End Of An Era: The Rise And Fall Of The Petrodollar System

Tyler Durden's picture

Submitted by Claudio Grass via Acting-Man.com,

The Transition

“The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.”

Ron Paul

 

oil pipeline to ghawar

A new oil pipeline is built in the Saudi desert… this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia and still the largest in the world

 

The intricate relationship between energy markets and our global financial system, can be traced back to the emergence of the petrodollar system in the 1970s, which was mainly driven by the rise of the United States as an economic and political superpower.

For almost twenty years, the U.S. was the world’s only exporter of petroleum. Its relative energy independence helped support its economy and its currency. Until around 1970, the U.S. enjoyed a positive trade balance.

Oil expert and author of the book “The Trace of Oil”, Bertram Brökelmann, explains a dramatic change took place in the U.S. economy, as it experienced several transitions: First, it transitioned from being an oil exporter to an oil importer, then a goods importer and finally a money importer. This disastrous downward spiral began gradually, but it ultimately affected the global economy.

A petrodollar is defined as a US dollar that is received by an oil producing country in exchange for selling oil. As is shown in the chart below, the gap between US oil consumption and production began to expand in the late 1960s, making the U.S. dependent on oil imports.

shaybah_from_the_dunes__by_lugh23s-d4v2i5l

Village in the desert: this compound in the Sahara houses people working at Saudi Arabia’s Shaybah oil field.

 

And while it led to the U.S. Dollar being established as the world’s premier reserve currency, it also contributed to the country’s increase in debt. The oil embargo of 1973-74 was a major hit that exposed the vulnerability of the U.S. economy.

Nevertheless, under the banner of “national security” the future policy course was firmly set: in a 1973 National Security Council (NSC) paper, it was stated that “U.S. leverage in energy matters resulted from its economic and political influence with Saudi Arabia and Iran, the two leading oil exporters”.

 

Chart-1-eia

US petroleum production, consumption and net imports – after surging dramatically from 1950 to the early 21st century, US energy imports have declined dramatically since the mid 2000ds as a result of the fracking boom. This is inter alia beginning to affect global dollar liquidity.

 

From a Gold-Based Monetary System to the Petrodollar System

Former U.S. Senator Ron Paul explains that “understanding the Petrodollar system and the forces affecting it, is the best way to predict when the U.S. Dollar will collapse. The origins of the petrodollar system go back to the Bretton Woods system, the 1944 post-war agreement, which made the U.S. Dollar the sole reserve currency.

 

fimf_conference

Bretton Woods monetary conference at the Mt. Washington Hotel in July 1944

 

From then on, only the U.S. Dollar would be convertible into gold at a fixed rate of USD 35 per ounce. This also meant that only the U.S. was able to change the price of gold and, in turn, it committed to maintaining the value of the Dollar by buying and selling unlimited quantities of gold, at the agreed upon rate of USD 35 per ounce.

In 1945, the U.S. Treasury held 17,848 metric tons of fine gold, which at the time represented around 63% of official global gold reserves. The gold-backed Dollar offered the world a reliable and stable reserve currency. However, cracks in the Bretton Woods system began to emerge, as US export surpluses began to drop after 1960.

The Kennedy and Johnson administrations were rather big on money printing, be it to finance the space race, or to spend on domestic social programs. A significant burden on the U.S. budget were also the wars fought in Korea and Vietnam, which had to be paid for by resorting to the usual war funding mechanisms, i.e. by borrowing money.

Thus, the country began to live on credit and banks worldwide were  flooded with US dollars. These dollars represented gold claims on the United States though. In 1971, the US “temporarily” suspended convertibility of the Dollar into gold, and announced that the dollar would be devalued to USD 38.00 per ounce.

 

Nixon-3

Richard Milhouse Nixon. Here is a link to a video of his announcement of the US gold default in 1971. It is a classical example of how governments are routinely telling bald-faced lies when imposing steps to combat “economic emergencies” they themselves have caused. These steps invariably mean that someone’s wealth is stolen or diminished in favor of the State.

 

A run on gold ensued, as European states, particularly France and Germany, were skeptical and wary of another devaluation. As a result, US gold reserves eventually shrunk to about 286 million ounces. Richard Nixon then “closed the gold window” in August 1971 and the dollar was devalued for a second time by 10%.

The gold price shot up to USD 42.22 in one go. This essentially meant that the U.S. Treasury defaulted on its promise to back the dollar with gold and thus, the financial system as it was constituted at the time was no longer sustainable.

 

Chart-2-Gold, 67-73

Gold price from 1967 to 1973. In the late 1960s there was an attempt by governments to keep the gold price under control through the “London Gold Pool” – they lost gold so fast in this market manipulation effort that they soon gave up again. It foreshadowed the eventual default. Monetarist economists like Milton Friedman told Nixon that the gold price would fall to $6 if the US were to “demonetize” gold – once again proving that the forecasts of most economists aren’t worth much – click to enlarge.

 

1973 was an important year for oil: the oil embargo was imposed as a reaction to the Yom Kippur war, but it also related to the closure of the gold window. The Dollar became nothing more than a fiat currency and the Fed was free to pursue monetary expansion completely unhindered. The main problem the US faced was how to motivate other countries to hold and use US dollars. Saudi Arabia became the lynchpin of this effort.

According to leaked documents, there were other interested parties that helped to “orchestrate” these developments in 1973-74. Henry Kissinger held a meeting in Bilderberg in the Netherlands with an influential group of men: Lord Greenhill of BP, David Rockefeller of Chase Manhattan Bank, George Ball of Lehman Brothers and Zbigniew Brzezinski.

The came to the conclusion that OPEC “could completely disorganize and undermine the world monetary system” and so they decided to target the commodity it controlled. Oil was to save their banks and financial interests from the collapse of the dollar.

 

Kisser and Faisal

Kissinger meets with King Faisal of Saudi Arabia. At this point, the latter seemed not quite convinced yet. In the end, the Saudi royals realized what a great deal this would be for them.

 

Shortly thereafter, Kissinger negotiated with the Saudi monarchy,  and helped steer events in the direction that would eventually lead to an agreement between Saudi Arabia and the United States. It has only recently been disclosed that there was another covert meeting between the Saudis and newly appointed U.S. Treasury secretary, William Simon.

The objective was to find a way to convert the then hostile Saudis to US allies and by doing so create the petrodollar so as to reanimate the ailing US economy. Nixon would not take no for an answer – not only was it a matter of economic security, but he also wanted to block the Soviet Union from getting a toehold in the region.

 

William Simon

Former US treasury secretary William Simon – it has only recently emerged that he actually went on a secret mission to Saudi Arabia to persuade the Saudis to take dollars for oil and recycle them into treasury debt

 

Simon knew how to sell the idea: America was the safest place for the Saudis to invest their petrodollars and no one would know about it (Saudi investments were not disclosed separately, instead they were grouped with other oil exporting countries). As shown in the chart below, today Saudi Arabia is the largest US creditor among oil exporting countries, holding about USD117 billion in treasury securities.

 

Chart-3-treasury bonds held by oil exporters

US treasuries held by oil-exporting countries. In this group, Saudi Arabia is the largest creditor of the US – click to enlarge.

 

And so, a partnership and a strategic alliance were formed: The US agreed it would guarantee the survival of the House of Saud, provide military security for the Saudi oil fields, as well as sell arms weapons to the Saudi government.

In return, Saudi Arabia would use its leverage in OPEC to ensure all oil transactions would be in USD, invest its own Dollars generated from oil sales in US investment vehicles, maintain influence over price levels and prevent another oil embargo.

This alliance marked a paradigm shift, the transition to the “petrodollar system”. It enabled the US to fill the vacuum that was left by the closure of the gold window. The oil conglomerates and financial oligarchs secured the flow of funds by creating a new wave of demand for US dollars.

Though artificial and baseless, it was backed by the increasing demand for oil worldwide. And this, also artificial, demand has successfully supported the continuation of expansionary US monetary policy for decades – at least until the beginning of the global financial crisis and the point where we find ourselves now.

 

Is Another Paradigm Shift Underway?

Similar to the paradigm shift that followed with the collapse of the Bretton Woods system, there is another major shift underway today. According to Ron Paul, we will know its consequences in full, the day oil-producing countries demand gold for their oil rather than dollars.

 

Rosneft

Rosneft facility in Siberia

We have already seen changes in oil sale agreements made in recent years. In 2013, Russia’s Rosneft agreed to supply China with oil worth USD 270 billion, the largest agreement to date. Additionally several OPEC nations are allowing oil transactions to be carried out in a currencies other than the dollar.

In January 2016, India and Iran agreed to settle their oil sales in Indian rupees. In 2014, Qatar agreed with China to be the first hub for clearing transactions in the Chinese yuan. In December 2015, the United Arab Emirates (UAE) and China created a new currency swap agreement for the yuan. Both steps strongly indicate that the Gulf states are taking measures to reduce their dependence and exposure to the US dollar.

It is therefore clear why all eyes are set on the geopolitical turmoil in the Middle East. Concerns have intensified after a failed military intervention by the US, the slowly weakening strategic position of Saudi Arabia in the region and the increasing strength of Iran after the removal of economic sanctions.

 

obama-salman

President Obama and Saudi Arabia’s new King Salman find something to laugh about. In reality, relations between the US and Saudi Arabia have steadily deteriorated in recent years, official proclamations to the contrary notwithstanding.

 

In addition, U.S.-Saudi relations are currently on shaky ground. In April Saudi Arabia warned it could proceed to sell off billions worth of US treasury bonds if Congress passed a bill that would allow the kingdom to be held liable in U.S. courts for the Sept. 11 terrorist attacks.

That bill indeed passed the Senate in May and is now in the hands of the House of Representatives, but a vote is yet to be scheduled. The Saudi threat has not yet materialized, but if it did, it would pull billions of dollars out of the US treasury bond market – it would be a move of great moment, symbolically ending more than 40 years of cooperation in the petrodollar system.

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Takeaction2's picture
Takeaction2 (not verified) Jul 22, 2016 6:04 PM

Well...I have been paying close attention for almost 10 years now...Nope.

nuubee's picture

Don't those sand dunes shift over months/years? Wouldn't it basically be retarded to build a pipeline on top of sand dunes?

 

Meta-Metaphor Achievement Unlocked!!

Escrava Isaura's picture

The imports and production lines are totally wrong. The writer should know better.

Anyway, below is the graphic that really matters.

https://en.wikipedia.org/wiki/Energy_returned_on_energy_invested#/media/File:EROI_-_Ratio_of_Energy_Returned_on_Energy_Invested_-_USA.svg

 

J S Bach's picture

As most astute readers of ZH know, it's NOT the "petro-dollar" that is the problem... it's debt-based currency of ANY kind.  TPTB use these misdirecting euphemisms to camouflage the real evil.  Dr. Paul HAS to know that the "experiment" has been going on for much longer than 35 years.

Whatever money replaces the petro dollar has to be based on sound substance... not debt.

Latitude25's picture

Money will be based on the next believable big lie if at all possible.

bamawatson's picture

doesn't even have to be believable, simply repeated n endorsed by the usual suspects n the compliant media n indoctrination, er uh, education system

Charming Anarchist's picture

Petrol can be money. 

Anything can be and will be money until man realizes that he does not need it at all.  .

Escrava Isaura's picture

There won’t be a next money system reassembly anything like we know, most likely nothing at all, because all assets (pension plans, homes, stocks) will go down to zero at the next capitalism meltdown.

 

That will be followed by the collapse of the industrial age and cheap energy (oil). At the next deflationary cycle, already starting happening, all the promises and debts cannot be paid. The new money injected into the economy won’t matter because of diminishing returns. So, the prices of things will go up not because of the money printing, entirely, but because of shortages.

 

Here we talk survival. No one will bother to show up to work because they lost everything and wages will only be going down. Once the government fails at this (3rd) stage, we’ll be entering a societal collapse.

 

Not sure if the collapse will start at 2PM, or the next day at 9AM. But it’s irrelevant. Once it starts, the dominos will start falling pretty quickly, because of all the complexities, debts, and future promises built-in onto the systems.

 

Majestic12's picture

"There won’t be a next money system reassembly "

1988 bitchez...its on time and under budget...

https://socioecohistory.wordpress.com/2014/07/26/flashback-1988-get-read...

Wake the fuck and try reading...it will help you help yourself.

jcdenton's picture

I think we are ALL ..

 

being  a bit ..

 

too ..

 

pessimistic ..

 

Try to have some faith ..

 

cause it is ALL we got ..

 

https://youtu.be/ME1at_WOCrk

Majestic12's picture

"Try to have some faith .."

"Faith" in what?

Let's have "faith" in hope, and pondering, and wishful thinking, and "glass half full", and "its not so bad if they put lube on your ass first"....

You sold me! Wow, I didn't know how good I could "feel" just by falling for the same old worthless platitudes of the pathological liars and psychopaths who run the world.

Thanks! JCDenton and Leo Wanta.

CC Lemon's picture

How about a sand based monetary system...

J S Bach's picture

If you're a hermit crab, sand would be a "sound substance". ;)

Unknown User's picture

To be exact, it's the Fractional Reserve scam of counterfeiting money (i.e., lending money that you do not have).

Sam.Spade's picture

'Lending money that you don't have'.  You make a fundamental mistake, one that the banksters.  The money is theirs because you loaned it to them.  Because that is what a bank 'deposit' is.  It's an unsecured loan by the depositor to the bank.  Because you loaned it to them, it is their money to loan out, not yours.

If we are ever to have a stable monetary system, we must start by changing the legal status of deposits from 'loans' to, well, deposits.  Title to the funds must not transfer from the depsitor to the bank.  Then, if the bank doesn't own the money, they can't legally lend it out multiple times as they do now.

But you are right on  your base point:  Fractional Reserve banking is the root of the instability that is about to destroy our monetary system.

geno-econ's picture

Both Presidential candidates are talking return of Glass Stegall, but it is just talk.  Corrupt Congress would never pass enabling legislation.  A Bubble Burst is more likely scenario

True Blue's picture

No, you are making a fundamental mistake: You loan them say $10,000 of your hard-earned by making a deposit, then using your money as a form of collateral they loan out $100,000 -conjuring the additional $90,000 from their rectal cotton-candy dispenser.

I have no problem making a deposit and the bank lending that deposit -so long as I get my cut of the interest. The problem is when they can 'loan' money that does not exist in the first place.

techpriest's picture

"
As most astute readers of ZH know, it's NOT the "petro-dollar" that is the problem... it's debt-based currency of ANY kind. TPTB use these misdirecting euphemisms to camouflage the real evil. Dr. Paul HAS to know that the "experiment" has been going on for much longer than 35 years.

Whatever money replaces the petro dollar has to be based on sound substance... not debt.
"

Yes, Dr. Paul does know that. The only reason the dollar system has held together is because of the petrodollar, i.e. the guarantee that other countries will readily trade in dollars, particularly oil-producing nations. Once that guarantee is taken away, it will be obvious that the dollar is backed by nothing.

Personally I think market-based money is the best route - let people choose their own currency. Debt-based, government-monopolized currencies will not survive against the real thing.

Eeyores Enigma's picture

this is all that needs to be said on the matter;

 

"As B. W. Hill recently noted, “The world is now spending $2.3 trillion per year more to produce oil than what is received when it is sold. The world is now losing a great deal of money to maintain its dependence on oil.”

 

Pee Coil bitches

The central planners's picture

45 since bretton woods but 35 years since Nixon cut "temporarily" the gold fron the dollar.

funthea's picture

Hum, wrong. Nixon cut the gold widow August 15, 1971. That time until now is 45 years. Bretton Woods was in July,1944. The time between Bretton Woods and the Nixon gold cut, was 27 years. And so, the time between Bretton Woods and now is 72 years. I'm mean, if we are keeping the numbers straight and all...

Phillpots's picture

I'm in my 50's. Why in the hell did my mum and dad allow this to happen? I have a son at 22. No way will I do the same.

N0TaREALmerican's picture
N0TaREALmerican (not verified) Phillpots Jul 22, 2016 6:30 PM

They didn't control the state-department, you don't control the state-department.

The state-department is, right now, figuring out a way to enrich the already rich.  If your kid gets fucked in the process, they don't really care. 

The best you can do is tell your kid not to be a patriotic dumbass (hopefully, YOU'VE learned that lesson already).

ElectroGravitic's picture

What if we stop buying their oil before they start demanding gold for it?
We do not have to be energy slaves.

The StanMeyerSparkPlug

BrilliantLight Power

FixTheWorldProject

SiriusDisclosure

Folks, the prison doors are open. If you want to get out of debt prison, you have to get up and take action. These projects do not fund themselves, and the banks aren’t going to put themselves out of business. That task is up to you.

Majestic12's picture

"Folks, the prison doors are open"

All great stuff except Sirius "Disclosure"...

The Rothchilds-Rockefeller-Warburg-City of London-Vatican cabal have 'bosses"....

Steven Greer is part reptilian...his "bosses" are the same bosses....

ZH holes can't bear to talk or think about this....

They want to "give permission"...deep in sleep....

They keep looking down...with blinders on, of course...

Add this one: https://www.youtube.com/watch?v=YZ7I9XgaW3A

ElectroGravitic's picture

Interesting. That does help explain why Greer sits on $500K earmarked for a movie showing us how we are all getting screwed by the banks for $Trillions, while he can’t be bothered to send $25K to the likes of FixTheWorldProject and the StanMeyerSparkPlug which will provide open source documentation enabling us to take back the $Trillions the banks stole from us; by crashing the value of their fossil fuel holdings and reducing the cost we pay for energy to zero.

As for Morin, I am working my way through his stuff. Thanks.

 

Killdo's picture

according to a freind who works for the White House around 60% of men working for the State department are gay and they even have their FB page. But again most of DC seems that way. 

I wonder why there are so many gays there statistically speaking

Majestic12's picture

"why there are so many gays there "

The 1% are a gay, hedonist, ritualistic, pedophile, reptilian bloodline.

Not just the Bite House.

If there was a fucking effort to require mandatory "Rh Factor" testing, you would see amazing plots at high confidence intervals.

If people wake up, there is a way to "test" these fuckers for easy identification.

Most "second" level errand boys (the top 5%) also have a high percentage of Rh negative.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Majestic12 Jul 22, 2016 11:20 PM

Jeezus are you just fucking insane? AB neg, here. So fucking what? Am I gay? No. And before you start screaming that I am Jewish, or some other such nonsense, I am a WASP.

J S Bach's picture

Phillpots...

No need to come down so hard on your parents.  In times of prosperity, it's very easy to overlook or even take any interest in the affairs of boring financial policies... especially if one is benefitting from a swimming economy (top of the Ponzi timeline).  If your folks purposefully voted for destructive policies, then you've got an honest beef with them. (I doubt that.)

All that matters now is that you will not "do the same" when it comes to educating your children or continuing to accept TPTB's criminal actions by sitting on your hands.

debtor of last resort's picture

Where's the Aramco-ipo aka seawater-etf?

Here2Go's picture
Here2Go (not verified) Jul 22, 2016 6:14 PM

Simon & Kissinger in 1973... Lew, Yellen, Bernanke, Greenspan, Soros, Blankfein today...

 

What has changed?

 

43 years... What has changed? (besides Peggy Lipton marrying Quincy Jones)?

Kirk2NCC1701's picture

I'll take "Famous Sayanim" for $500, Alex.

Majestic12's picture

"(besides Peggy Lipton marrying Quincy Jones)?"

Link: "solid!"

JamesBond's picture

All the phases of addiction (to money and power).  

Crawdaddy's picture

And the beat goes on...I've been watching the show since Nixon. He cheated the world, primarily the American people, by leaving the gold standard. But even before that there were wars to distract us from the rising socialism (promoted by both parties), and politics to distract us from solutions (vote for the lesser of the evils to avoid the big evil.) The show will continue until they crash the world so they can have their precious NWO.

Old 1973 NBC govt petro-dollah propaganda:

https://www.youtube.com/watch?v=VCLRlVxOH-Q

Somehow that evil turtle-backed golem named Kissinger continues to metabolize.

 

 

JamesBond's picture

Then PM are not such a bad investment in today's economic climate, are they...?

Officer, I keep all this silver around because of the werewolves in the area.  Honest.  

 

 

Hohum's picture

Nice oil graph but imports are now about 8+million barrels per day and rising.

Latitude25's picture

$125 billion in Saudi owned US treasuries to dump?  No way could the FED ever print this incredible quantity of money.  NO WAY.

itstippy's picture

Thank you  - my thoughts exactly.

During QE3, Bernanke was printing $85B per month and buying U.S. debt.  He bought up the equivalent of all 43 years' worth of Saudi petro dollars in about 5 weeks of printing,  and just put it on the Fed's balance sheet where it will sit forever.

If the Saudis were to start selling piles of U.S. Treasuries, the U.S. Federal Reserve would simply start buying piles of U.S. Treasuries.  No problem.  The U.S. Federal Reserve, European Central Bank, Peoples Bank Of China, and Bank Of Japan run the show, not the hapless Saudis.

Crawdaddy's picture

The Saudis are a manufactured foil at work since the 50's to fool us into thinking they are independent. The "independent Saudi" is just as mythical as the "vigilante bond seller."  Imaginary and stage managed propaganda. Totally controlled by the shadow govt.

LoneCapitalist's picture

The announcement that the Saudis were selling the treasuries, would do far more damage than the actual sale.

ElectroGravitic's picture

They don't intend to print it. Into quantity field press: 1  2  5  0  0  0  0  0  0  0  0  0 then press enter. Whereupon it is used to goose the stock and bond market and pay outrageous salaries and perks.

Atomizer's picture

No one went to jail during Libor, London Whale, Corzine, Clinton Foundation, etc

This cartel will be taken down. That includes your sandniggers in Saudi Arabia. 

Atomizer's picture

Libtards, even your tickle up you leg messiah is going down. This shit is going to stop. 

One-Eyed-Thong's picture
One-Eyed-Thong (not verified) Jul 22, 2016 6:46 PM

Sound Money, Hoez !!!

Hungman's picture

I would wager that the Saudi's hold at least 10 x as much US debt as the writter believes. 

Things that go bump's picture

Do they know that we'll never pay them back?