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Putin And The Petrodollar Card Castle

Currencies / US Dollar Aug 14, 2014 - 06:51 PM GMT

By: Andrew_McKillop


The End of The Petrodollar
Googling my name and petrodollars may be useful – the petrodollar paradigm has been alive, but never well since the early 1970s quick-fix of Nixon and Kissinger to cut US trade and budget deficits, bolster the US dollar, and stroke Saudi royal fur in the right direction. The Nixon-Kissinger quick fix was to use the “windfall gains” of Arab Gulf oil producers, and especially Saudi Arabia to enable their early form of quantitative easing.

Yes it existed, already. Taking in “windfall gains” of dollars used to pay for suddenly four-times-more expensive oil in 1973-1974, especially the dollar hoard run up by Saudi Arabia and placing it in the Federal Reserve Bank of New York, the US Federal Reserve system true to its “fractional reserve' doctrine could and did print more dollars, and more easily forgot the consequences.

Those were the high times of the petrodollar.

By 1986 petrodollar recycling was already dead, for the first time, as oil prices crashed or more exactly were deliberately cratered to supposedly weaken the Islamic Republic of Iran in its 1980-1988 war against the Iraq of Saddam Hussein – defending the Arab Gulf sunni-ruled petromonarchies from Revolutionary Iran. Oil prices stayed low until 2000-2005. The US Treasury and the Federal administration found other and new ways to operate the same tricks they had previously needed petrodollars to operate. Petrodollars were already finished.

After about 2005 petrodollar recycling was feebly resuscitated, only to a certain extent, but never regained its Old Glory of the 1974-1986 period. Now it is entirely finished.

A Totally Different Ballpark
From this year 2014, petrodollars are officially dead and the death sentence has been pronounced by Vladimir Putin, with enthusiastic agreement from China, India, Brazil, Iran and others. Reported by Reuters and other newswires, August 14, President Vladimir Putin said that Russia “should aim to sell its oil and gas for roubles globally because the dollar monopoly in energy trade [is] damaging Russia's economy”. 

Petrodollar recycling was always semi-secret and always exaggerated. Websites operated by the Federal Reserve Bank of NY however provide detailed data – but with no independent verification – on the claimed amounts it “recycled”. Relative to the Fed's QE since 2008 however, the sums are peanuts.

The KSA of 2014 is highly different from the KSA of 1974. Unsure and uncertain census data for September 1974 for the country, officially named Al Mamlakkah al Arabīyah as Su‘ūdīyah was about 13 million. Current (2013) estimates are around 27.5 million. Current budget spending plans of Saudi Arabia include a string of all-new 80 000-population cities costing about $7.25 billion each, as well as the Kingdom's weapons importing spree and its total dependence on food imports for its still rapidly growing population. If the Kingdom exports oil it can eat. Otherwise not.

This certainly limits the amount of “unusable petrodollars” able to be handed over to the US Federal Reserve or anybody else.

Put another way the nominal value of KSA's total oil exports of about 8.75 million barrels a day, using an average barrel price of $100 for convenience only (actual average prices for Saudi oil exports are much lower) produces a maximum total income of around $319 billion per annum. Relative to US Federal debt, Federal Reserve QE, the US budget and trade defecits, this is not impressive given that only a small, and declining percentage of the KSA oil revenue total is “unusable windfall gains”.

Put another way, Wal-Mart's annual turnover is well above $400 billion per annum!

Petrodollars and their recycling had a defined period or window of opportunity, but this window has only declined since the brief heyday and hot spot of petrodollar recycling in 1974-1986. What is more important is that the legend lingers on, and for sure and certain bolsters American arrogance towards a world that has no special need of the USA – especially its military meddling. Russia's Vladimir Putin is now directly attacking this arrogance. In classic economic terms it is called “une rente de situation”.

Post Petrodollar
Simply due to what Russia calls western aggression, any vestiges of the petrodollar system and petrodollar recycling are now terminated or soon will be. Charting the sequels will be complex for one reason because the US has always officially denied the existence of “petrodollar recycling”, at the same time as the US Federal Reserve Bank of NY publishes data on it!

Russia together with China and other BRICS countries and Iran are moving to reduce their exposure to and dependence on the US dollar, and its lookalike euro which has steadily moved upward since 2000 as a petro-money. Reduced international demand for both currencies – the dollar and euro – are therefore probable or inevitable. The logical result is their depreciation against other moneys and certain key yardsticks of economic value, especially gold and oil. The next logical sequel of this is higher inflation in the US and in Europe, which are currently affected by creeping deflation.

The constant refrain of both Janet Yellen's Federal Reserve and Mario Draghi's ECB is that inflation is too low and deflation is a menace. Finally and formally destroying the petrodollar may rapidly help them out, but not in a way they expected!

Due to the “petrodollar system” being a vestige and a legend rather than a reality, the impact on sentiment and the psychology of market traders, worldwide, is likely to be the largest effect from the move to “de-dollarize” world trade in oil and then other goods. The effects are therefore likely to be disproportionate to the real role and weight of oil-dollars in world oil trade, and can likely and further destabilize oil trading and oil prices - and most certainly intensify the USA's economic plight.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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