What Does the End of the Petrodollar Mean?

Mar 13, 2023 | Finconomics 101, No Bull Economics

Petrodollar Post Banner

On January 17, 2023, the Saudi minister of finance announced that the Kingdom was ending the petrodollar. “There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal”. Yikes!

Background

In 1971, the U.S. ended its policy of maintaining a set global U.S. dollar price for gold in line with the Bretton Woods system established in 1944. This was driven by an increase in deficit spending which lowered the value of the U.S. dollar in relation to gold, causing a crisis of confidence in the greenback. This situation was aggravated by the 1973 oil shock which further fueled inflationary pressures.

Resultantly, in 1974 President Nixon reached an agreement in which the U.S. committed to buy oil & provide military support to Saudi Arabia in exchange for their commitment to using their dollars to help finance U.S. deficits by purchasing Treasuries. Further, Saudi Arabia would require oil buyers from other nations to settle in U.S. dollars, further strengthening the greenback. Other OPEC producers followed Saudi’s lead.

This practice of “petrodollar recycling” helped mitigate U.S. inflation and interest rates as excessive U.S. dollar printing to fund domestic deficit spending was absorbed directly into U.S. treasuries held by oil-rich OPEC nations.  

Implications

Our country’s very poor fiscal management is currently driving less international support for the U.S. dollar. This is vividly portrayed by Saudi Arabia’s recent decision to end its long-standing requirement for all trading partners to settle oil export sales in the U.S. dollar. This development helps explains the Fed’s current mandate to hike interest rates as it seeks to defend against declining confidence in the U.S. dollar. Better to cut government spending as discussed in this post.

Saudi Arabia Imports Graph

Source

Signup
NoBullEconomics
Restaurant Research

Email Sign-up

15 Second Posts

What is Fixed-Income Issuance Dominated by?

Total U.S. fixed income (FI) issuance declined -34% y/y to $8.8 trillion during 2022 as interest rates ramped up.

Bank Deposits Growing Much Faster than Business Loan Demand

Banks have been parking excess deposits in various forms of government debt that are subject to interest rate risk & in risky crypto bets. This is causing systematic risk.

Nerdwallet Survey Shows an Indebted & Very Stressed Consumer

Consumers are combating the higher price of living & higher interest rates by driving less, buying store brands & taking on more debt.

The United States of America is Worth Saving

Americans need to be reminded about our heritage as the single most productive nation as measured by GDP/person with a unique capability to bless the entire world if we can simply get back to business.

Should Private Banks Go Extinct?

Since the 2008 Great Recession, 134 banks with assets of $1.25 Trillion have been closed by regulators. At the same time, the Fed’s ballooning balance sheet now amounts to nearly 50% of total domestic bank deposits.

What Happened to Silicon Valley Bank?

Don’t assume that SVB’s difficulties are symbolic of the entire banking industry.

Senator Kennedy Schools Country on Economics 101

We have a choice of how to tame inflation, cut government spending, or throw people out of work.

Inflation is Marginalizing Purchasing Power from the Lower-Income Demo

As households with annual incomes >$70k drive 62% of total food-away-from-home sales, it is more important than ever to focus on this demo especially as spending from the lower-income demo slows.

A Look at Consumer Expenditures by Category

You can learn a lot about someone by how they spend their money…

Forever Wars Are Expensive!

Ukraine aid payments of $77B through 1/15/23 represent the equivalent of a 5% dividend on LTM S&P 500 earnings.

Digital Marketing Opportunities
Restaurant Research

A Restaurant Research LLC Company