While it’s unlikely that the petrodollar will be replaced or subverted in the near term, it is worth looking at the notion again, as its importance to the U.S. economy cannot be understated. In addition, this segues into the other important macroeconomic issue of the U.S. dollar remaining the world’s reserve currency.
In a draconian scenario, if either of these were replaced by another fiat currency or the like, some would argue it could spell utter catastrophe for the American economy. The stars have been aligning recently in favor of the BRICS nations and their current loathing of the West.
BRICS, which is an acronym for five of the world’s leading emerging economies: Brazil, Russia, India, China, and South Africa, has been receiving extra airtime as of late amid aggressive interest rate hikes by the Federal Reserve, which has put pressure on the currencies of other countries.
The United States now faces a growing wave of global de-dollarization as many of the largest and most populous countries on the planet are banding together to launch a U.S. dollar alternative to be used in global trade.
China’s Silk Road initiative has helped coordinate growth, and as such, BRIC nations are expected to contribute over 50% of global GDP by 2030. Why would they want to transact such business in U.S. dollars?
Petrodollars are not an actual currency but simply U.S. dollars that have been exchanged for crude oil exports.
The Petrodollar System is an economic system created in the 1970s in which most international transactions involving oil are denominated in U.S. dollars. The goal of this system was to increase demand for the U.S. dollar, thus allowing the United States to extend its political and economic influence through currency strength.
Perhaps an unintended consequence of the sanctions on Russia is the de-dollarization process that is now accelerating.
Put yourself in the shoes of Russia, China, and the BRICS, and you can see why the U.S. hegemony is in jeopardy. According to Vantage Point, as more countries look for ways to avoid relying on the U.S. dollar, there becomes an opportunity for other world currencies, gold, and even cryptocurrencies to take a larger share of global oil trade.
This would weaken the Petrodollar system as it stands today and could prove difficult for the U.S. economy to manage without the sizable benefits it currently gets from controlling most of the international oil market. The average American has no idea what a petrodollar is and is unlikely unaware of its significance economically. However, the average American understands inflation and how things cost more while getting less for each dollar.
Let’s take a look at the current international landscape.
China is pushing for its currency, the yuan, to be the primary competitor to the dollar in international trade. It has forged new partnerships with Russia and other countries that are willing to deal directly with the Chinese yuan.
What U.S. officials fear now is that Saudi Arabia could announce it will no longer price oil exclusively in dollars. Any abandonment of the petrodollar would formally signal the end of the dollar’s status as a world reserve currency. The consequences of such a development would be “catastrophic.”
That’s according to Monica Crowley, who served as assistant to the U.S. Treasury Secretary under President Donald Trump. Crowley says domestically, “Abandoning the dollar is going to mean raging inflation, so much worse than anything we have ever experienced.”
If one believes the doomsday scenario, it could be interpreted that America will likely fall off the financial cliff shortly.
That probably won’t be the case even in the most draconian situations.
In practice, the British pound accounted for 30% of global foreign exchange reserves as late as 1968, nearly a century after the U.S. supplanted the U.K. as the largest global economy. Economist Robert Triffin first noted the inherent conflict between global demand for a reserve currency and the ultimate erosion of confidence in the currency over time. The thing is, global economies ebb and flow.
The U.S. goes from a net importer of oil to a net exporter and is now back to an importer again. Thus, money flows from petrodollars one way to dollars and vice versa as the world commodity markets fluctuate. Even as our current accounts deficit rises imminent threat of de-dollarization is not likely.
The rise of petrodollar oil export earnings reflected and further entrenched the primacy of the U.S. dollar in global trade and investment. In addition, the global economy remains deeply dependent on the dollar as a reserve currency.
Let’s hope this is correct.