The End of the Petrodollar - What Impact Will It Have?

[ussusimiel]

The Petrodollar and its imminent demise has come up in a couple of threads recently and I am wondering what impact it will have.

This series of articles (I haven't read them all) seems to give an extensive overview of the situation.

Here're are some of the author's predictions:

Foreign nations would begin sending a flood of U.S. dollars back to the United States in exchange for the new currency needed for oil.

The Federal Reserve would lose their ability to print more dollars to solve America’s economic problems.

The Treasury Secretary and the Federal Reserve Chairman would meet to determine the best course of action.

That action would involve an immediate and dramatic increase in interest rates to reduce America’s money supply.

Hyperinflation would ensue temporarily while the interest rates took time to take full effect.

All oil-related prices, including gas prices, would reach outrageous levels.

Washington would soon realize that the total amount of money in the system would have to be dramatically slashed even further, leading to an even higher increase in interest rates.

The clueless American public would demand answers. Those on the left would blame the right. The right would blame the left. And both political parties would seek to blame the Federal Reserve.

People with adjustable rate debts would be crushed and massive layoffs would occur as businesses would be suffering from the high interest rates.

Asset prices across the board would plummet in value.

Amid the financial carnage, an economic recovery eventually would begin to take place. But this new American economy would be tremendously smaller due to a drastically reduced money supply.

How accurate do you think these predictions are? Do they take the US's newly developed energy independence into account? Do they reflect the importance of the fiat nature of the dollar? Do they reflect the importance of the US market to the global market (especially China)? Do they reflect the importance of the dollar as a secure reserve currency?

u.

[Morning]

Excellent topic. As a trader I have been on top of this. No time now, but I will come to it.

[Hashi Lebwohl]

Eventually interest rates are going to have to increase but mostly because they have been artificially kept low for far too long; however, I do not think that this will lead to hyperinflation or system shock. Instead, people will have to get out of their ARMs (as they should in any event) and credit won't be as easy to get (you should pay cash for things whenever possible, anyway, and avoid credit whenever you can).

It sounds like the author is predicting panic but panic won't actually happen. The large banks, the ones who we were being told were too big to fail and who needed bailout money back in 2008/2009? They have made more money since then than they lost at that time so they are actually ahead after the most recent housing bubble collapse. In fact, even without the bailouts they would still be ahead so I suspect what really drove the bailouts was that if the funds they manage lost a certain percentage they wouldn't receive hefty bonuses or they may lose their jobs altogether. Well, if you were helping to create the artificial housing bubble you should have lost your job...but that is for another thread.

OPEC is truly beginning to worry now that production is so high here in the United States. We are very close now to the point where we won't need any Middle East oil at all; this scares even Saudi Arabia.

[Vraith]

I highly doubt any of those predictions.
Take the first: dollars will rush back to the U.S.
Really? How exactly will that happen? What is the mechanism?
You don't just "turn in" currency for something else...you have to SPEND it.
And spending is a 2-way street.
[not really...it's massive cloverleaf with contradictory traffic signs and multiple police forces some of which are at war with each other].
And this gets even more fun cuz no ones gonna be buying cars and bread...they're buying other currencies.
I think foreign central banks have around 4 trillion in dollar reserves.
What will they replace it with? What if, tomorrow, they said, no more dollars, we're buying Euro's! [or they decide on China's instead]...what do you think will happen to the EU or China's currency and economy? You think they want that or will be happy with it?

Even if such a mechanism exists, I doubt it is a problem unless everyone in the world does it at the same time.
[[the use of the dollar, though still most common, has been falling for a while...at least it WAS until the EU went all austerity. I haven't looked lately, but I bet the dollar got a boost cuz of that.]]

[aliantha]

Given that gas prices here are at their lowest in several years right now, I'm somewhat doubtful that anything OPEC could do would cause the sort of massive upheaval this guy is predicting.

What I find more interesting is that we were told that gas prices were going to keep going up and up because the supply was running out, and we'd just have to suck it up. Now there's a glut? How does that work, exactly? (I mean, I know how it works -- somebody's been controlling the flow through the spigot in order to prop up prices.)

I also think you've hit on something, u., when you talk about the US's fiat currency. As Vraith has (more or less) said, this guy doesn't seem to have a handle on how that works.

[Obi-Wan Nihilo]

And yet the dollar strengthens daily.

[Morning]

www.zerohedge.com/news/2014-11-03/how-p ... dy-noticed

[ussusimiel]

Thanks for the article, Morning! I'm not sure that I understood it all, but it did give me some pointers as to where the petrodollar thing is going.

From the article it seems like that for the first time in 18 years there will be a drain of dollars out of the US as the oil producing countries save the money (I'm not sure where) or invest it domestically. The net result is that there will be less cash floating around for loan creation and this could lead to a fall in investment and lower GDP growth figures.

However, the dollar currently is strengthening (as nihilo points out) due to a well-performing economy (among other things). This seems to contradict the trend that would result from the ending of the reign of the petrodollar, i.e a weakening dollar and sharply rising inflation.

One of the things that I am picking up from reading is that as the petrodollars decrease there will be an overall contraction in the US economy (whether through an actual contraction or decreased growth) as the petrodollars have inflated demand for US goods/assets over the years, leading to an economy that is not properly representative of the real levels of competitveness/activity.

If that turns out to be the case it will be interesting to see how the US responds to the new situation.

u.

[Vraith]

From the article it seems like that for the first time in 18 years there will be a drain of dollars out of the US as the oil producing countries save the money (I'm not sure where) or invest it domestically. The net result is that there will be less cash floating around for loan creation and this could lead to a fall in investment and lower GDP growth figures.

Something like that is part of it. But a lot of odd somethings are.
Fun thing: last time this terrible "draining" of dollars [which isn't all, or even most out of U.S...just out of dollar denominated, which I know you are aware isn't the same thing]...anyway, last time the "capital exports" from the energy exporters were this low, the U.S. grew pretty well.


This all could, and probably will be, bad for big oil exporters...especially the ones who basically have no economy except oil exports.


But I think it's backwards: they aren't "exporting" cash, cuz oil is cheap, cuz too many places have austerity and slow growth, which is slowing their growth. The u.s. and u.k. and a couple others are on the up side of this, not in danger. [though some places have to get moving or eventually THAT will slow things down].

I've started and stopped looking into the petro/reserve currency thing several times...but preliminarily it seems to me that the advantages to the U.S. [and the need for the U.S. to keep it] are exaggerated. It's a myth similar to the deficit myth...and could be harmful for the same reason, cuz people believe it, and cuz some people pretend to believe it cuz they can use it. [again...preliminary!...this is a big, far-reaching,]complicated subject].

[finn]

I think we are already seeing the effect and impact of a serious attack on the dollar as a fiat currency. That's why the Nobel peace prize winner has wars raging around the globe and is baiting the key players, China, Russia and Iran and softening up the public for any aggressive economic or diplomatic moves.

The BRICS are gathering momentum and are buying up gold like billy-o! I think the attack on the dollar will be by re-asserting a gold standard across the BRICS currencies. The rate of exchange will then need to be met by trade with those not in the BRICS circle of friends.

The big question is whether the US will use its military to try to beat down the US Dollar shut out, but I think it may be optimistic to want to take on Russia AND china who may stand firm with Iran, the likeliest target (under a cloud of the usual American bullshit about weapons of mass destruction, vilification campaigns about how badly they treat their pets etc, etc .)

[Vraith]

re-asserting a gold standard across the BRICS currencies.

That would be even stupider than the Euro, and taking away member nations currency power.
Serious, capital dumb stupid.
Not that that will prevent such a thing [though I think it highly unlikely].

And common as it is for the U.S. to intervene militarily for bad reasons [bad applying to both "not useful/not accurate" and "not moral"], I don't think petrodollars and reserve currency are a likely cause.

[Morning]

philosophyofmetrics.com/2014/10/28/something-sdr-this-way-comes/

[finn]

Vraith, in the past few years, China in particular but also India has been buying gold at an accelerated rate, roughly equivalent to more than yearly production. The Germans (Bundasbank) have demanded a return of their physical gold from BoA (I think it was) and were told it would take 7 years to accumulate (ie it was not actually there anymore).

The (in particular) Wall Street banks and traders have sold, leveraged and resold gold to an extent where something like 90+ people have a certificate of ownership in some form or another for each ounce of actual, physical gold. The amount of gold held by the US is pitifully small as faith in the dollar hegemony has persuaded people that it will never fail and that gold is just a another toy to play with in the leveraging game...... hey: no care, no responsibility, no accountability right?

China, India, Russia, Brazil and South Africa are gold rich, they are the biggest countries on the planet, the most populated and collectively with the largest resources. I think they will use their muscle to re-establish some order as the US has been blatant in its flaunting of any attempts to regulate its own excesses whilst the US administration has taken on the role of Pontius Pilate. I think Europe will follow, certainly the Germans will look closely, probably why they want their gold back!

[Vraith]

Vraith, in the past few years, China in particular but also India has been buying gold at an accelerated rate, roughly equivalent to more than yearly production. The Germans (Bundasbank) have demanded a return of their physical gold from BoA (I think it was) and were told it would take 7 years to accumulate (ie it was not actually there anymore).

The (in particular) Wall Street banks and traders have sold, leveraged and resold gold to an extent where something like 90+ people have a certificate of ownership in some form or another for each ounce of actual, physical gold. The amount of gold held by the US is pitifully small as faith in the dollar hegemony has persuaded people that it will never fail and that gold is just a another toy to play with in the leveraging game...... hey: no care, no responsibility, no accountability right?

China, India, Russia, Brazil and South Africa are gold rich, they are the biggest countries on the planet, the most populated and collectively with the largest resources. I think they will use their muscle to re-establish some order as the US has been blatant in its flaunting of any attempts to regulate its own excesses whilst the US administration has taken on the role of Pontius Pilate. I think Europe will follow, certainly the Germans will look closely, probably why they want their gold back!

That may all well be true.
And certainly a lot more of the world is developing muscular, advanced, grow-able economies and relationships. All good. I hope all the countries in the world become first-world economies. That they use whatever is good of our ways, and ignore the bad ones, and come up with better solutions [and hopefully we'll get rid of our own bad ideas].

But anything like a gold-standard is just total idiocy.
They may run a con-game that makes people feel safe...like the folk who think they can survive nuclear war cuz they've got a basement, a shotgun, and some canned goods...but no modern country, let alone a group or all countries, could run on anything remotely resembling a real gold-standard.

Just for fun [and with rounding on the lowball side]:
the total of all gold ever mined is around 6 billion ounces.
the current price is around 1200.
it would have to rise to roughly 2500 represent 1 year u.s. GDP.
Around 15000 to represent current physical u.s. assets.
At least 150,000 per ounce just to represent current world assets.

[Avatar]

We sell our gold. We sell it for fixed prices even before it gets mined. Not something I'm particularly in favour of. But I don't think we're ever (thankfully) going to go back to a gold standard or anything.

--A

[Brinn]

This topic is amusing!

[SoulBiter]

Given that gas prices here are at their lowest in several years right now, I'm somewhat doubtful that anything OPEC could do would cause the sort of massive upheaval this guy is predicting.

What I find more interesting is that we were told that gas prices were going to keep going up and up because the supply was running out, and we'd just have to suck it up. Now there's a glut? How does that work, exactly? (I mean, I know how it works -- somebody's been controlling the flow through the spigot in order to prop up prices.)

I also think you've hit on something, u., when you talk about the US's fiat currency. As Vraith has (more or less) said, this guy doesn't seem to have a handle on how that works.

From what I read, the glut is due to OPEC dumping oil on the market to drive the frackers out of business. If the cost of oil is low enough, its no longer viable (from a dollar standpoint) to continue to frack for oil.

[Vraith]

This topic is amusing!

You can't just say that. You have to say what [and who] is wrong. Get typing

From what I read, the glut is due to OPEC dumping oil on the market to drive the frackers out of business. If the cost of oil is low enough, its no longer viable (from a dollar standpoint) to continue to frack for oil.

I've seen a fair amount of repetitions of that.
It may even be true to some extent. But if that's the motivator, I believe it will fail.
A few years ago, oil only had to drop to around 95/100 a barrel to hurt most fracking. A year or a bit more ago, it had to drop all the way to 85 or so to undercut.
Recently the Dakota's said they'd been just fine as low as 75 per barrel...and the Texas-area folk said 60.

I think most of the producers see the problem...and they know they can't stop fracking. They're fighting...and in significant portion amongst themselves...for share amongst the market that exists.
They really don't have a choice if they're part of the group that has no economy EXCEPT oil exports.

This strategy might help [at least delay] against other places besides the U.S./Canada because their costs to frack might be much higher. I don't know if that's so...but it seems likely.

But they'd better figure out how to get off their dependence, and sooner rather than later.
Cuz there are a bunch of other factors/technologies besides fracking production working against them.
And they just can't survive long term [maybe not even medium term] on oil prices that low.
If world eco-growth rate rises, it will lengthen their time horizon...but it will only push it off a bit, not eliminate it.

[Hashi Lebwohl]

Don't forget the new Republican majority in Congress who may greenlight and/or fast-track the Keystone XL Pipeline, which has been waiting in limbo for a couple of years now.

Voters in Denton, TX passed an anti-fracking ban--no new leases may be tapped for fracking-based production. Naturally, the first lawsuits have already been filed against the measure even though it isn't a city ordinance yet. Still, other cities in the nation will watch to see what happens in Denton before figuring out where they will go on the issue.

edit: *laugh* I hadn't even seen this when I typed that a few minutes ago.

In his own news conference one day after the midterms, Senate Minority Leader Mitch McConnell said approving the Keystone XL and cutting corporate taxes will top his agenda in 2015.

Sen. Mitch McConnell: "We need to embrace the energy revolution that is going on in our country, promote it. It’s hugely advantageous to America, not only in the area of energy independence, but employment. I mean, the employment figures connected with Keystone are stunning. ... The president has indicated he is interested in doing tax reform. We all know having the highest corporate tax rate in the industrialized world is a job exporter. All this talk about job exportation, what’s exporting jobs is having the highest corporate tax rate in the industrialized world."

McConnell is the presumptive Senate majority leader for when Republicans take control of Congress in January.