US, WASHINGTON (ORDO NEWS) — So far, there are no signs of a weakening price war between Saudi Arabia and Russia. A number of analysts warn that the confrontation may drag on. Saudi Arabia seeks to hurt both OPEC manufacturers and non-OPEC manufacturers in order to restore their status as a stabilizing producer capable of setting prices.
Given that the Arab country recently stated that it was “very comfortable” with oil at $ 30 per barrel, it is quite capable of fulfilling the threat of maintaining production at around 12 million barrels per day for a year. At the same time, it will practically not increase costs, using its significant reserves.
Given this, some experts are seriously scared by the specter of the collapse of the petrodollar system that has existed for several decades. Saudi Arabia, the key US ally on which the petrodollar system is based, has challenged the US, so the collapse of the petrodollar system could lead to massive devaluations in major oil producing regions.
Is this likely to happen any time soon?
Petrodollars are dollars paid to oil producing countries in exchange for their oil. The beginning of this system was laid in the early 1970s, when it replaced the gold standard.
In the last days of World War II, a meeting of 44 member states of the union states took place in Bretton Woods. The leader of the new global economic order was the relatively young United States, which replaced the former hegemon: Great Britain, tormented by war and burdened with debts.
At this historic meeting, an international monetary system, backed by gold, was created. And if at first the system worked well, then its shortcomings soon became apparent. Global gold supply is growing extremely slowly, that is, during the gold standard, government spending and inflation declined.
The system also put undue pressure on the US regarding the balance of payments. In 1971, stagflation in the United States forced many countries, including the United Kingdom, to buy back most of their dollars for gold. On August 15, 1971, President Richard Nixon shook the world by officially halting the convertibility of US dollars to gold, effectively putting an end to the gold standard.
Worried about a trade deficit, forced to pay huge sums for US imports, Saudi Arabia soon returned to the negotiating table. The petrodollar system was created in 1973 when the United States and Saudi Arabia entered into a deal whereby every barrel of oil purchased in Saudi Arabia was denominated in US dollars.
Under the new agreement, any country that buys Saudi oil could do so only for US dollars. In exchange, the United States offered weapons and military protection to Saudi oil fields from neighboring countries. By 1975, all OPEC countries agreed to enter into transactions with the United States similar to Saudi ones: to set prices for oil supplies in US dollars in exchange for weapons and military protection.
In short, the petrodollar system has created artificial demand for US dollars around the world. As global oil demand grew, so did the demand for US dollars.
In 1979, the United States and Saudi Arabia agreed on a Joint Commission of the United States and Saudi Arabia on economic cooperation, in which the two countries pledged to use exclusively petrodollars when concluding oil contracts. In fact, US dollars were returning back to America.
Since then, most oil-exporting countries have begun to pass petrodollars through sovereign wealth funds. Through these funds, countries invest in non-oil companies that reduce their dependence on oil. The largest processors of petrodollars, these oil-producing countries use funds to provide an airbag that can be relied upon in difficult times and which will help reduce volatility in their economies and the global economy.
Although this coin has a flip side.
According to BIS, 70% of the reserve funds OPEC invests in may not be accounted for. BIS reports on the funds of OPEC members, so funds not included in OPEC are not taken into account.
The US Treasury suspects that unaccounted funds are associated with investing in regional stock markets, regional stock markets, hedge funds and private equity funds. Some may find their way into the US market, where they are invested through foreign intermediaries that cannot be traced.
These hidden petrodollars can exacerbate global volatility due to their sheer volume. For example, the dumping of American treasuries by a large holder will lead to a sharp fall in the dollar – something many were afraid of during the trade war between the US and China.
The collapse of the petrodollar?
Keizer Report believes that Russia has gained the upper hand in the geopolitical oil game, while the US shale and the US dollar will be hit hard: “… The era of the US, which owns the world’s reserve currency, is over.”
No one doubts that the American shale industry will be one of the first victims of the ongoing price war (Chevron Corp. recently reduced production at the Perm field by 20%). But one cannot say that neither Saudi Arabia nor Russia will suffer losses.
The Saudi government has already announced the introduction of austerity measures, including a 5% budget cut for 2020. Russia seems to be in a better position due to low debt levels and sufficient wealth fund reserves in excess of $ 100 billion. Nevertheless, this year it may well face a deficit due to the effects of the price war, not to mention the consequences of the coronavirus pandemic .
But, more importantly, reports of the impending collapse of the petrodollar are greatly exaggerated.
The United States has repeatedly used the power of the petrodollar to strengthen its foreign policy. Nevertheless, he was not injured.
In 2014, Russia and Iran signed a 5-year trade agreement worth $ 20 billion, under which it is expected to sell Iranian oil and not to use petrodollars.
Bypassing Washington’s sanctions, Iran and Venezuela signed oil contracts implying the use of their own currencies, not petrodollars.
China and Russia have repeatedly called for the replacement of the dollar, which has the status of a global reserve currency. In 2018, China launched RMB oil futures.
Nevertheless, the actions of these countries did not lead to a fall in the dollar. On the contrary, the dollar index in recent years has been constantly at multi-year highs.
Apparently, many are greatly mistaken about the importance of oil as a commodity. Yes, it lies at the heart of the global financial system and is directly responsible for the hegemony of the dollar, but since the 1980s, the dollar has become a global reserve currency due to the strength and dynamism of the US economy.
Exporters accept payments in other areas, but their central banks almost always require dollars for reasons not related to oil. The US dollar is guaranteed by US taxpayers, based on decades of consistent macroeconomic management policies.
In fact, the greatest threat to the hegemony of petrodollars is the transition to renewable energy sources. Europe leads the way in clean energy; the US lags behind the EU and China. A decrease in fossil fuel consumption will weaken demand for the dollar, but will not lead to its decline until it finds a suitable replacement.
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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.