Guest Post: The Coming Collapse Of The Petrodollar System

Tyler Durden's picture

Authored by Andrew McKillop,


The theory of Petrodollar Warfare can be attributed to US analyst and author William R Clarke, and his 2005 book of that title which interpreted the US-UK decision to invade Iraq in 2003. He called this an "oil currency war", but the concept of the petrodollar system and petrodollar recyling dates back to the eve of the first Oil Shock in 1973-1974. The role of the petrodollar system as a driving force of US foreign policy is explained by analysts and historians as basic to maintaining the dollar's status as the world's dominant reserve currency - and the currency in which oil is priced.

The term "petrodollar warfare" as used by William R. Clark says that major international war, legal or not, was seen as justified to protect the petrodollar system. Over and above the loss of human life, the combined costs of the Afghan and Iraq wars for the US are controversial like the interpretation of these wars as "oil wars", but analysts like Joseph Stiglitz and Linda Bilmes put the total combined war cost at above $4 trillion. This can be compared with - and totally dwarfs - the annual cost of US oil imports, which are now sharply declining on a year-in year-out basis as domestic shale oil output ramps up, and US oil demand stagnates.

Clarke's theory, like the explanation of the role and power of the "petrodollar system" depends on two basic drivers. Most major developed countries rely on oil imports, which are purchased using dollars, so they are forced to hold large stockpiles of dollars in order to continue importing oil. In turn this also creates consistent demand for dollars, and prevents the dollar from losing its relative international monetary value, regardless of what happens to the US economy.


Variants of the Petrodollar War concept include the role of oil currency conflicts and rivalry, notably concerning US relations with Iran, Venezuela and Russia, and possibly with Europe concerning the gradual replacement of US dollars with the euro, for oil transactions. More important, the entire petromoney system and the potential for Petrodollar War hinges on global oil import demand and the oil price. Both of these have to hold up. When or if they do not, foreign oil importer nations who formerly found it beneficial to hold dollars to pay for oil, would have to find some other (unexplained) reason for huge holdings of dollars, when their oil imports decline and-or oil prices also decline.

The "currency war" variant of the petrodollar system theory, holding that a shift to notably euros or gold for oil payments would undermine the system, is unrealistic when given any serious analysis, because all world moneys are interchangeable or convertible, and gold is priced in US dollars.



These are easy to define.

1974-1986 The first phase. The 1972 start of "petrodollar recycling" initiated by Nixon and Kissinger  just before the fivefold rise in oil prices of 1973-74, set the process of US-Saudi Arabian cooperation for the near-exclusive benefit of these two players. The US dollar was "backstopped" by the transfer of Saudi liquidities to the US Federal Reserve system banks, especially the Federal Reserve Bank of New York.  A small number of other chosen central banks, especially the Bank of England, and the central banks of Germany, France, Italy and Japan also benefitted.

1986-1999 The second phase. This also featured US and Saudi control, but under Clinton's two mandates the focus radically changed to the controlled deflation or reduction of both oil prices and the world value of the US dollar. While the US continued to benefit from "petrodollar recycling", Saudi Arabia was the major loser, undoubtedly changing its perceptions of the system's utility to KSA.

2000-2013 The third and last phase. This period featured a major longterm rise in oil prices and the entry not in force, but progressively of the euro currency into the now enlarged "petromoney recycling" process. Euros now cover about 25% of global oil transactions, for an annual value of around €700 billion, with about the same amount of back-to-back additional lquidities. The massive growth of QE and central bank "easing", from 2008, has heavily reduced the role of "petromoney recycling".

Among the major changes of the petromoney system during these 3 phases, the first phase set the basic political concept among US deciders that "petrodollar recycling" could at one and the same time enable the US to run huge trade and budget deficits, low or very low interest rates, and prevent the collapse of the dollar's value due to the forced need of all world buyers of oil to hold US dollars to make purchases of oil. By the second phase, this underlying concept shaded to including non-oil assets as the focus of value manipulation, controlled inflation and controlled deflation of value. In the third phase, massive increases of the oil price to 2008 played a major role in enabling the continued depreciation of the dollar's world value as US sovereign debt also massively increased, but since 2008 and the start of central bank QE the need for, and role of the petrodollar system have heavily contracted.



Estimates of the exact size and role of petrodollars and petroeuros in the international money system, finance system, and economic system are varied. Many analysts however say the minimum role of the petrodollar system is to create, back-to-back, liquidities at least equivalent to the transaction value of the world oil trade, which for crude and products is about $3.4 trillion-a-year. Combined, the approximate minimum total $6.8 trillion annual value of oil trade plus the petromoney system is about 10% of world annual GNP, equivalent to about 45% of US annual GDP. This may appear as still large and important but has to be compared with, for example, the exposure of national private banks only in Europe in relation to national GDPs, which is often 300% - 400%.

Only QE can "plaster over" these liabilities.

Petromoney recycling is still treated by "the elites" as a critical prop to monetary system integrity, and explains why the USA is far from the only country depending on the system holding up. All oil producers, even smaller-sized, are beneficiaries the same way as all major developed nations' central banks, but the US is still the prime beneficiary. However, the basic supports for the system's operation - continuing high oil demand, high oil prices, and oil priced in dollars -  have all weakened or are threatened, today. In particular when global oil demand declines or stagnates, and when oil prices decline, the dollars that will no longer be needed for global purchases of oil will return in massive amounts back to their country of origin, the USA. The consequences can only be dramatic, and threaten the start of a process completely unlike the Clinton-era controlled devaluation of the dollar's value along with the decline of oil prices consented by Saudi Arabia.

The now-menaced "petrodollar system" is also weakened because of worldwide change in the perception of oil and oil energy. From the dawn of the petroleum age to its accelerating twilight, today, geopolitical strategies concocted by developed nations featured the maintenance of secured access to world oil supplies. This was believed to be a win-win strategy for developed nation policy makers, and especially for US policy makers. From the 1970s and the first Oil Shock of 1973-1974, the only "morph' in this policy and strategy was to substitute expensive oil, for cheap oil.

For the USA's ability to run deficits and the petrodollar system, much higher oil prices were a major gain, not a loss, and this is almost surely still the perception of the Obama administration today.

In its first phase and last phase, the economic and political incentives for ensuring national access to oil supplies, and the existence of the petrodollar system as a monetary and finance tool - unrelated to the economy - worked better with higher oil prices. Today however, with the major and massive changes of oil resource availability revealed by the shale energy revolution, rising global oil production capabilities, stagnating oil demand, and rising renewable energy supplies in all major developed countries, and the constantly declining role of oil in the economy, the Petrodollar System's days are surely numbered, like the notion that $100-oil prices are "normal".

The impact of this will be massive.

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disabledvet's picture

we got QE and a War Machine now. Move along...

otto skorzeny's picture

The war machine will bleed the $ machine to death.

The Thunder Child's picture

I have to give this article by Andrew McKillop a 1 out of 5 because so many details are left out and overlooked nor does it make the apprpriate connections concerning the petrodollar, Sauda Arabias/USTs as well it does not cover the SWIFT payment system, Libya's gold Dinar and the banking cartel which perpetuates this scam. If you want the best analysis on the petrodollar without BS and propaganda I would recommend these 3 articles by Jim Willie.

The Coming Isolation of USDollar

USDollar: Ring-Fenced & Checkmate

Financial Treachery & Harsh Consequences

HeavyShadow's picture

These were not wars. Just enhanced interrogation techniques.

TwoShortPlanks's picture

BRICS Currency: Gold and Debt Based Money

The executive Life Boats are now loaded with Gold, and will depart for China/Asia as soon as the going gets long Muppets, and thanks for all the Fish!

It's too long to write in here!

disabledvet's picture

actually no it's not too long to write here. the Spanish imperial system was always superior to the English how did the English one "win out" so to speak in the end? "Blood, sweat and tears" in my opinion...and so it is with this "American (French?) thingy" currently going on in the Eastern Med and Mali. it has to be financed of course so the "easiest" way is to limit the scope and scale of the war effort itself. good luck with that. wars are inherently expansionary in a fiat world...there's always a bid in the market by their very definition thus vast speculations (most not successful i might add...although this one sure is beyond belief doing well) arise. they are not based on anything really...just the supposition that "by definition no one can turn a war machine off" and "no one will either." the economists "job" as it were then is merely to "trim the cream off the excess" (for himself of course) and that "cream" is oil, natural gas, distillates, etc that appear for all intents and purposes to have "immutable" pricing power. of course this is a highly diversified economy here in the USA..."not our first rodeo" when it comes to the World War there is a lot of accounting involved in paying for these things...something Wall Street is VERY good at. so sure...oil companies have done a great job...amazing job actually...of creating product...but it will never show up in the stock price the way it does in a railroad stock because railroads are in fact "the war effort." God forbid if they become the means to pay for said activity. you know as in "they'll buy your gold mine, they'll buy your oil wells, they'll buy your utility" etc. all with zero debt of course. did i mention Government subsidies?

BigJim's picture

 The "currency war" variant of the petrodollar system theory, holding that a shift to notably euros or gold for oil payments would undermine the system, is unrealistic when given any serious analysis, because all world moneys are interchangeable or convertible, and gold is priced in US dollars.

er... what? How can the author write an entire article confirming the petrodollar thesis and then write that?

Of course 'world moneys are interchangeable'... that's beside the point. They're interchangeable for dollars, which are required to buy oil (at least 75% of it, according to this article) thus propping up the value of the USD and supporting the whole petrodollar system/world 'reserve' (LOL) currency thingy.


disabledvet's picture

this is my whole purpose for "smack talking" by the way. "to generate interest within an otherwise pretty boring...but smart...article." this is how we humans actually communicate. we need to be smart...but in the end it's all about chasing tail.

jbvtme's picture

local currencies, local production, local control.  all else is slavery

hardcleareye's picture

The question is who's tail are you chasing and have you considered the possibility it might be your own?

"Circular logic aka mental masturbation......"  lol

Weisshaupt's picture

 I don't think the author is just talking smack to generate interest. His assertion is that the lessening supply is forcing dollars home, and that a switch to gold wouldn't matter because you would still have to purchase gold with dollars in order to purchase the oil.  The Euro is being largely propped up by Dollar swaps and other such schemes so much the same argument could be made for that as well. The Collusion of central banks in the "race to the bottom" is effectively making all fiat currencies "interchangeable"  But,  I think he, like a lot of others, just refuses to understand "money" -- In  any free exchange, the commodity or service is priced in terms of what the exchange medium represents - commodities or services provided in the past. Gold for Oil and Oil for Gold is  a Barter transaction  when the gold or the Oil   cannot be directly traded for other goods.  The second you CAN use gold or Oil for a future exchange of other goods  without exchanging it for some "money"  then the commodity becomes "money" - and that changes the entire nature of the transaction. The  directly exchangeable commodity is no longer priced  in terms of dollars, but will float against other currencies just as the dollar floats now.  The concept of the Petrodollar is based on the fact that OIL is a required commodity, and  Like Salt in the ancient world, Oil would be money - and directly traded between countries - if it were more directly portable and consumable.   The Powers that Be have placed an articfical restriction that prevents oil from being used directly, and mandates the dollar be used as a proxy in those transactions.  The Euro ( mantinained in collusion with the Dollar)  probably isn't a threat to the system if it is used as the proxy instead - since the Euro is effectively now a proxy for the dollar. If Gold becomes money again, and is increasingly used as "money" in international trade, it will become impossible to mandate any fiat currency (Euro, Dollar, Yuan, etc)  be used as a proxy for the oil. Gold, unlike the oil, is portable (though not really consumable)  and therefore could be used just as easily as any Fiat coinage.   Gold also isn't "contolled" in the way a Fiat is.. There is only one source od dollars in the world. There are multiple sources of gold. . China is pulling ( and keeping) piles of it that they pulled from the ground. They certainly didn't pay "dollars" to get it. For this reason Gold is always the currency of last resort- when no one's Fiat can be trusted. 

The Author is right - as long as Gold is a commoidity priced in dollars, a switch to gold will be meaningless.  However the second that gold becomes money, freely exchangeable for other things as a currency, not as a barterable commodity, the Dollar ( and other fiats ) are done.  However, gold arising as  currency probably requires that the dollar decend - and the process could happen quickly or slowly -  but happen it will because the US Government has ensured it via QE.  The Dollar was originally backed with Gold, and the world used it and trusted it because  it was freely exchangeable for the currency of last resort. Then once the world was hooked,  FDR pulled the rug out  and Nixon finished the job after another generation.  If and when Gold gains traction as a currency,  I  fully expect China to "back" their currency with some amount of gold  - effectively making thier fiat the new "proxy" for gold,  and attempt to use that same trick, in a bid for the worlds new reserve currency. None of that will matter much to those in the United States of course, as the Dollar collapse will bring massive poverty,  social turmoil and probably a civil war. 

hardcleareye's picture

Great post, but the US is not going to sit back and allow this to happen.  They will use the military force to maintain the dollars reserve currency status.  My gut tells me that before the dollar collapse occurs all hell will break lose in a major world war.  The outcome of this future conflict will determine the fate of the dollar.

JOYFUL's picture

While it's true that noooobody does it like Jimbo....

Andrew McK is a whole big cut above ....Oil Dr[umb]... Strat[poor] and the usual implants from the MSM inserted here...

I say .... welcome aboard Andy!*

*besides, he's Flakey's worst warmist nightmare!

DavidPierre's picture

“A bank run in gold bullion banks.  It’s a vault run.

Wealthy investors are asking for their gold, and some are finding out it’s not there. 

Back in 2011 and 2012, you had an important event every three of four months.  Now, it’s every two or three weeks.  So, the mean time between failures is rapidly declining. 

Before, they were talking about stress tests.  Now, they realize that all of them in the past were a fraud.  So, they are talking about ‘bail-ins’ because they are expecting failures

It’s all coming to a climax where gold is going to be central with a gold-trade central bank and gold priced at $7,000 per ounce.”

TwoShortPlanks's picture

Same article as mine above. LOL

disabledvet's picture

if i put my gold on a railroad car (a very secure rail car i would hope) is that gold accounted for? (i would imagine i would a: have to own the gold and b: have to pay the railroad a large sum of money to keep it "off the books" as it were.) i imagine banks can do the same thing of course. or can they? you all are the experts on this tell me?

mr. mirbach's picture

This article is a terse yet concise summation of many years of the NWO chess game for world domination to anyone that has been keeping track of history, details are for noobs.

Urban Redneck's picture

The details determine the timeline of life-expectancy.  It's not just the petrodollar and (physical oil vs. paper oil volumes) inflating demand for USD, all commodities traded in dollars do this (which are dwarfed by paper counter parts), and the banksters then inflated this demand with the explosion of currency and interest rate derivatives. 

disabledvet's picture

on a roll...keep it coming. totally spot on.

auntiesocial's picture

I remember when I used to think $60.000.00 annual was a benchmark. If you are making 60K, you aren't THE MAN, but you are getting by just fine. Now, if you are making 60K and the only one pulling in a check in your house, you are screwed. How did that happen. Then, it gets better. All the jobs that the job creators create--- THEY AIN'T PAYIN' NO 60K. No Sir. So let's break this down. 60K = 5K a month. Then 20% of that is for FICA, WICA, STATE, FED, BLAH BLAH BLAH. OK, now out of that whoping 4K, you have to pay rent, groceries, car payment, utilities, gas, etc, etc. OK, now how much do you have left? HMMMMMMM? and now you are telling me that the dollar is about to be devalued? If we lose our place as world reserve currency, then how much does "average joe" really make and take home? yeah, this ain't going to end well when... this guy, average joe, is not even the worst case scenario. What is going to happen? You are going to have a nation of average joe's losing their marbles and flipping out coz they can't keep their worlds glued together...


hivekiller's picture

Not to worry. The dollar will soon be backed by agriculture. You can't eat gold. China is accumulating gold but needs food. America will get their gold by selling them food. Americans can all get jobs as peasants tilling the land of the Rockefellers et al. See, it's all working out.

LawsofPhysics's picture

Well, this is my plan anyway, now about that fresh water, honeybees and other essential nutrients...

Lore's picture

Re: "The impact of this will be massive."

Talk about a cliffhanger!  The article seems like a preamble, stopping abruptly just as you're thinking "Yeah, we get that; NOW what?!" 

He needs to take it to the next stage by outlining the decisions that need to be made quickly by major participants. 

You can fire all the cannons and missiles you like, but at some point, YOU HAVE PRODUCE SOMETHING THAT OTHER PEOPLE WANT. Banksters seem hellbent to prove otherwise, but the fact remains that DEBT IS NOT WEALTH.  YOU CAN PRINT UNTIL YOU'RE BLUE IN THE FACE, BUT IT WILL NEVER REPLACE A REAL ECONOMY.  LET MARKETS WORK.  STOP TRYING TO PLAY GOD.

Herd Redirection Committee's picture

The crazy thing about manufacturing... All America still manufactures is high tech weapon systems.  And by definition, you can't really be exporting that. 

Lore's picture
Interesting documentary, helps to understand policy decisionmaking that doesn't make sense to a 'normal' No idea as to accuracy of content... It was sent to me by a third party...DYODD "Psychopaths" (38 min)
cape_royds's picture

While I agree with your sentiment, to understand Empire, ask the question:

Producing what, that who wants?

The USA produces a wide and complex array of products for a sector of the global economy which we might call, "the market for Global Enforcement Services."

The USA is the world's foremost provider of Global Enforcement Services. Not only do they produce the most, they also are regarded as a reliable and credible producer of armed force for export, world-wide.

No other Enforcement Services provider can offer the quantity, quality, and variety of Enforcement Services offered by the USA. The USA has a superb track record of being able to promptly and dependably blow people up, or lay waste to towns, or blockade harbours, or kidnap and torture people, anywhere on the planet, at any time. Given just a few weeks' notice, the USA can invade and occupy any non-nuclear country.

Who else in the world can offer Enforcement Services with comparable speed and reach? Not Russia. Nor China. Nor the lesser NATO allies. The USA has no peer competitor in the Global Enforcement Services market.

So when global capitalists, from time to time, require Enforcement Services to keep their planetary wealth redistribution model running smoothly, they look to the world's foremost provider of such services: the USA.

Third World country defaulting on debt? Hire the USA to blow them up.

Minor powers trying to preserve sovereignty in the face of the globalization juggernaut? Hire the USA to sanction them, and perhaps blow them up later, if they don't have some sort of arranged "colour revolution" first.

Now non-USA elites do have some mixed feelings about these transactions. They understand that USA elites are taking advantage of the USA's near-monopoly position in Global Enforcement Services. probably think the prices are too high, and that the provider is not sufficiently sensitive to their needs. Some non-USA elites would prefer to be able shop around a bit.

But it's hard to become a Global Enforcement Services provider. The initial capital investment required is enormous. The lead time is very long. Even if the investments are made, consumers might be reluctant to take a risk on purchasing services from an unproven provider.

e.g. would European bankers want to risk hiring China to sanction, blockade, invade, occupy and torture a Middle Eastern country? First of all China would have to build a blue water navy and a proper orbital surveillance platform. Then China would have to demonstrate to the customers' satisfaction its ability and will to spend years in demolishing other countries, and to abduct and torture people around the world in support of a geopolitical goal. Aside from Tibet, China lacks that sort of credibility. Indeed, the USA itself had to spend several decades establishing its brand identity in the Global Enforcement Services marketplace.

So when you ask the question: what does the USA produce, and for whom, the answer is that the USA produces Global Enforcement Services, and the consumers are not only the imperial US elite, but imperialists around the world also purchase the USA's enforcment services. Payment is rendered in the form of the USA's "exorbitant privilege."

Things only get really interesting if there is a groundswell of interest in alternative providers, or if there is widespread nuclear proliferation which would obsolete many parts of the enforcement services package.

Shale oil? Yeah, right...

jcmiii's picture

Mr Willie has equal amounts of "BS and propoganda" in his perspective peppered with comments "The United States and its fascist allies" or "the events of September 2001 were the syndicate coming out party and the Patriot Act their Nazi Manifesto"

JOYFUL's picture

Whoa.... dude, BS & propoganda???  Jim's indeed a peppery\spicy taco.... but what BS could you be referring to?

oh.... I gets it now... propoganda... apropos of Pogo... you be prop-0-sin that Jimbo be closin in ...

on the enemy within!   ....we have met the enemy... and he is....????

"BIG" Jim Willie.... talking with Greg Hunter... on a thread of Andy McKillop - "NAZI BANKERS" says JIM>

with soundtrack by RUSH!.....Phukkin A dude! doesn't get any better than this!

you some kinda retard dude?



Jack Sheet's picture

A subscription to JWs newsletter for 6 months costs 110 USD and I have just renewed. It is better then any other of the "big picture" newsletters because it pulls no punches and is well argued. None of what he writes is in any way implausible. Other newsletter writers don't want to scare their subscribers off, or they fear "reprisals". His big edge are the "sources" - I have so far seen no evidence that they are implausible, either.

Jack Sheet's picture

Jim Willie's Golden Jackass website appears to be down since yesterday. Hacked?

trentusa's picture

ZH is the only one to comment on the petrodollar system. If not for ZH i would not even know it existed. Still, for the lack of info and what was not said i give this article a 3. Tyler is getti ng soft now that ZH is so big. At least specify the usa invaded Iraq bc he refused to sell oil in us dollars. Tell the wholr story tyler dont wimp out on us.

JOYFUL's picture

This is not Tyler's story... it's Andrew McKillops'. And people need to do a little diligence on who dude is. I've enjoyed his pieces on Market Oracle for the last year or so, because he brings a fresh perspective into the energy side of things that is not available from anywhere else. Anywhere.  Get it? We actually do have a good mix of people bringing the perspective which you(and others here) claim to be fatallly absent from this piece. Too much shallow static in the background here ...

The inclusion of this author in the mix here would be a major win for everybody... except 'the usual suspects'... whose modus operandi is to stifle that which threatens their primacy.

I smell a rat.. and I'm calling it out.  This guy is best in category. Somebody(or other) doesn't wish to see him here. You know where I stand on the whole middle eastern issue. Now stand and deliver naysayers.

"ZH is the only one to comment on the petrodollar system".... you need to get out more.

Welcome aboard, Andrew McKillop.

JimBowie1958's picture

The coming introduction of LENR technology in the form of Rossi's Hot-Cat is likely to make the US dollar lose a lot of its value in the global markets as it devalues petroleum itself.



Flakmeister's picture

Read and understand the fine print.... at worst it is a scam, at best it is merely a fuel cell... The longer things go on, the more likely it is the former even it does prove to be a fuel cell...

JimBowie1958's picture

Dude, I have read it. and some other engineers I know have read it, and a few that are scientists.

The seven scientists who were involved in the test have professional careers at stake and they wont destroy those careers for Rossi.

The tests are legit as a scientist can do them or they wouldnt have released this report.

And the report uses low-ball estimates throughout, getting a COP of 6 then running the machine under slower conditions got a COP of 3. And they ran it for four days then five, which is way too long for a fuel cell to run and be hidden inside that tube.

This thing does much better than a COP of 6, and a COP of 3 is truly revolutionary.

Flakmeister's picture

It ain;t what it is advertised to be.... The fact that a former con artists is involved should be a tell.., That is all...

JimBowie1958's picture

Rossi is not a con artist, and has no criminal record. The charges against him were concocted by corrupt officials who were trying to shake Rossi down.

He was sent to prison but later acquitted of ALL charges.

Dont buy the bullshit that TPTB are selling. They want to monopolize this before the public is even aware of it.

angel_of_joy's picture

we got QE and a War Machine now. Move along...


Both are way overrated.

No dice.

disabledvet's picture

"they are not a benefit" i agree. in fact i would argue they are a detriment...but in order to do this we must define a benefit first. for example "palliative care." by definition this is a LEGAL and Governmental enterprise then yes? "shall we talk entitlements as well"? these simple words can have POWERFUL meanings.

Parabox's picture

It's the Iron Patriot now.  still fitting...

Xrated's picture

Saddam Hussien and Kadaffi both wanted to go  to the gold only standard for oil, look what they got.

It's only a matter of time with the idiot Obama running this country.

otto skorzeny's picture

Obama is just a cog in the machine.

AldousHuxley's picture

Obama running the country?

CEO running the company?

Kings running the kingdom?


The advisers do. Top guys are figure heads to calm the masses.


prains's picture

Obama is just a cog in the machine.


not even, he's a mustard installer on the hot dog of life

RebelDevil's picture

Will the Petrodollar system simply die if the rest of the world simply priced oil in terms of gold?

I think so.