http://theeconomiccollapseblog.com
http://albertpeia.com/beginningofendforpetrodollar.htm
‘The largest oil exporter in the Middle East
has teamed up with the second largest consumer of oil in the world (China) to
build a gigantic new oil refinery and the mainstream media in the United States
has barely even noticed it. This mammoth new refinery is scheduled to be
fully operational in the Red Sea port city of Yanbu by
2014. Over the past several years, China
has sought to aggressively expand trade with Saudi
Arabia, and China
now actually imports more oil from Saudi Arabia
than the United States
does. In February, China
imported 1.39 million barrels of oil per day
from Saudi Arabia.
That was 39 percent higher than last February. So why is this
important? Well, back in 1973 the United
States and Saudi Arabia
agreed that all oil sold by Saudi
Arabia would be denominated in U.S.
dollars. This petrodollar system was adopted by almost the entire world
and it has had great benefits for the U.S. economy. But if China becomes Saudi
Arabia's most important trading partner, then why should Saudi Arabia
continue to only sell oil in U.S. dollars? And if the petrodollar system
collapses, what is that going to mean for the U.S. economy?
Those are very important questions,
and they will be addressed later on in this article. First of all, let's
take a closer look at the agreement reached between Saudi
Arabia and China recently.
The following is how the deal was
described in a recent China Daily
article....
In
what Riyadh calls "the largest expansion by any oil company in the
world", Sinopec's deal on Saturday with Saudi oil giant Aramco will allow a major oil refinery to become
operational in the Red Sea port of Yanbu by 2014.
The
$8.5 billion joint venture, which covers an area of about 5.2 million square
meters, is already under construction. It will process 400,000 barrels of heavy
crude oil per day. Aramco will hold a 62.5 percent
stake in the plant while Sinopec will own the remaining 37.5 percent.
At a time when the U.S. is
actually losing refining capacity, this is a stunning development.
Yet the U.S. press has been largely silent
about this.
Very curious.
But China
is not just doing deals with Saudi
Arabia. China has also been striking deals
with several other important oil producing nations. The following comes from
a recent article by Gregg Laskoski....
China's
investment in oil infrastructure and refining capacity is unparalleled. And
more importantly, it executes a consistent strategy of developing world-class
refining facilities in partnership with OPEC suppliers. Such relationships mean
economic leverage that could soon subordinate U.S. relations with the same
countries.
Egypt
is building its largest refinery ever with investment from China.
Shortly
after the partnership with Egypt
was announced, China signed
a $23 billion agreement with Nigeria
to construct three gasoline refineries and a fuel complex in Nigeria.
Essentially, China is running circles around the United States
when it comes to locking up strategic oil supplies worldwide.
And all of these developments could
have tremendous implications for the future of the petrodollar system.
If you are not familiar with the
petrodollar system, it really is not that complicated. Basically, almost
all of the oil in the world is traded in U.S. dollars. The origin of
the petrodollar system was detailed in a recent article by Jerry Robinson....
In
1973,
a deal was struck between Saudi Arabia
and the United States
in which every barrel of oil purchased from the Saudis would be denominated in
U.S. dollars. Under this new arrangement, any country that sought to purchase
oil from Saudi Arabia
would be required to first exchange their own national currency for U.S.
dollars. In exchange for Saudi Arabia's
willingness to denominate their oil sales exclusively in U.S. dollars, the United States offered weapons and protection of
their oil fields from neighboring nations, including Israel.
By
1975,
all of the OPEC nations had agreed to price their own oil supplies exclusively
in U.S. dollars in exchange for weapons and military protection.
This
petrodollar system, or more simply known as an "oil for dollars"
system, created an immediate artificial demand for U.S. dollars around the
globe. And of course, as global oil demand increased, so did the demand for
U.S. dollars.
Once you understand the petrodollar
system, it becomes much easier to understand why our politicians treat Saudi
leaders with kid gloves. The U.S. government does not want to
see anything happen that would jeopardize the status quo.
A recent article by Marin Katusa described
some more of the benefits that the petrodollar system has had for the U.S.
economy....
The
"petrodollar" system was a brilliant political and economic move. It
forced the world's oil money to flow through the US
Federal Reserve, creating ever-growing international demand for both US dollars
and US debt, while
essentially letting the US
pretty much own the world's oil for free, since oil's value is denominated in a
currency that America
controls and prints. The petrodollar system spread beyond oil: the majority of
international trade is done in US dollars. That means that from Russia to China,
Brazil to South Korea,
every country aims to maximize the US-dollar surplus garnered from its export
trade to buy oil.
The
US
has reaped many rewards. As oil usage increased in the 1980s, demand for the US
dollar rose with it, lifting the US economy to new heights. But even
without economic success at home the US dollar would have soared, because the
petrodollar system created consistent international demand for US dollars,
which in turn gained in value. A strong US dollar allowed Americans to buy
imported goods at a massive discount – the petrodollar system essentially
creating a subsidy for US consumers at the expense of the rest of the world.
Here, finally, the US hit on a downside: The availability of cheap imports hit
the US manufacturing industry hard, and the disappearance of manufacturing jobs
remains one of the biggest challenges in resurrecting the US economy today.
So what happens if the petrodollar
system collapses?
Well, for one thing the value of the
U.S. dollar would plummet big time.
U.S. consumers would suddenly find that all of those "cheap imported
goods" would rise in price dramatically as would the price of gasoline.
If you think the price of gas is high
now, you just wait until the petrodollar system collapses.
In addition, there would be much less
of a demand for U.S. government debt since countries would not
have so many excess U.S. dollars lying around.
So needless to say, the U.S. government
really needs the petrodollar system to continue.
But in the end, it is Saudi Arabia that
is holding the cards.
If Saudi
Arabia chooses to sell oil in a currency other than the
U.S. dollar, most of the rest of the oil producing countries in the Middle East would surely do the same rather quickly.
And we have already seen countries in
other parts of the world start to move away from using the U.S. dollar in
global trade.
For example, Russia and China have agreed to now use their
own national currencies when trading with each other rather than the U.S. dollar.
That got virtually no attention in
the U.S.
media, but it really was a big deal when it was announced.
A recent article by Graham Summers summarized some of the other
moves away from the U.S. dollar in international trade that we have seen
recently....
Indeed,
officials from China, India, Brazil,
Russia, and South Africa (the latest addition to the BRIC
acronym, now to be called BRICS) recently met in southern China to
discuss expanding the use of their own currencies in foreign trade (yet another
move away from the US Dollar).
To
recap:
China and Russia have
removed the US Dollar from their trade
China is rushing its trade agreement with Brazil
China, Russia, Brazil, India, and now South Africa
are moving to trade more in their own currencies (not the US Dollar)
Saudi Arabia is moving to formalize trade with
China and Russia
Singapore is
moving to trade yuan
The
trend here is obvious. The US Dollar’s reign as the world’s reserve currency is
ending. The process will take time to unfold. But the Dollar will be finished
as reserve currency within the next five years.
Yes, the days of the U.S. dollar
being the primary reserve currency of the world are definitely numbered.
It will not happen overnight, but as
the U.S.
economy continues to get weaker it is inevitable
that the rest of the world will continue to question why the U.S. dollar should
automatically have such a dominant position in international trade.
Over the next few years, keep a close
eye on Saudi Arabia.
When Saudi Arabia announces a move
away from the petrodollar system, that will be a major trigger event for the
global financial system and it will be a really, really bad sign for the U.S.
economy.
The level of prosperity that we are
enjoying today would not be possible without the petrodollar system. Once
the petrodollar system collapses, a lot of our underlying economic vulnerabilities
will be exposed and it will not be pretty.
Tough times are on the horizon.
It is imperative that we all get informed and that we all get prepared.’
