A Potential Petrodollar Shock with a Huge Impact on
Markets
By Victor
Sperandeo with the Curmudgeon
Introduction:
We explore a scenario where Saudi Arabia, acting alone or
with all of OPEC, could replace the U.S. dollar as the currency used to price
its oil, thereby causing a dollar crash that would have a shock effect on many
markets.
Biden, Oil Prices and Saudi Arabia:
On his first day of office, President Biden issued an
executive order canceling the Keystone XL pipeline making good on his
promise to the climate activists who helped get him elected, but inviting a
lawsuit brought by 21 states who say they will be hurt economically by Bidens
decision.
That along with other anti-fossil fuel policies to effectuate
the green new deal helped lift oil prices to + 50% this year. Biden
then asked the Saudis to increase oil production to drive prices down [1.]. The Saudis said no.
Note 1. Rising oil prices and
foreign policy blunders have sent Bidens approval ratings to the low-to-mid
40% level as per this graph:
On June 18th, the WSJ reported that the Biden administration instructed
the Pentagon to remove approximately eight Patriot anti-missile
batteries from countries including Iraq, Kuwait, Jordan and Saudi Arabia. The Terminal High Altitude Area Defense (THAAD)
anti-missile system was also withdrawn from Saudi Arabia and jet fighter
squadrons assigned to the region were also reduced. Those assets had been moved into Saudi Arabia
following a 2019 strike on their oil production facilities. While claimed by
Houthi forces in Yemen, U.S. officials assessed that Iran was behind that 2019
attack.
On September 11, 2021, the FBI released the first document
related to the 9/11 attacks after Biden ordered the declassification of more
records. Of consequence was a memo
detailing "significant logistic support" that two of the Saudi
hijackers received in the U.S.
After the U.S. defense support was reduced, the Saudis have
been looking for one or more partners to protect themselves and the kingdoms
oil reserves. For example:
1. On September 14th, Greece announced it would be sending U.S.-made Patriot anti-missile batteries
and soldiers to staff them to Saudi Arabia, to replace U.S. manned Patriots the
Biden administration withdrew in April.
In an opinion piece, Kenneth R. Timmerman of the NY Post wrote:
When Greece steps up
to fill the vacuum left by a U.S. pullout, it gives you a measure of just how
far the United States has retreated from the world stage over the past nine
months. This is not the Greece of Alexander the Great, but todays Greece.
Nearly bankrupt just a few years ago, Greece has now replaced the United States
as defender of the worlds largest oil producer. Ouch.
2. Saudi Arabia
has asked Israel about the possibility of procuring their missile
defense systems, because of the U.S. defense systems the Kingdom has for so
long relied upon have been removed. The
Saudis are considering either the Iron Dome, produced by Rafael, which
is better against short range rockets, or the Barak ER, produced by IAI,
which is designed to intercept cruise missiles. Israeli defense sources told Breaking Defense that such a deal would
be realistic, as long as both nations received approval of Washington. One source added that Saudi interest in the Israeli
(defense) systems has reached a very practical phase.
Victors Opinion:
If this tit for tat continues, one day soon well see Saudi
Arabia ending the Petro Dollar [2.] monopoly of the
U.S. They very well could persuade OPEC
to ditch the dollar or take unilateral action to do so.
Note 2. Petrodollars are U.S.
dollars paid to an oil-exporting country for the sale of crude oil. The
petrodollar system is an exchange of oil for U.S. dollars between countries
that buy oil and those that produce it.
Oil importing countries pay for that commodity in U.S. dollars, which
bolsters the greenback as the worlds reserve currency.
In my view, Saudi Arabia will look to a basket
of currencies plus Gold/Silver to set the price of oil, as no other
countrys fiat money today can be a reserve currency to replace the
dollar. To be a reserve currency, a
large and liquid debt market is required to invest in. You also need open and transparent capital
markets. Chinas Yuan is out of contention on that basis, even though China is
the worlds second largest economy and closing the GDP gap with the U.S.
A hypothetical Petrodollar replacement basket could be: Gold 10%, Silver 5%, U.S. Dollar 15%, China Yuan 15%,
Euro 15%, Japanese Yen 15%, British Pound 4%, Canadian dollar 4%, Australian
Dollar 4%, Russian Ruble 4%, Mexican Peso 2.5 %, Brazilian Real 2.5 %, Swiss
Franc 2 %, Swedish Krona 2%.
Naturally if a currency was devalued too much in a year, the Saudis
could lower the weight, and increase the percentage of stable or appreciating
currencies.
Sidebar NOPEC and Ending the Petrodollar Hegemony:
In June 2019, Reuters reported that Saudi Arabia was
threatening to sell its oil in currencies other than the dollar if
Washington passes a bill exposing OPEC members to U.S. antitrust lawsuit. The No
Oil Producing and Exporting Cartels Act (NOPEC) was a U.S. Congressional
bill, never enacted, designed to remove the state immunity shield and to allow
OPEC, and its national oil companies to be sued under U.S. antitrust law for
anti-competitive attempts to limit the world's supply of petroleum and its
consequent impact on oil prices.
Should this Petrodollar replacement occur, it would cause
severe havoc in the U.S. and the rest of the western world. The dollar would
sharply decline and that would cause U.S. inflation to spike. Stocks would
immediately decline, while gold prices would increase sharply as markets went
into chaos.
Is such a potential shock likely? I believe so, but
governments have a lot of power to get around problems. One should be aware
that Saudis de facto iron man leader, Mohammed Bin Salman al Saud (MBS) -pictured
below, could make this decision for the Kingdom without OPEC's approval.
If it was announced on a weekend, many world equity markets would be limit down
on Monday.
In addition, the dollars invested in Reverse Repos
(started in March 2021) are up 1,000 % from $134 Billion on 3/31/21 to $1,313
trillion on 9/24/21. This is causing the credit markets to tighten and yields
to rise.
What happens when the Fed unwinds the air on this balloon?
The dollar declines!
Conclusions:
The Petro dollar release valve described above could
be the catalyst to cause inflation to rise and equity bull markets to collapse.
All of this Fed
money printing and manipulation of fiat dollars would embarrass a sorcerer from
the 14th century. It adds up to the
magic of trying to make something from nothing without any consequences.
End Quote:
Only the naive inflationists could
believe that government could enrich mankind through fiat money. Ludwig Von Mises
Stay healthy, enjoy life, success, good luck and till next
time
.
The Curmudgeon
ajwdct@gmail.com
Follow
the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned (since 1971) to profit in
the ever changing and arcane world of markets, economies
and government policies. Victor started
his Wall Street career in 1966 and began trading for a living in 1968. As
President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the
firm's research and development platform, which is used to create innovative
solutions for different futures markets, risk parameters and other factors.
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