Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on April 18, 2016
The Real Test Of The Petro Dollar System
Currently the US Dollar, traded on the stock market as (UUP), and (USDU); is the world’s reserve currency. Although there is talk of the fall of the US Dollar as the world reserve currency, it’s all talk and there’s no signs that this will happen any time soon. Hungary recently issued sovereign bonds in Yuan – but so what? It’s just a drop in the bucket. The practical fact is there is no real threat to the US Dollar’s status as a reserve currency. However, there may be one. When Richard Nixon essentially created the modern Forex system by defaulting on the previous Breton Woods agreement, he cleverly supported the US Dollar with the one commodity the world needs most: Oil. By making an agreement with Saudi Arabia and then other Oil producing nations, it created natural support of the US Dollar. Nixon told them the following: Sell Oil in US Dollars, and we’ll provide you with military technology, security, and other benefits. We’ll do business, you’ll invest in our markets, and recycle those dollars you get from our partners. It all works like a well oiled machine (pun intended) for 40+ years. There’s only one thing that could disrupt it – Saudi Arabia chooses to end it. And they’ve threatened to do so, if the US releases classified documents about 911 which implicate Saudi Arabia.
How it could impact the markets
Under the Petro Dollar agreement, Saudis’ re-invest their US Dollars in US markets, most notably, the treasury market – but also US Stocks. ETFs for US Treasuries include (GOVT) and (SCHO). Large selling of US Treasuries, the US Dollar, and US stocks, could cause the market to go down. Some worry that it could cause others to panic sell because of momentum. These fears are unfounded. It can cause temporary volatility, but nothing systemic. As the Fed says in a 19 page letter, if something is going to cause the US financial system to melt down, it’s likely going to be JP Morgan (JPM).
About 911
911 was the event of our lifetime, that changed Wall St., and changed America. Although the 911 Commission ‘investigated’ the event, many questions remain unanswered. Families of victims want those questions answered, and have taken measures into their own hands. They want more information made public, such as 28 pages that have been classified. A lawsuit filed in New York by the victims families, headed by attorneys Jim Kreindler and Sean Carter:
A federal lawsuit moving forward in Manhattan could open the floodgates to tightly held government secrets about foreign connections to the 9/11 attacks.While the Obama administration refuses to make public the censored 28 pages of the congressional intelligence report implicating the Saudi government in the terror strike –defying bipartisan requests from lawmakers – the two investigators who authored the long-secret section will more than likely be called to testify in the lawsuit brought against the kingdom of Saudi Arabia.
Former FBI investigator Michael Jacobson and former Justice Department attorney Dana Lesemann ran down FBI leads tying Saudi officials to some of the Saudi hijackers and documented their findings in the report.Jacobson and Lesemann went on to work for the independent 9/11 Commission, where they uncovered more evidence and connected new dots to the Saudi Embassy in Washington and the Saudi Consulate in Los Angeles.During a July 30 court hearing, lawyers for 9/11 victims’ families and insurers revealed that the staffers’ most serious allegations against the Saudis were stricken from the final draft of the 9/11 Commission report as well.“They were removed at the 11th hour by the senior staff,” plaintiffs’ attorney Sean Carter of Cozen O’Connor said, explaining that the decision was a “political matter.”
These removed 28 pages can have huge implications not only for the lawsuit, but for the markets in general. Saudi Arabia has said that they will sell up to $750B in treasuries, should Congress pass a bill allowing the lawsuit against the Kingdom to take place, as reported here on SA:
Saudi Arabia has told the Obama administration that it willsell up to $750B in treasuries and other American assets if Congress passes a bill that would allow the Kingdom to be held responsible in U.S. courts for any role in 9/11.
What’s inside these 28 pages is likely only the tip of the iceberg. Many information has come to light since the 911 commission which leaves more and more questions unanswered. One such information is the large amounts of Tritium found at Ground Zero.
Senator Bob Graham believes that 911 could only have been carried out with sophisticated logistic support from within the United States,as reported in his recent 60 minutes interview:
Bob Graham: I think it is implausible to believe that 19 people, most of whom didn’t speak English, most of whom had never been in the United States before, many of whom didn’t have a high school education– could’ve carried out such a complicated task without some support from within the United States.
Petro Dollar system
The US Dollar enjoys global supremacy for a number of reasons, one of them being the Oil for US Dollars Petro Dollar system. Oil producing nations have agreed to sell Oil in US Dollars thus providing a natural demand for US Dollars. This is explained in detail in Splitting Pennies:
The American Forex system is a global financial Monopoly. The best example is the “Petro Dollar” trade. By pricing and selling crude oil in US Dollars, it guarantees a constant supply of buy orders for USD. This is a triple slam dunk for the global USD financial Monopoly:
Oil producing nations who want to participate in the Petro Dollar system buy USD naturally and invest much of those USD in US markets, US Treasuries, and other US denominated instruments. There could be no greater mechanism to support a currency, if one was to be constructed. …
Remember that these are intra-country business deals, that take generations to come to fruition. Sons and Grandsons who inherit these relationships, aren’t fully aware of the importance of them or the mechanics of their global operations. For example, when this de facto Forex system was created by Nixon in 1971, there was no electronic trading. This was a different market. What would happen in today’s environment, if the Kingdom of Saudi Arabia decided to in one moment sell all of its US Treasury holdings?
Analysts agree however, this strategy isn’t feasible, as the Kingdom has internal financial problems. Cutting off it’s biggest economic and political ally in the West would be a disaster for them. On the other hand, you never know what ‘event’ may trigger drastic moves.
But although Saudi Arabia is a significant market player, it is dwarfed by its competition. There are other places in the world that have oil (anyway – most of the Oil from SA is not the Oil we need). Saudi Arabia’s significance declines over time as their Oil fields are depleted and the rest of the world develops alternative energies. In fact, it is pressure from US Oil companies that keeps many alternative energies on the shelf. There are literally hundreds of alternatives that in 1 year could replace Oil, but are not politically feasible. The most powerful of these alternatives at the moment is Thorium Nuclear Reactors, a more potent and safe alternative to current Uranium reactors. They don’t melt down, Thorium is abundant in nature, and they can even consume Nuclear waste! Why this technology isn’t being used? Because Chevron (CVX) and Exxon (XOM) are making too much money. And they pay taxes (interestingly, Oil companies famously avoid offshore tax havens and pay the maximum possible tax to Uncle Sam). Suffice to say – energy is big business, and big business for Washington. So if you’re worried about a Saudi fire sale and how it will impact the markets – don’t. With electronic markets, there is a concern that any big orders can cause a market panic, but it would likely be very temporary. As far as the fundamental concern that Saudis’ selling debt or stocks could cause a market crash, it’s not possible.
Stock Investors
The Saudis’ invest big in US stocks. The most notable investment was from Prince Alwaleed Bin Talal’s Citigroup investment:
In the early 1990s it was almost unthinkable that a Saudi Arabian, and a Royal at that, would burst onto the global banking investment scene from seemingly nowhere – but in 1991 that is exactly what happened. Effecting a significant coup that would catapult him into the global spotlight, HRH invested heavily in Citibank (subsequently Citigroup) stocks in a bold move that surprised many. That surprise rapidly turned into admiration as the Prince’s guidance helped restore the banking giant to full health, returning it to its place as the world’s leading financial institution. Prince Alwaleed’s investment in Citigroup has since delivered an extraordinary level of return, and represents the largest proportion of HRH’s personal wealth.
The Saudis’ have unknown investments in USA but they are substantial. The central bank doesn’t disclose it’s holdings, billionaire princes and other ‘charities’ controlled by the Kingdom may only disclose their holdings when it is suitable for them, politically.
It was noticed in January of this year that the Saudis started unloading US Treasuries by Bloomberg:
SAMA’s own figures show reserve assets held in foreign securities have fallen by a record $108 billion in 2015. The Saudi central bank, which doesn’t disclose separate figures for Treasuries, owned $423 billion in overseas securities as of November. “I come down on the side of thinking there should be more transparency,” said Jeff Caughron, chief operating officer at Baker Group, which advises community banks with more than $45 billion in investments. But at the same time, “the Treasury is constrained by political sensitivities and that comes into conflict with market participants that crave more transparency. It’s an understandable conflict.”
So although we do not know the extent to which they are invested in US markets, we know that it’s substantial, and we know they have an incentive for doing so.
If there’s any take-away from this scenario, it might be a time to go long US based energy companies with an established track record of dealing with the US government, such as Chevron and Exxon . Or maybe that’s part of the reason they’ve been seeing a rally recently, as pointed out by an SA author:
The latest rally in the energy firms is very curious. A stock like Chevron (NYSE:CVX) now trades at the highs going back for nearly a year while oil is only creeping above year-end lows.
Alternative energy stocks, which still haven’t proven themselves in this tricky political environment, should be individually researched carefully. Here’s a few:
- Pattern Energy (PEGI)
- Green Plains Partners, LP (GPP)
- Enviva Partners, LP (EVA)
- Terraform Global (NASD: GLBL)
If you’re concerned about how the release of classified 911 information will impact the markets – consider going long energy. Don’t worry about the selling of US debt. If there really was a fire sale of US Treasuries, the Fed can easily print money and buy them. As the Fed has unlimited supply of US Dollars, there’s no chance in this universe or multi-verse that the US can default on its debt obligations.
Maybe it’s time the “Petro Dollar” system be replaced with “Nuclear Dollar” system. It’s outdated, things have changed. Since 1971, the population of the Planet Earth has more than doubled. Advances in technology are immense. Maybe it’s about time we started using them.
We talk about this in our book “Splitting Pennies – Understanding Forex”
21 Comments on "The Real Test Of The Petro Dollar System"
onlooker on Mon, 18th Apr 2016 1:19 pm
I do not see the world wide economy staying cohesive and functioning long enough to build out these Thorium Reactors. As for the Petro Dollar system it is embedded within the US economic system and when the US economy implodes so will the Petrodollar system.
Anonymous on Mon, 18th Apr 2016 2:40 pm
What a nothing article. Contains no useful information or insight, of any kind.
Onlooker, its the other way around. The petrodollar system supports the uS empire, not the other way around. The uS economy IS imploding now, the petrodollar system is one of the props holding it up. The uS economy can continue to deteriorate, but as long as the world is forced to trade, buy and sell oil in USD, then the center can hold(mostly).
But come at it from the other direction. The world is no longer forced to trade in oil in USD in London and Jew York-the uS economy and its global empire will collapse, and rapidly.
dave thompson on Mon, 18th Apr 2016 2:58 pm
“There are literally hundreds of alternatives that in 1 year could replace Oil, but are not politically feasible.” Total BS because there is NO known replacement for oil, ZERO. Otherwise a good article.
joe on Mon, 18th Apr 2016 4:31 pm
No no no, Obviously it was the shepherds and poppy growers of Aghanistan that made it so that 9-11 could happen. Fat Arabs and European jihadis who get NATO guns and money would never bite the hands that feed them, right?
makati1 on Mon, 18th Apr 2016 7:20 pm
All above are great comments. Nothing to add.
onlooker on Mon, 18th Apr 2016 7:33 pm
Thanks Anonymous agreed it is the other way around. But doesn’t a weak and getting weaker US economy make the fall of the Petro dollar that much more likely?
Anonymous on Mon, 18th Apr 2016 9:34 pm
No, because the petro-dollar themselves are created out of thin air. The artificial demand for uS petro-dollars, is created by the petrodollar system itself. This circular demand for dollars is what(helps)keeps the uS economy from collapsing. Constant re-cycling of those dollars into uS t-bills, bonds and so on, allows the uS regime to keep its(mostly) war based economy going. True, the ‘domestic’ economy can experience problems, but the petrodollar system is *not* the domestic economy.
On it own a weak economy in the uS is not really sufficient to collapse the system. To give but a few examples, the dot.com bubble, sub-prime crisis, the recessions in the 80s-90s, all were bad. But none of them even came close to collapsing the PD scam. Petrodollars continued to keep the uS economy lubricated through all of those. Its a very resilient system-but not 100% of course. The only thing ‘big’ enough for that, is for the (majority) of the world to stop accepting USD for oil, traded in Jew York and London.
makati1 on Mon, 18th Apr 2016 9:53 pm
Anonymous, but we have also reached the point of “Peak Debt”. Basing the future on what happened in the past is not a good idea, I think.
Anonymous on Mon, 18th Apr 2016 10:07 pm
Quite possibly, but who exactly is all that uS debt owned ‘to’? As it happens, a great deal of it is owed to itself. The uS owes itself fiat debt created out of of nothing. To be paid back, in theory anyhow, by equally vigorous dollars. What would happen if the uS actually wrote off that debt? It would probably be a lot less worse than people think. Well, some, ok a LOT of jews would be upset, but thats about it. If anything, a debt jubilee in the uS would make the petro-dollar stronger, since a lot of debt overhang attached to it would simply disappear. This would convince everyone concerned that the uS dolla was still worth something.
The system CAN be collapsed, but certain conditions need to be in place before that can occur.
Anonymous on Mon, 18th Apr 2016 10:08 pm
bah, vaporous dollars-not vigour…sigh
Davy on Tue, 19th Apr 2016 6:29 am
All currencies today are created in a similar fashion currently and vary by country size and economic policy. PO board agendist want you to think “out of thin air or printing presses”. If you dig a little deeper it is a systematic thAng but that would not be good tabloid by the anti-everything agendist. Google it or just use common sense. If you want to appeal to the sheeple anti-mericants then embellish and be creative with your wording. They love it.
Demand for the petro-dollar is complex and is related to the dollar reserve status. Most commodities are priced in dollars. This keeps the global economy from collapsing because there are no alternatives. There has been efforts to change the weight of the dollar in the system. These have been smart efforts but at a very small scale. They have specific applications. Sometimes as with Iran they make sense when they were sanctioned. Sometimes they make sense to trade with China who’s trade volumes are so large and can justify some cross-border trade. China was/is promoting its Yuan this way and it is more of trade policy than a financial policy with global reach. One needs only to reflect on the last year with China and we understand the Yuan has a long way to go to eclipses the dollar. Likely never because China is in bad economic shape the same as everyone else. The global system is not in the position to make huge changes especially now when the whole system is buckling under global debt issues.
At the moment and in the near future it just does not make sense to use other currencies at the level of the dollar. People who trade in volumes could give a shit about our board anti-mericant positions. These traders do what works because big volumes with tight margins make small differences matter. They want to maximize profits not make statements. The petrodollar is a domestic and global thAng. They cannot be separated. The whole dollar death thAng of the past two years is dead. The end of the dollar will likely be the end of the global trading system. The question is which will cause the other to die first.
Interesting article as further reading:
http://www.zerohedge.com/news/2016-04-17/hungary-issues-sovereign-bonds-denominated-yuan-another-nail-us-reserve-currency-sta
GregT on Tue, 19th Apr 2016 10:53 am
The USD was chosen as the world’s reserve currency at the end of WW2 in Bretton Woods for a few main reasons;
1) The United States had the world’s leading industrial base because it had not been destroyed by war.
2) The US had large gold reserves, and having the USD pegged to gold created stability in global trade.
3) The US was the world’s leading producer of oil.
By the late 60s two of these criteria were no longer being met, creating huge trade deficits, which caused Nixon to slam shut the gold window on August the 15th, 1971.
Since then the Empire has maintained global hegemony mainly through currency manipulation (monetary inflation), financial terrorism, and War. This has come as a great benefit to
the Empire, while causing immense hardship and suffering to billions of people throughout the world. These hardships are now coming home to roost. The international banking cartel
behind this scheme knows no allegiance to any nation, or to any people. They have the world, including the US, by the balls.
geopressure on Tue, 19th Apr 2016 11:04 am
It appears that Obama is flying to Riyadh because Saudi Arabia is about to switch to Yuan-Only & end the petrodollar altogether… This explains why the FED had two emergency meeting last week… It explains why China just pegged their Yuan to the price of Gold (no longer fiat)… It explains why Obama is flying over there… it explains why all this Saudi-911 Bullshit has sprung up from nowhere in the last week or two to threaten the Saudis with… It explains why the ‘favorite’ Prince has just taken over in place of the Oil Minister… It explains why the Saudis are threatening to dump US Treasuries…
To be clear, It looks like one of the following things is happening::
(1) the Petrodollar is about to end & Obama will loose the power to manipulate oil prices via increasing (or decreasing) the value of the dollar… OR
(2) the Saudis want the US to think that they are about to end the petrodollar so that the US won’t raise interest rates after the April 27th FED Meeting – which they were definitely planning to do…
If I had to pick, I would wager that #1 of the above is taking place… It would be unwise to make a drastic move like Peg the Yuan to gold if the entire plan was not going to be executed…
geopressure on Tue, 19th Apr 2016 11:18 am
I would say that there is a 50% chance that the Petrodollar will be a thing of the past by the end of next week, probably by the end of this week…
Let’s see, I have to figure out the best options to buy to profit from this eventuality…
There’s a way to make 25x your money off something like this, I just have to figure out which options are the right options…
$50K in your pocket if correct, -$2K if you are wrong…
Davy on Tue, 19th Apr 2016 1:07 pm
Yawn, we have heard such nonsense in the past and it came to naught. You are going off the deep end Geo.
geopressure on Tue, 19th Apr 2016 4:52 pm
Nope, Davy, you have NEVER seen such strong indications that the Petrodollar was going to be dropped…
You have seen the creation of the petroyuan, but that is NOTHING like the ending of the petrodollar…
This is as BIG AS IT GETS for a forum such as this..
I don’t think Obama is going to be able to beg his way out of it tomorrow… At best Obama walks away with Saudi Arabia agreeing to increase production…
peakyeast on Tue, 19th Apr 2016 5:37 pm
@Geopressure: The chinese has been buying up vast amounts of gold the past year (or more?).
for example:
http://money.cnn.com/2016/02/10/investing/china-gold/
I am no genious at finances, but it does seem like a good and reasonable plan to peg ones currency to something that one to some extent can control and owns a great deal of.
peakyeast on Tue, 19th Apr 2016 5:43 pm
The obvious would be that the dollar will have a “correction” against both euro and yuan. – So its probably wrong 🙂
geopressure on Tue, 19th Apr 2016 6:56 pm
I’m not sure I understand your comment, Peakyeast, China fixed the Yuan to Gold last night. Yes, they own a lot of gold, but this is just happening… Well, the FED & Obama started reacting to it about 7-10 days ago…
—
Oh, yes, it makes a LOT of sense…
It makes even more sense for Saudi who want to trade in a currency that (1) means something & (2) can’t be manipulated to destroy your country’s lifeline…
Switching to Yuan-Only would achieve both things…
There are too many indications that this is what is about to happen, though our media will hide it, no doubt…
Apneaman on Tue, 19th Apr 2016 7:05 pm
geo, we are all well aware of your lack of understanding. Don’t sweat it. peakoil.com is an equal opportunity community. No one gets refused for having an over-active imagination and wearing tinfoil. Let me know if you want to go back on the meds, I’m certain I can easily convince the rest of the fellas to pass the hat. We care we do.
geopressure on Tue, 19th Apr 2016 9:33 pm
I appreciate your concern…