The Petrodollar Myth

Here we go again. It is amazing how people keep touting the same stuff.

With all that is going on, we hear about the US losing the "Petrodollar" status. If Russia and Saudi Arabia (along with whomever else) decide to accept payments in a currency other than the US dollar, then the US could be in trouble.

Unfortunately, this is complete mythology as we will show by the end of this article.

The inspiration from this comes from out own @nealmcspadden who wrote this post, Is the PetroDollar System Ending?.

image.png

Source

The Myth

So where did the myth of the Petrodollar come from?

This all stems from another myth that gold bugs (and many Bitcoin maxis) hold dear, the gold standard. After Nixon "took the US off the gold standard, which was fried a couple decades before (that is for another article), something had to be developed that fit their narrative.

After all, there is no way a currency can have value on its own. Hence, the USD, once removed from gold, only had value since because of the Petrodollar. Without that, the USD would be worthless.

Sadly, this is not the reality. The USD has very little to do with oil. In fact, as we will see, it is pretty much a laughable concept.

The USD

Before getting to the math in this equation, let us take a look at the dollar.

Did you know that you can walk into a store and make a purchase, using a $10 bill from 2020 or 1910? The latter might be worth more from a collector's standpoint but the basis still holds true. Why is this?

The simple answer is the US never nuked its currency. Try doing the same thing with a British pound. Or French franc. Or Japanese yen. If you think back to before the European Union, every decade saw at least one European country destroy its currency. They believe the EU will save them, something I contest. To me, it is only a matter of time (maybe by 2030) before the EURO is crushed.

We also have the situation where US Treasuries were never defaulted upon. Again, look around the world and see how many countries blew up their bond market. Most of them did a great deal of damage by going negative. Do these people realize what it does to their pension funds which tend to hold a lot of government bonds?

Obviously, this doesn't directly tie into the Petrodollar idea but it does give you a backdrop against what the USD is bringing to the table.

The Oil Landscape

There are roughly 100 million barrels of oil consumed daily. At the rough price of $80 per barrel, this is $8 billion in trade each day being done in the USD. A hefty sum to say the least.

However, we are going to see, this is really a minimal amount.

Here is a quote from the article:

So Saudi Arabia and China just announced that basically they will be swapping oil for Chinese RMB. This is a huge nail in the petrodollar coffin.

Perhaps, if the Petrodollar existed.

To start, can anyone guess who is the largest producer of oil?

Here is the top 10:

CountryBarrels\Day
1United States14,837,639,510
2Saudi Arabia12,402,761,040
3Russia11,262,746,200
4China4,905,070,874
5Canada4,596,724,820
6Iraq4,443,457,393
7Iran4,376,194,355
8UAE3,772,788,273
9Brazil3,242,957,836
10Kuwait2,990,544,137

Isn't this interesting?

Looking at the list, if we put Russia, Saudi Arabia, Iraq, and China in together, we see that totals about 32 million barrels. We can remove China's total since they are an importer so they likely do not sell much energy to the rest of the world.

This puts up at 27 mllion barrels or a litle more than 25% of the total.

So, of the $8 billion daily, we are looking at around $2 billion that potentially could be done outside the USD.

The question is whether this is a significant amount?

Inside The Numbers

There is no doubt the energy sector is large. Oil is the king of this so it is logical that a hit there is of major impact.

That said, $2 billion is nothing. Here is where mythology gets blown out of the water.

This is just a sampling of the USD dominance and why it is light years ahead of any other currency.

  • Repo Market - $4.5 trillion daily in tri-party repos (most USD denominated)
  • Global Foreign Reserves - $6.4 trillion (or 55% of the total amount)
  • US Fixed Income Securities - $8.5 trillion ($915 billion traded daily)
  • FOREX - $2.5 quadrillion ($7.5 trillion traded daily: 88% USD)
  • Global Debt - estimated $300 trillion, almost half USD denominated (need USD to make payments)
  • Bank Cross Border claims - $66 trillion in USD
  • US Equities - $470 billion traded daily

Is the CNY even close to these numbers? The EUR? JPY? The answer is no.

In short, the USD is integrated into every part of the financial system. Even China is on board with this.

Total trade because the US and China is about $650 billion per year. This is $500 billion in exports to the US with another $150 billion imported by the Chinese.

What this means is that China and the US have about $1.78 billion per day in transactions between the two countries. This is a similar to the potential of 25% of the oil sales taking place outside the USD.

In Conclusion

A failure to understand these basics and how currency can derive value is a detriment within the cryptocurrency industry. We see things repeated, often for decades, that fit a narrative but not how the situation really is. Like the overpopulation nonsense, just because something was espoused for half a century doesn't make it true.

With currency, a lot of it is the economy behind it is crucial. Finance, money and economics is a game of confidence. To achieve this, certain factors have to be met. If a currency does not have depth, liquidity, sophistication, and distribution, it is going to be limited in scope.

We see the US dollar is the most hated currency in the history of humanity. It is also the most powerful. Never have we seen a currency with the global reach on the scale we have today. When tens of trillions of dollars worth of transactions are occuring each day in the currency, that is unmatched.

To put it in context, the $2 billion in oil transactions that can get removed does not even come close to covering the increase in interest payments on the USD denominated debt that is being refinanced.

The dollar's domination has little to do with the fact oil payments are made in them.

One final comparison: 1 million oil futures contracts trade daily, 1,000 barrels per contract.

Guess what they are traded in.

It will take the Chinese, or anyone else, decades to get to the point the USD is at today.


If you found this article informative, please give an upvote and rehive.

gif by @doze

screen_vision2025_1.png

logo by @st8z

Posted Using LeoFinance Beta

Sort:  

Interesting sentiment

I for one have always somewhat blindly espoused the petrodollar concept.

But I suppose that has less to do with finance and more to do with a lot of the wars and conflicts we start in the developing world. It is quite funny that so many people think USD will get dethroned when no other currency even comes close to being able to replace it across multiple sectors. Even Bitcoin may end up helping USD instead of hurting it like many assume. "Pristine collateral" as you've been saying, is a valuable tool.

I think you're ascribing too much to the concept. The worldwide oil market is not the only factor in USD demand, but it's a large one. That's why in the article I mention there are other factors and it's a mixed bag.

Posted Using LeoFinance Beta

Your table shows billions of barrels per day per country, but then you refer to them as millions.

!BEER nice article!

Never have we seen a currency with the global reach on the scale we have today

because it is not the US-Dollar. Paying IN US-Dollar is not the same as paying WITH US-Dollar. World trade is not done in US-Dollar. And even US retail is not done in US-Dollar. Taxes are paid in and with US-Dollar. The majority of retail payments and all of the e-commerce, is done with private money like Visa, Mastercard, PayPal, ApplePay, GooglePay aka private-credit-money.

It is a seamless UX, so we don't call them "Visa-Dollar", or "PayPal-Token" but this is what they are - Stablecoins. And like all of the other stablecoins that we see in "crypto", those are not US-Dollar. They were never authorized by the fed, they are not backed by US-Dollar, there is often ZERO USA inside those money market funds.

When you buy a house or a car, then you buy it WITH credit from your bank that has credit from JP-Morgan. You can translate it into USD when you visit an ATM, but this does not make it US-Dollar. It is stateless money existing in an offshore web of banks and funds. Even its rate (LIBOR) is set in London by big private banks. Currency is a non-vocal language and the same as "English" as the world language is not the language of England, the Dollar is not the currency of the USA. The majority of English words are printed outside of England. Same with the Dollar. FED has no impact at all.


Hey @taskmaster4450le, here is a little bit of BEER from @lauch3d for you. Enjoy it!

Do you want to win SOME BEER together with your friends and draw the BEERKING.

Thanks for sharing the nice article. Actually, the oil sector is one of the biggest trading parts of the world economy and the USA is the largest oil producer, so there is no way of removing of USD from the oil business!

And for others, huge USD is dominating the international market and even trillions are stored as a foreign reserve by other countries thus ignoring or pulling down the USD is nothing but a daydream. But it is also true that many countries are motivated to pay a part of their mutual trade in their own currency which saves a lot of their USD reserve and costs!

Posted Using LeoFinance Beta

It will take years for any other currency to take the place of the dollar and I just don't think an alternative exists just yet. When I think of what people will flock to when the times are rough, it's the dollar. The amount of trust is huge and I don't really see it dropping much unless rates turn negative.

Posted Using LeoFinance Beta

But the US behaves agressively towards any country trying to leave the $-system. Seems like some threat is being perceived.

What did you mean by the uk nuked the British pound? We didn’t join the Euro so it can’t be that