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"There Will Be Blood": Petrodollar Death Means A Liquidity And Oil-Exporting Crisis On Deck
Recently we posted the following article commenting on the impact of USD appreciation and dollar circulation among oil exporters, as well as how the collapsing price of oil is set to reverberate across the entire oil-exporting world, where sticky high oil prices were a key reason for social stability. Following today's shocking OPEC announcement and the epic collapse in crude prices, it is time to repost it now that everyone is desperate to become a bear market oil expert, if only on Twitter...
How The Petrodollar Quietly Died, And Nobody Noticed
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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Dammit I am busy with Black Friday Sale and this not something to think about- Signed- American Sheeples
PS; Does this mean we send more to die for the Petro Dollar Wars? Bullish on Yellow Ribbons and Coffins
This post is 100% wrong
EKM take me through your logic.... I dont see this post as correct either.
Dollar to parity with the Euro, maybe 7 RMB, with money flowing in fast to the US. Hard to follow the dynamic through, but certainly dont see it as bad for the USS of A as for the rest of the world......
There are officially $40 + trillion sloshing around created since 1972 gold de-link and another $20-30 trillion unaccounted for in offshore account.
World GDP is $80 trillion annually.
There's too much dollars around, hence real producers no longer want it.
Hence, extinguishing dollars (either by Fed or hoarded by allies), makes USD more scarce hence more desirable, assuming Pentagon and Clintons will demolish Obama vetoes (and they will).
If you look at the 10 yr bond rate of France its gone<1% for the first time.
The ECB is launching a 300 billion investment program. It hopes to capture some of that money sloshing around.
Given that German banks are going negative on deposit rates, the mood today is that too much money chasing safe havens and ready to be laundered by EU Boss Juncker's Luxlaundry machine which will be the center of this Euro-merry-round ready to invite hot money and set the economy en route; a bit like Lucky Luciano helped pump the Italian miracle post 1945 with Mafia and Swiss money laundering.
The dark side of finance has many tricks. And cheap oil may well be a welcome deal to start this Euro rolling.
Now for Putin and EU to find a solution. But that is land of PAx Amercana. And Obama has to choose...which way the bells chime; its money honey or its war time.
petro$ would become less important as the oil price drops, since other oil import nations require less quantity of us$ to purchase oil. and the petro$ would be no longer needed, when the us produce enough oil for self sufficient.
Fewer dollars to buy oil, granted. The hard part to see is the arabs are going to have to tap their tbill piggy bank to keep unrest down at home, if Belgium were buying that could be trouble...
STFB
Every month the USS is hemmoraging $45-50 billion dollars a month via trade deficits. So its only a matter of time until the federal reserve has to turn back on the money printing machines.
oh shit.
i forgot to care.
anyone got a spare feel, before people start to stare?
Am I supposed to care about the death of ponzi financing?
The system of recycling worthless bullshit into real cash through fraudulent accounting and blatant lies.
Stock market corruption has run rampant for hundreds of years and demolished every economy that turned to the banking cartel instead of attempting to grow their economy through real enterprise. The day the first unit of currency is lent with a fraction of interest, that economy is dead. It could take a couple years to disintegrate or a couple hundred, like terminal cancer the patient is already dead just the exact date of death isn't known.
"The day the first unit of currency is lent with a fraction of interest, that economy is dead."
You need not have said anything else!!! Except maybe this "The only stock ever needed was/is the one that supports my rifled barrel and action.
But will it be ...better...than...EXPECTED!!!
I tend to perch my hungry ass upon the success secrets of the ancients, this way no matter what amount of confusion and chaos befalls the world, in the end I hopefully come out all sparkly and shiny, anchors away.
The pieces are all starting to come together. It has taken a long time and not quite over yet, but our patience and perserverence will prevail. That much I know.
Over my dead petrodollar!
Happy Turkey Day BITCHEZ!
Keep stacking and keep loading ammo.
The dollar will collapse as soon as we run out of zero's.
By the time that happens, there'll be plenty of people willing to contribute what's left in their bank accounts: zeros.
Dear Zero Hedge Readers -
Vlad is taking his ruble and oil beatings now and is unable to entertain your softball questions (e.g., "How many lions did you hold today?" or "What was the biggest fish you've caught?").
After Vlad has dabbed his eyes dry, however, he'll return for your admiration!
WARNING: The Petrodollar Is Crumbling At High Speed, The Previous System Of Global Energy Governance Is Definitively Broken, An Enormous Shock To The Financial Markets Could Occur In 2015
http://investmentwatchblog.com/warning-the-petrodollar-is-crumbling-at-high-speed-the-previous-system-of-global-energy-governance-is-definitively-broken-an-enormous-shock-to-the-financial-markets-could-occur-in-2015/
Peak Semen......
This article sets new records for length of sentence. At least two paragraphs are single sentences. I couldn't read any more.
Go back to writing school Tyler. This is close to incomprehensible.
Did an old school Tyler pull Thanksgiving duty?
The first sentence of that first article makes this one look like it was written by a piker.
Tyler says not to talk about his grammar like that.
She cooked one hell of a meal today.
This article sets new records for the length of a sentence. At least two paragraphs are single sentences; I couldn't read any more.
Go back to writing school, Tyler. This is close to incomprehensible.
FIFY
It's not petrodollar.
It's the almighty dollar.
That's why war is the new economy
http://newworldorderg20.wordpress.com/2014/11/27/russia-and-the-u-s-sell-to-both-sides-of-india-pakistan-tension/
http://newworldorderg20.wordpress.com/2014/11/23/chinas-j-31fc-31-is-junk-yet-u-s-claims-they-need-to-spend-more-tax-payer-cash-against-it/
http://newworldorderg20.wordpress.com/2014/11/22/u-s-state-dept-official-caught-handing-over-classified-documents-to-pakistani-officials/
http://newworldorderg20.wordpress.com/2014/11/21/china-holds-drills-with-both-india-and-pakistan-no-honor-among-war-buddies/
"everyone is desperate to become a bear market oil expert"
What market?
Question is can the snuff shale, and Putin, with pricing before the middle east goes up in flames.....
Here's what's going on behind the scenes that the Russians are aware of.don't forget that Russia now takes oil payment in Rubles and Chinese Yuan.I'm impressed by the GoldenJackAss,Jim Willie,a very knowledgeable man.
http://www.silverdoctors.com/jim-willie-dollar-to-rise-right-before-it-d...
Hahahahahahahahahahahahahahahahaha!
Joke of the day!
* All foderoso dollar!
hehe!
* foderoso = fuck + powerful.
hehe.
What will the long-term effects of $60 per barrel of oil be?
I'm assuming/guessing global production will be cut, driving prices much higher (?)...
US $ is expensive because it does not exist!
The thing is that simple!
If the planet Mars was covered by pine forests or secóia maybe there was enough paper to print all in notes of $ 100.00 to cover the shortfall.
The bag without bit of background and baites the Fed created.
Hence the search of China and Russia, India, the Netherlands, Venezuela etc. by restoring their gold!
hehe.
Created the monster but forgot to print the thing!
Kkkkkkkkkkkkkkkkkkkkkkk!
The remaining ones will be built in the US, which is out serve to poke round-shaped confetti to the next carnival.
hehe!
The guys EDF will say:
We are powerful, we have the US $ in the hands ...
The rest of the world mainly petrodollars are now saying:
Pay off!
Give me your dollars ...
Where's the paper?
Gold! Gold! Gold!
That you can not print!
Sons of bitches!
hehe!
So does the Fed like this drop in oil prices or hate it? Isn't it deflationary? If oil costs less, then consumer goods will ultimately drop in price, and employers will be able to pay workers less, and there will be less money about to purchase McMansions and to pay the interest on debt. So isn't the Fed going to end this soon, and drive up oil prices up again? I'm assuming the Fed has a hand in this (and plans it to be temporary), and is not just standing on the sidelines looking on in horror.
Wonder if anyone has heard of this suit or what some of you think of it?
http://rt.com/business/209023-metals-price-fixing-lawsuit/
The Saudi government projected budget for 2014 was $228 billion....
Cutting oil prices for more than a few months will be painful for the country...
All this concern over a loss of a reserve currency status and declining oil prices is both pointless and diversionary.
The world is in the mess it's in largely because western corporations, seeking competitive advantage, began outsourcing American middle class jobs decades ago. They left little behind but promises of future prosperity in the form of cheaper goods, while a boon in cheap credit anesthesitized the effects of lost wages until the bills piled up beyond sustainability. Defaults began to rise, and led to Wall Street waking up to the lunacy of subprime debt and engineered finance, which led to Lehman and Bear, and all the rest.
The globe got much smaller, and much, much more competitive during those decades, while the west continued to destroy what was left of a very delicate balance of eco-political order, originally hammered out at Bretton Woods.
No nation has yet seen fit to call the world back together (at a much bigger table) to halt our collective and pointless race to the bottom, while seeking in earnest to build a new order, befitting today's circumstances.
As a result, we continue to languish in a helter skelter morass of central bank insanity that cannot possibly restore anything worth having--though they will not stop--until all hell finally breaks loose.
And it will break loose.
So what difference do cheaper gasoline prices make when incomes are severely constrained? The irony is that the fall in crude prices is mostly about shrinking demand, NOT an extrordinary supply increase. The world of just several years ago would've had NO trouble sucking up whatever American fracking has added to the global market. None whatsoever. It isn't today because it CAN'T. The effects of bonsai outsourcing has had a cascading effect on the rest of the world, and the EM's in particular. This cannot be fixed monetarily. And unless coordinated, it cannot be rectified politically either. OPEC is showing this to us with its inability to cut supply to boost oil prices; no one can afford to stick their necks out alone. Most of its membership needs the money too badly to add additional injury to already weak demand.
So...nothing happens.
m
THEN there's the fretting over losing our reserve currency status, as if that were ever beneficial to us in the first place. While we may have had a more benevolent motive in helping to put the postwar world back together, the power we gained post-Breton Woods to lead the world to peaceful prosperity, instead of endless war, has in the aggregate, created far more problems for everyone than a wiser use of that power might've avoided.
Increasingly, we are not liked or respected around the world PRECISELY because we try to manage it too much. Dumping the dollar is about ending American hegemony and control that, economies and cultures no longer economic infants or politically immature, have become fed up with. Indeed, large dollar reserves are not being bot-dumped into treasuries at old rates, and China, for example, has seemingly given up on browbeating the U.S. government into reforming it's deficit habit, and instead has bought huge gold tonnage to provide for a time when IT may take the lead shot caller position someday.
Why not?
It likely knows it's not going to collect on much owed to it, so China semi-quietly prepares itself for the train wreck a comin'....
The point is, the U.S. no longer possesses the socioeconomic power to compel a dollar standard.
Petrodollars in jeopardy are a symptom, not a cause, of the dollar standard predicament.
m
And finally, we have the sophomoric notion that individuals engaging in meager (what else would a low-wage economy enable most individuals to possess?) asset hoarding will somehow be in a better position to sustain themselves during a major socioeconomic collapse.
There are even loons promoting land and shacks (housing) as some sort of shield against the effects of a global economic disaster...
Really?
In what way(s)?
Does anyone know today how much an ounce of a precious metal will secure under THOSE conditions tomorrow?
Can you eat a house?
Do the well-to-do today really believe they'll be able to hold on to what they have, in the midst of myriads more without, all around them?
Have they ever heard of a little piece of history called the French Revolution?
None of these things are solutions.
But, is anyone listening?
m
"Can you eat a house?"
Do gingerbread houses count? if so then yes you definitely can.
what petrodollar death means ?
Simply put Fed stops printing money for the rest of the whole world and only prints for USA
the rest of the wolrd addicted to easy money suddenly realizes it has no credit flowing in.
But there will be new printers ready to assist very quickly so dont worry
Last I checked, the Fed had put something like $3.5 trillion of new fiat into the economy over a 6 year period.
How many trillions have the oil companies put into the economy over the same 6 year period?
Just because people do not have a good feel for VERY large numbers does not mean that we are stupid. The banks can print a lot more that the oil companies can remove and any implication otherwise mean they are trying to play us for bigger suckers than we already are.
Make no mistake. In the current, non-free-market environment, markets go up because the banks are controlling price and markets will go down because banks are controlling price. There are no accidents. There are not black swans. There are no perfect storms.