United Nations High Commissioner for Human Rights and the Director-General of the World Health Organization (WHO) read.
The second reason is the move by the US and Europe to cut off Russia from the global financial messaging system known as SWIFT. Mostly forgotten is that Iran was cut off from SWIFT years before. By weaponizing the financial system, any nation that hopes to retain sovereignty and independence is forced to look outside of the dollar-based system.
Western media has been near silent on this global trend, which means that this is real.