The US dollar survived the collapse of Bretton Woods in the '70s because its use in crude oil transactions made it the king of reserve currencies, but can it survive a collapse of petro dollars? Can the world survive the catastrophic geopolitical consequences that would follow?
There is an overriding belief that the U.S. dollar can hold onto its status as the world's king reserve currency simply because of petro dollars. But in recent years, a serious threat to this system has developed-and the risk of the dollar being dethroned is very real.
The U.S. dollar has reigned supreme since the end of WWII, when the Bretton Woods system gave it is initial power. With Bretton Woods'collapse in 1971, oil became its new saviour and kingmaker as the U.S. dollar became the prime currency for crude oil transactions.
In 1973, the U.S. made a pact with the Saudi King to conduct all crude oil trades in U.S. dollars-in return for U.S. protection of its oil fields. Because of the global hunger for crude, the demand for U.S. dollars experienced a similar, sustained hunger. Related: $380 Billion In Upstream Projects Delayed As Oil Keeps Tanking
The major producers of crude oil had an abundance of dollars, which was recycled back into the system to purchase dollar-denominated assets. The consumers pay for crude oil in dollars; hence, they always have to keep a steady reserve of dollars, thereby maintaining a high demand for the the currency.
This is now under threat, and history risks being repeated.
The Bretton Woods system failed due to the over valuation of the dollar as spending increased over the war in Vietnam war and America's Great Society programs.
The argument that the U.S. dollar is a flawed currency is gaining ground. According to commodity guru Jim Rogers, this is illustrated by a string of Quantitative Easings by the U.S. Fed, an ultra-low interest rate policy and ever-increasing U.S. debt. Demand for the U.S. dollar has remained high despite this because of the world's reliance on it to fund crude oil purchases. Related: ExxonMobil's Large Offshore Discovery Faces Political Risk
But this paints a false picture.
Over the past few years, countries such as China, Russia, Iran, and Brazile, Russia, India, and China, and South Africa (the BRICS nations) have begun to pose a challenge to the current system, forming pacts to transact oil in local currencies, bypassing the petro-dollar.
So are we witnessing the beginning of the end of the petro-dollar? Not quite yet.
The U.S. has dealt with all earlier challenges to its petro-dollar system with a strong hand.
A key reason for the wars in Iraq, Syria, and Libya, was in response to an attempt to find an alternative to the petro-dollar.
With China and Russia leading the most recent attack on the U.S. dollar throne, the battlefield is moving to a new and much broader front. Related: Forget $20 - Oil Prices At $8 Per Barrel In Canada
The U.S. and Russia are already engaged in proxy wars in the Gulf region, but any escalation or a direct altercation could sow the seeds of a dreaded WWIII.
The current strength of the U.S. dollar shouldn't be taken for granted. Although a viable alternative to the U.S. dollar has yet to be found, the petro-dollar is vulnerable in the long-term, and perhaps even in the medium-term.
It is a circular argument. At the same time that current conflicts could easily move into direct altercations of a preliminary Third-World-War nature, the collapse of the petro-dollar as various nations seek an alternative could have economic consquences that could be the end game for a major world war.
An increase in oil prices would stave off this pending danger, but for now, prices continue on their relentless downwards slide.
By Julianne Geiger for Oilprice.com
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Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group. More
Comments
The dollar in reality is not worthy more than just plain paper...however the power of the corrupt have been able to keep it's value floating using the petro route...
This country US with 18 trillion in debts, has only dwelled on one thing to survive, like a parasite...i.e., create unrest in the world and thrive on other's miseries.
Time is not too far for the same to happen in US of A.
Mr Prsdnt was deeply sorry about ppl (killed in recent shootings) .
Yes I'm with those going through such pain... what about those deliberate bombings done in many countries... Aren't they humans... Millions of ppl killed in Vietnam, Iraq, Syria...
The US of A has actually sabotaged and put back the world by several decades / centuries, playing ball to those money/power hungry cartel, by creating, funding trr grps, trojan NGOs in many countries (for destabilization) and many wars, trying to play the role like a leader...
Well.. nature has it's own course of doing things.. and when it starts... there's no end until it's set right.
http://www.neatorama.com/2008/12/22/9-most-brazen-ponzi-schemes-in-history/
The fact is that for most of the US history, it has run a deficit year by year until now we have a cumulative 8 trillion dollar debt with no intention of ever paying it off. The central bankers of the world need US dollar denominated treasuries to keep in their central banking system to prop up their own countries. As the US debt goes up and up, Each central bank must accumulate more Treasuries to maintain their share of that debt and to sustain the worth of their own currency. If they stop, then as the US Debt goes up their proportion of the debt in comparison goes down even if they keep the same amount of treasuries. The value then of their currency would be diminished.
Perhaps a self-reinforcing cycle might be a more proper term or a positive feedback loop.
Underlying it all is the US military's vast airforce, 11 aircraft carriers and substantial technological and military advantages, one of the greatest being our allies and trading partners. All of these "investors" in the American "ponzi" continue their behavior because it pays great dividends in the form of employment, mutual self defense, and a well fed populance. Its times like the financial crisis of 2008 when you see a vast collapse of the scheme. But even then, mechanisms were in place to recover such as the 800 billion bank bailout.
People buy a barrel of oil as shares. The oil doesn't get pumped out the ground in the knew Russian system.
Russia, Iraq, Iran, South America and the rest will pre sell barrels of oil as shares. If $29 billion dollars is invest in barrels, the government get's their money "without" pumping it out. The share holders make a big return fast, because the price is going to skyrocket with the outlook showing 65% less oil to run the world economy's in 2 weeks time.
At $30 a barrel $30 billion dollars would stop 1 billion barrels of OIL on the market.
They pre buy the oil and the second Russia, Iran, Iraq,South America and the rest don't pump out 12 million barrels a day for 1 week, is the second the economy goes nuts because in 2 weeks time, the economy will run dry. The outlook is going to show an economy that has no oil or missing a massive %. That is going to make oil like gold.
The oil country's that need that money to run there country, get it instantly without pumping out oil.
This system can turn oil into gold and 100% will.
Oil is about to sky rocket in price and could end up at $1,000 a barrel soon. Not even Saudi Arabia can save the west now.
Russia and the west enemy will boom and get rich, the west will suffer go broke and companies will leave the country's.
That is no longer true. You obviously weren't an investor in GM, Chrysler, Washington Mutual, Fannie Mae, Freddie Mac, and lots of other companies where the "agreed-upon" system was ignored at will and/or private property was seized by the US government without appropriate compensation to its owners.