How The Petrodollar Quietly Died, And Nobody Noticed

Tyler Durden's picture

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company - the end of the system that according to many has framed and facilitated the US Dollar's reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, "developed world" status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements, leading to, among other thing, such discussions as, in today's FT, why China's Renminbi offshore market has gone from nothing to billions in a short space of time.

And yet, few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico'ed both itself, and its closest Petrodollar trading partner, the US of A.

As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their "petrodollars" out of world markets this year, citing a study by BNP Paribas (more details below). Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.

A consequence of this year's dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed.

This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

But no more: "this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations."

In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.

According to BNP, Petrodollar recycling peaked at $511 billion in 2006, or just about the time crude prices were preparing to go to $200, per Goldman Sachs. It is also the time when capital markets hit all time highs, only without the artificial crutches of every single central bank propping up the S&P ponzi house of cards on a daily basis. What happened after is known to all...

"At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out," said David Spegel, global head of emerging market sovereign and corporate Research at BNP.


Spegel acknowledged that the net withdrawal was small. But he added: "What is interesting is they are draining rather than providing capital that is moving global liquidity. If oil prices fall further in coming years, energy producers will need more capital even if just to repay bonds."

In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.

Which is hardly great news: because in a world in which central banks are actively soaking up high-quality collateral, at a pace that is unprecedented in history, and led to the world's allegedly most liquid bond market to suffer a 10-sigma move on October 15, the last thing the market needs is even less liquidity, and even sharper moves on ever less volume, until finally the next big sell order crushes the entire market or at least force the [NYSE|Nasdaq|BATS|Sigma X] to shut down indefinitely until further notice. 

So what happens next, now that the primary USD-recycling mechanism of the past 2 decades is no longer applicable? Well, nothing good.

Here are the highlights of David Spegel's note Energy price shock scenarios: Impact on EM ratings, funding gaps, debt, inflation and fiscal risks.

Whatever the reason, whether a function of supply, demand or political risks, oil prices plummeted in Q3 2014 and remain volatile. Theories related to the price plunge vary widely: some argue it is an additional means for Western allies in the Middle East to punish Russia. Others state it is the result of a price war between Opec and new shale oil producers. In the end, it may just reflect the traditional inverted relationship between the international value of the dollar and the price of hard-currency-based commodities (Figure 6). In any event, the impact of the energy price drop will be wide-ranging (if sustained) and will have implications for debt service costs, inflation, fiscal accounts and GDP growth.

Have you noticed a reduction of financial markets liquidity?

Outside from the domestic economic impact within EMs due to the downward oil price shock, we believe that the implications for financial market liquidity via the reduced recycling of petrodollars should not be underestimated. Because energy exporters do not fully invest their export receipts and effectively ‘save’ a considerable portion of their income, these surplus funds find their way back into bank deposits (fuelling the loan market) as well as into financial markets and other assets. This capital has helped fund debt among importers, helping to boost overall growth as well as other financial markets liquidity conditions.

Last year, capital flows from energy exporting countries (see list in Figure 12) amounted to USD812bn (Figure 3), with USD109bn taking the form of financial portfolio capital and USD177bn in the form of direct equity investment and USD527bn of other capital over half of which we estimate made its way into bank deposits (ie and therefore mostly into loan markets).

The recycling of petro-dollars has benefited financial markets liquidity conditions. However, this year, we expect that incremental liquidity typically provided by such recycled flows will be markedly reduced, estimating that direct and other capital outflows from energy exporters will have declined by USD253bn YoY. Of course, these economies also receive inward capital, so on a net basis, the additional capital provided externally is much lower. This year, we expect that net capital flows will be negative for EM, representing the first net inflow of capital (USD8bn) for the first time in eighteen years. This compares with USD60bn last year, which itself was down from USD248bn in 2012. At its peak, recycled EM petro dollars amounted to USD511bn back in 2006. The declines seen since 2006 not only reflect the changed  global environment, but also the propensity of underlying exporters to begin investing the money domestically rather than save. The implications for financial markets liquidity - not to mention related downward pressure on US Treasury yields – is negative.

* * *

Even scarcer liquidity in US Capital markets aside, this is how BNP sees the inflation and growth for energy exporters:

Household consumption benefits: While we recognise that the relationship is not entirely linear, we use inflation basket weights for ‘transportation’ and ‘household & utilities’ (shown in the ‘Economic components’ section of Figure 27) as a means to address the differing demand elasticities prevalent across countries. These act as our proxy for consumption the consumption basket in order to determine the economic benefit that would result as lower energy prices improve household disposable income. This is weighted by the level of domestic consumption relative to the economy, which we also show in the ‘Economic components’ section of Figure 27.

Reduced industrial production costs: Outside the energy industry, manufacturers will benefit from falling operating costs. Agriculture will not benefit as much and services will benefit even less.

Trade gains and losses: Lost trade as a result of lower demand from oil-producing trade partners will impact both growth and the current account balance. On the other hand, better consumption from many energy-importing trade partners will provide some offset. The percentage of each country’s exports to energy producing partners represents relative to its total exports is used to determine potential lost growth and CAR due to lower demand from trade partners.

Domestic FX moves are beyond the scope of our analysis. These will be tied to the level of openness of the economy and the impact of changed demand conditions among trade partners as well as dollar effects. Neither do we address non-oil related political risks (eg sanctions) or any fiscal or monetary policy responses to oil shocks.

GDP growth

The least impacted oil producing country, from a GDP perspective, is Brazil followed by Mexico, Argentina, Tunisia and Trinidad & Tobago. The impact on fiscal accounts also appears lower for these than most other EMs.

Remarkably, the impact of lower oil for Russia’s economic growth is not as severe as might be expected. Sustained oil at USD80/bbl would see growth slow by 1.8pp to 0.6%. This compares with the worst hit economies of Angola (where growth is nearly 8pp lower at -2%), Iraq (GDP slows to -1.6% from 4.5% growth), Kazakhstan and Azerbaijan (growth falls to -0.9% from 5.8%).

For a drop to USD 80/bbl, it can be seen (in Figure 27) that, in some cases, such as the UAE, Qatar and Kuwait, the negative impact on GDP can be comfortably offset by fiscal stimulus. These economies will probably benefit from such a policy in which case our ‘model-based’ GDP growth estimate would represent the low end of the likely outcome (unless a fiscal policy response is not forthcoming).


Global growth in 2015? More like how great will the hit to GDP be if oil prices don't rebound immediately?

On the whole, we can say that the fall in oil prices will prove negative, shaving 0.4pp from 2015 EM GDP growth. The collective current account balance will fall 0.58pp to 0.6% of GDP, while the budget deficit will deteriorate by 0.61pp to -2.9%. This probably has the worst implications for EM as an asset class in the credit world.

Energy exporters will fare worst, with growth falling by 1.9pp and their current account balances suffering negative pressure to the tune of 2.69pp of GDP. Budget balances will suffer a 1.67pp of GDP fall, despite benefits from lower subsidy costs. The impact of oil falling USD 25/bbl will be likely to put push the current account balance into deficit, with our analysis indicating a 0.3% of GDP deficit from a 2.4% surplus before. Fortunately, the benefit to inflation will be the best in EM and could help offset some of the political risks from reduced growth.

As might be expected, energy importers will benefit by 0.4pp better growth in this scenario. Their collective current account will improve by 0.6pp to 1.1% of GDP.

The regions worst hit are the Middle East, with GDP growth slowing to 0.3%, which is 3.8pp lower than when oil was averaging USD105/bbl. The regions’ fiscal accounts will also suffer most in EM, moving from a 1.7% of GDP surplus to a 1.8% deficit. Meanwhile, the CAB will drop 5.3pp, although remain in surplus at 3.9%. The CIS is the next-worst hit, from a GDP perspective, with regional growth flat-lined versus 1.91% previously. The region’s fiscal deficit will worsen from 0.7% of GDP to -1.8% and CAB shrink to 0.7% from 3% of GDP. Africa’s growth will come in 1.4pp slower at 2.8% while Latam growth will be 0.4pp slower at 2.2%. For Africa, the CAB/GDP ratio will fall by 2.4pp pushing it deep into deficit (-2.9% of GDP).

Some regions benefit, however, with Asia ex-China growing 0.45bpp faster at 5.5% and EM Europe (ex-CIS) growing 0.55pp faster at 3.9%, with the region’s CAB/GDP improving 0.69pp, although remain in deficit to the tune of -2.4% of GDP.

* * *

And so on, but to summarize, here are the key points once more:

  • The stronger US dollar is having an inverse impact on dollar-denominated commodity prices, including oil. This will affect emerging market (EM) credit quality in various ways.
  • The implications of reduced recycled petrodollars has significant ramifications for financial markets, loan markets and Treasury yields. In fact, EM energy exporters will post their first net drain on global capital (USD8bn) in eighteen years.
  • Oil and gas exporting EMs account for 26% of total EM GDP and 21% of external bonds. For these economies, the impact will be on lost fiscal revenue, lost GDP growth and the contribution to reserves of oil and gas-related export receipts. Together, these will have a significant effect on sustainability and liquidity ratios and as a consequence are negative for dollar debt-servicing risks and credit ratings.

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Manthong's picture

Most of us here did.

Tsar Pointless's picture

Sure did. Those who spend more time toying with their fantasy football lineups than anything else in life probably didn't, but fuck them.

hedgeless_horseman's picture



Two years ago, in hushed tones at first, then ever louder, Zerohedge began discussing that which shall never be discussed in polite
company - the end of the thing that according to many has framed and
facilitated US and Japanese trade: Alaskan oil production.

Considering that much of Alaska's crude oil went/goes to the former dynamo of both USD recycling and nuclear power, Japan, the Petrol Dollar isn't nearly as fucked as the Petrol Yen.


Sayanara Mrs. Watanabe. Enjoy burning JGBs to boil your rice, and tell Mr. Watanabe he might want to re-think how he and his father and grandfather have been treating all of those Chinese just West of you.  I did some research and China is much closer to Japan than the USA and a much bigger market for your Datsuns and Hello Kitty vibrators.

BobPaulson's picture

Luckily the NarcoDollar is still recycling liquidity back to wall street or they would be seriously screwed. The only chance of that happening would be if the grown drugs were superceded by the synthetic chemical drugs, thus preventing the US military from cornering markets in Columbia and Afghanistan (and Mexico as a traffic hub). 

Come to think of it, maybe the key to US Narcodollar hegemony is keeping the synthetic drugs priced out of the world market, sortof like...oil

A Nanny Moose's picture

Queue up Mary Jane legalization. Perhaps poppies to follow?

Manthong's picture

Well HH, it’s just a darn good thing that the liberals squashed an effort to use a lousy 2000 acres of the 19 million square acres in ANWR for drilling.

And it insures that the thousands of jobs the drilling and pipeline would create won’t mess up the liberal government’s plan to put everyone out of work and on a state stipend.

And it’s also good that they will keep the Porcupine Caribou up there honest as there will be no nice warm elevated and heated pipe to snuggle up to like the Central Arctic herd has on the pipe from Prudhoe Bay.

philipat's picture

This would be a good time for the Saudis to finish it by agreeing to price oil to its largest customer, the Chinese, in RMB - especially now there is an implicit Gold backing.

PS. The narcos prefer EUR because of the EUR500 note. The Fed should stay in the game and extend the Ponzi further by issuing a USD 1,000 note?

markmotive's picture

'Dying', yes.

'Dead', no.

The Petrodollar war machine is fighting for its very survival and will probably take the rest of the world down with it.

philipat's picture

Agreed. They won't go down either figuratively or literally without a fight, including possibly WWIII...

mjk0259's picture

How are lower oil prices bad? The other 85 percent of the economy benefits and it's more labor intensive.

AldousHuxley's picture

US knows they lost the war. the cat is out of the bag. OIL will be traded in EUROS and RMB in MIDDLE EAST BURSE.

not on wall st or in london.


thus, government push for "energy independence".

Told democratic billionare bloomberg to pump solar energy on his news outlets.


population density push

solar energy push

electric car subsidies

hold off on syria, iran, afghanistan wars

zerozulu's picture

Finely, Saudi figured it out. selling oil for Ctrl-P $s is same as selling it for free.

mt paul's picture

damn caribou...


poop all over the pipeline...

shovelhead's picture


Nikola says: Ignore the bad reviews on the Hello Kitty vibrator. This product works fine.

Well, okie dokie then.

armageddon addahere's picture

Low oil prices + falling consumption = less petrodollars leaving the country

Less petrodollars leaving the country = lower balance of payments deficit and more money staying in the US.

How is this a problem?

daveO's picture

As planned by the FED, to stay on top.

JimS's picture

Well..... here's the teeny, tiny problem for your equation of "low oil prices + falling consumption" ...... rapidly falling revenues for those US oil explorers that are in the fracking fields. Since many, if not all of them, have borrowed huge amounts from the capital markets, and...... the debt needs to be serviced. With your "equation" that spells massive bankruptcies' in the near future, IMHO. But, maybe they can borrow more from the FED at zero rates???

effendi's picture

The heavily leverage frackers will go bankrupt. That punishes both their investors and their foolish lenders on Wall St. The assets are then sold off (pennies in the dollar) and the new owners now only need to pay the costs of fracking and not the cost of debt servicing. 

GOOD. That will lower the cost from the current $80 to a lower level and permit the new owners to better compete with the Saudis and others. Cheaper oil helps the rest of the economy and hurts the despots in the Middle East.

Stuck on Zero's picture

Bad for Wall Street and bad for the oil exporting nations that are building giant ghost cities like in Dubai:


sun tzu's picture

Alot of the oil companies and related suppliers went bankrupt during the 1980's energy bust and took down lots of banks with them along with with lots of good paying jobs. 

CHX's picture

Just wait... You'll eventually get ALL your dollars back, trillions of dollars held outsite the US. How could this possibly be a problem?

DaddyO's picture

I'll bite! Hyper-inflation?


IronForge's picture

Bit overdone, Hedgeless,

Though many people have died in the War - and many deaths could have been avoided in Nanking - there seems to be a slight disconnect in the actual damages involved to the point were the claims to its extent are at times questioned.

From what I've been able to read, too much covering up appears to have taken place w/o punishing the appropriate people.  Yet, many residents and Soldiers assigned there got along well on personal basis.  Seeing photos of people from both groups smiling a few days after the incident doesn't help out the cause.

However, noticing that at least one member of the Imperial Family stood up to call for more accountability of its House Members' involvement in the War was interesting to read.

One thing I'm not too impressed about is all the Frenzy propped up by the TWNese in this:  Many of them live work, and are vendors in Japan; and I don't see the "Frenzymongers" holding rallys in Japan.  Are they a bunch of Ass kissers to the Alpha-Culture of the Lands they live in?  Considering that they seem to kiss up to, stir up, and/or sabotage the Mainland CHNese, JPNese, and the USAmericans against one another (indirectly at times) on the same/similar/resultant issues do not impress me. 

Sorry to say (I address the Upright here); but considering how the TWNese treated the Formosans after they were kicked off the Mainland, it pretty much sums up WHY they lost the Civil War (where the US Navy was invovled somehow, as my Late Father rcvd a Service Medal for it) were kicked off.  I'm a postwar reconciliationist; but seeing anti CHN crap fanned by the TWNese over here and in JPN doesn't impress me at all.

Yet, no one's raising a finger on the GBRitish, who ran (and are still to some extent) running the "Laundered Opium Trade Funded Power Play" Racket in HKG, or the other (mostly) European Countries who've pillaged and plundered CHN for the better part of the 19th-20th Centuries. 

I'd like to see some consistency, considering that the CHN/JPN Trade Valuations are larger than the USA/JPN Trade Valuations.  TWN and HKG (and SGP, for that matter) KNOW their roles as "middlemen" btwn CHN and the Rest of the World will soon be eclipsed as CHN and its Trade Partners increase its level of interactivity.  My read is that the Senkakus (which were always on the back burner and never resolved (even after JPN and CHN normalized politial dialogues; and Idon'tremember the CHN Primier's Name; but even he brushed the Island Issue off to "incompetent" bureaucrats (of both sides) who couldn't reach an agreement before the Summit Mtg), though solutions were duly being presented in a calm manner) and the anti-JPN demos too place shortly after JPN and CHN announced their rendition of the De-Dollarization (USD, HKD, SGD - ^_^) - while TWN and KOR followed JPN's announcements on the De-Dollarization of Trade with CHN.

JPN should have kicked out a few TWNese businesses out in response; but were too defanged to do so, pussyfied by the USA and too distracted distinguish the (really not so friendly) TWNese from the CHNese.

That being said, don't ge me wrong - "If I were a Military Judge, Flag Officer, or a War Tribunal Judge with Full Power bestowed by the State and Throne" presiding over Incident, I'd probably sh!+can and/or incarcerate/execute more JPN Officers and senior NCOs, since the welfare of Civilians rests in the hands of the Occupying Forces. 

It'd be funny to see how much Petrol JPN starts accumulating via the new CHN Oil Bourse and/or direct Trade.  CHN has been buying up the ISIL Discount Crude, hasn't it?

cnmcdee's picture

Gull Island - Prudoe Bay Alaska apparently has 1100 psi of well head pressure ready to flow oil. 

But it was sealed and censored from the public.



Tao 4 the Show's picture

And they were singin'

Bye, Bye, Miss American High

Can't drive the Chevy to the levy

Cause the gas tank is dry

And good ol' boys

Couldn't buy their whiskey and rye...

Freddie's picture

Can't drive the Chevy to the levee because they recalled 60 million GM pieces of shit due to bad ignitions. 

Amerika = full retard.  Morons watching college ball and the NFL/NBA like sheep or Hollywood films glorifying murder and the police state. 

Dr. Richard Head's picture

Fuck them indeed.  The huddled masses of The Football watchers are quite a sight to behold. 

Look at this fuck destroying his house because of a Cowboy's loss.  If only we could direct these zombies to the Fed. -

Chupacabra-322's picture

@ Dr. Richard,

Just viewed that gem you posted. We are literally Doomed as a Human Race. Little does that Douche Bag realize that all sporting events are predetermined & fixed.

gmrpeabody's picture

His problems go deeper than a football game....

Football games don't kill houses..., people kill houses.

Jack Napier's picture

Indeed, a former friend of mine destroyed my lawn furniture after our team lost a superbowl a few years back. We are both still football fans, but I refuse to be around him, for a plethora of other reasons. Football doesn't make crazies. It's just a popular sport, and it can be enjoyed without being a petuitary retard, despite the fact that they are the vast majority. Rigged? Sure. It's still a cerebral sport that includes smashing. Bill Hicks may not have liked American Gladiators, but I sure did, and that doesn't mean I'm an idiot for it.

Slowdrip's picture

"petuitary retard", very nice, going to have to borrow that one, thanks....

A Nanny Moose's picture

More than just bread and circuses, team sporting events divide the rubes over meaningless issues on a non-existed field of battle.

Major sports are just another government sponsored program...not unlike education.

saints51's picture

And to think we believe our country can be fixed one day.

TheObsoleteMan's picture

Our country can be fixed in a day. God....all the blood. There would be rivers of it.

NotApplicable's picture

LOL, that's awesome!

Krugman would be proud.

Spastica Rex's picture

Thank you. I mean really - thank you.

I take way too much pleasure in videos like that, but my life is a bit pathetic and now I feel at least a little bit better.

Thank you.

GeorgeHayduke's picture

I know what you mean. I won't even go out to any restaurant with a TeeVee on a Sunday during football season for fear of a game being on and then having to deal with the fans in the place.

bmr22's picture

Wow I have to say the plan to turn us into morons is working as planned.

Yes_Questions's picture



between the need for a new tv, counter top, coffee table, various sundries and the cleanup, looks like goober is a regular job creating MACHINE!


Took Red Pill's picture

More fans should be like him! It's good for the economy, broken windows and such.

Syrin's picture

It must not be entirely dead since gold keeps going down, not up.   When it thoroughly dies, gold skyrockets

JamesBond's picture

oh, and to be able to hit that inflection point perfectly.... 

see you at the beachfront condo in Destin. 




TheReplacement's picture

I think your inflection point will be very brief.  Suppose you can cash out gold at $5K/oz.  Who's going to sell you beachfront for dollars then?  Gold is a store of wealth.  If you are going to benefit from the inflation you really kind of need to rack up the debt now and have the gold to sell later.  Agree to the price with a strong dollar (debt).  Pay it off with a weak dollar (gold profits).

CHX's picture

1+ Buy gold with a strong dollar, sell exchange gold into a new (gold-backed) dollar... Heck of a trade, but it requires brains, guts, nerves of steel, and patience, lots of patience.

TheReplacement's picture

I think your inflection point will be very brief.  Suppose you can cash out gold at $5K/oz.  Who's going to sell you beachfront for dollars then?  Gold is a store of wealth.  If you are going to benefit from the inflation you really kind of need to rack up the debt now and have the gold to sell later.  Agree to the price with a strong dollar (debt).  Pay it off with a weak dollar (gold profits).

Lets Buy The Dip's picture

Your update - AWESOME! There are bigger things to worry about than fantasy football. I woke up and went....HOREY SHEET after I saw what CRUDE did last night. DANG!

it already 1 day in and looks like it will be an exciting month for the markets.

CRUDE Broke its DECENDING triangle today. See here. ==>

combatsnoopy's picture

There's more collateral in Fantasy Football than the currency.  I can't blame them.  

thunderchief's picture

Two of the big misses going on right now, completely ignored by all are...

Currency swaps between countries, which are not so much anti dollar, but more about efficiency. Think new tech, the dollar is needed as much as an answering machine or pager these days.

And... the complete disconnect of hard assets and paper futures on the comex, gold and silver sticking out like a bitch with her skirt in the breeze..