It’s true that “he who has the money makes the rules”.
After World War II, the United States had the world’s largest gold reserves. By winning the war, the United States was able to rebuild the world monetary system around the dollar.
Created at the Bretton Woods Conference in 1944, the new system tied the currencies of nearly every country in the world to the US dollar at a fixed exchange rate. It also tied the US dollar to gold at a fixed rate of $35 per ounce.
The dollar was said to be “as good as gold”.
The Bretton Woods system has made the US dollar the world’s premier reserve currency. It forced other countries to either store dollars for international trade or exchange dollars with the US government at a promised price.
But it was doomed to failure.
Runaway spending on war and welfare has caused the U.S. government to print more dollars than it can give back in gold at the promised price.
By 1967, the number of dollars in circulation had increased significantly compared to the amount of gold backing them. This forced foreign countries to exchange dollars for gold, depleted the US gold supply at an alarming rate, and collapsed London’s gold pools. At this point, it was clear that the system was broken.
On Sunday night, August 15, 1971, President Nixon interrupted a scheduled television program to make a surprise announcement to the nation and the world. He announced the unilateral end of the Bretton Woods system, severing the last link between the dollar and gold.
The end of the dollar’s gold support has had serious geopolitical implications.
Most importantly, it has eliminated the main reason foreign countries store large amounts of US dollars and use US dollars for international trade. As a result, oil-producing countries began demanding payment in gold rather than a sharp depreciation of the dollar.
It was clear that the United States had to create a new monetary system to stabilize the dollar. So he devised a new plan and chose Saudi Arabia as his accomplice. This agreement became known as the “petrodollar system”.
The United States has handpicked Saudi Arabia because of its vast oil reserves and dominant position in the global oil market.
Essentially, the petrodollar system was an agreement that the United States would ensure the survival of the House of Saud. In exchange, Saudi Arabia will do her three things.
First, it will use its dominant position in OPEC to ensure that all oil trading is done exclusively in US dollars.
Second, it recycles hundreds of billions of dollars from annual oil revenues into US Treasuries. This will allow the US to issue more debt to finance a previously unimaginable budget deficit.
Third, it will ensure oil prices within acceptable ranges for the United States and prevent further oil embargoes.
The petrodollar system gave other countries another compelling reason to hold and use dollars. It also maintained the dollar’s unique position as the world’s best reserve currency.
But… why oil?
Oil is the world’s largest and most strategic commodity market.
As you can see in the chart below, it is smaller than all other major commodity markets combined. For example, the annual production value of the oil market is ten times that of the gold market.
Every country needs oil. And if a foreign country needs US dollars to buy oil, there are compelling reasons to hold onto US dollars, even if they are not backed by a promise to redeem them in gold.
Think about it…if France wants to buy oil from Saudi Arabia, it must first buy US dollars on the foreign exchange market to pay for the oil.
This creates a huge artificial market for the US dollar, distinguishing it from pure local currencies like the Mexican peso.
The dollar is just an intermediary. It is used in countless transactions worth trillions of dollars that have nothing to do with US products and services.
The oil market is so huge that it acts as a benchmark for international trade. If a foreign country already uses dollars for oil, it’s easier to use dollars for other international trade.
The US dollar is used for nearly 80% of all international trade, in addition to nearly all oil sales.
Ultimately, the petrodollar boosts the purchasing power of the US dollar by encouraging foreigners to absorb the dollar.
The petrodollar system helped make the dollar and US Treasury markets deeper and more liquid. It also helped the United States keep interest rates lower than it would otherwise be, allowing the U.S. government to finance a huge deficit it otherwise could not.
Otherwise, a deficit of trillions is not possible without the destruction of the currency by printing money.
It cannot be overemphasized how much the petrodollar system will benefit the United States. It is the cornerstone of the US financial system and has underpinned the dollar’s role as the world’s reserve currency since the 1970s.
That’s why the US government protects it very tightly. You need a system to survive.
The world leaders who challenged the petrodollar are dead.
For example, Saddam Hussein and Muammar Gaddafi. Each led the oil-producing countries of Iraq and Libya. And both tried to sell their oil in something other than US dollars before U.S. military intervention led to their deaths.
Of course, there were other reasons why the US overthrew Saddam and Gaddafi. But protecting the petrodollar had to at least be taken seriously.
When countries like Iraq and Libya challenge the petrodollar system, it’s one thing.
But when China (and Russia) undermines the petrodollar system, it’s an entirely different dynamic…which is happening in a big way right now.
China and Russia are the only countries with sophisticated nuclear arsenals to match the United States to the top of the military escalation ladder.
In other words, the US military cannot attack Russia and China with impunity.
This has discouraged the US from entering into direct military conflict with China and Russia, even as it seeks to deal a fatal blow to the petrodollar system.
US Sanctions Accelerate Petrodollar Collapse
Following Russia’s invasion of Ukraine, the US government launched its most aggressive sanctions campaign to date.
Russia is now the most sanctioned country in the world, surpassing Iran and North Korea.
“This is a financial nuclear war and the biggest sanctions event in history,” said a former U.S. Treasury official.
“In less than two weeks, Russia has gone from being part of the global economy to becoming the single biggest target of global sanctions and a financial pariah,” he said.
As part of this, the US government seized the Central Bank of Russia’s US dollar reserves, the country’s cumulative savings. (After the Taliban took Kabul, Washington did the same with Afghanistan’s dollar reserves.)
It was an excellent illustration of the dollar’s political risk. The US government can seize the dollar reserves of other sovereign countries by flipping a switch.
wall street journalin an article titled “World is shocked if Russia’s currency reserves are not really money,” said:
“Sanctions show that foreign exchange reserves accumulated by central banks can be taken away. There is a possibility.”
The speaker of the Russian parliament recently called the US dollar a “candy wrapper,” but it’s not the candy itself.
It’s important to remember a few simple facts.
#1: Russia is the world’s largest energy producer.
#2: China is the world’s largest energy importer.
#3: Russia is China’s largest oil supplier.
And now that America has banned Russia from the dollar system, there is an urgent need for a reliable system capable of handling hundreds of billions of dollars worth of oil sales outside the dollar and financial system.
The Shanghai International Energy Exchange (INE) is that system. China’s maturity as an alternative to the petrodollar is a big reason why the vast amount of energy trade between Russia and China is being done in the yuan instead of the US dollar.
Moreover, Washington has for years threatened to impose sanctions on China as well.
These threats to China may be a bluff, but if Washington carried it out — as it recently did against Russia — it would be like dropping a financial nuclear bomb on Beijing. Without access, China would have struggled to import oil and trade internationally. As a result, China’s economy has come to a significant halt, posing an intolerable threat to the stability of the Chinese government.
China would rather not rely on such an enemy. This is one of the main reasons we created an alternative to the petrodollar system. INE allows oil producers to sell their products in renminbi (and indirectly gold) while bypassing the US dollar, sanctions and the financial system.
Other countries on Washington’s sanctions list have eagerly signed up.
According to Credit Suisse, Russia, Iran and Venezuela own 40% of OPEC+ members’ proven oil reserves. These countries are under strict US sanctions, making it difficult to accept and trade US dollars globally. Therefore, it is not surprising that these licensed oil producers are willing to accept RMB as payment and support the oil yuan system.
But licensed oil producers aren’t the only ones to benefit from petroyuan…
please think about it. Oil producing countries have two options.
Option #1 – Petro Dollar
The dire financial situation in the US has ensured that the dollar will lose significant purchasing power.
In addition, there are enormous political risks. Oil producers are subject to the whims of the U.S. government and can confiscate their money whenever they want, as they recently did to Russia.
Option #2 – Shanghai International Energy Exchange
Here, oil producers can participate in the world’s largest market and try to gain more market share.
You can also easily convert your earnings into physical gold and remit it back to your home country. It is an international currency with no political or counterparty risk.
From an oil producer’s point of view, the choice is simple.
Most people don’t realize it yet, but we are at the end of the petrodollar system and the beginning of a new monetary era.
Further financial turmoil could well be on the horizon.
Are you ready?
That’s why we’ve released an urgent PDF guide, Surviving and thriving during the most dangerous economic crisis in 100 years. Download this free report to discover the top three strategies you need to implement today to protect yourself and achieve success.
Click here to download now.
