Crisis in America: Is the End of the Petrodollar System Near?

According to an exclusive report from the Wall Street Journal, Saudi Arabia and China are now discussing pricing some Saudi oil exports in Yuan. Could the day the world stops using petrodollars be the end of the US dollar and America’s global power status?

Is a Suadi/China petroyuan deal in the works?
Is a Suadi/China petroyuan deal in the works?

What Are Petrodollars?

In its simplest terms, all oil bought and sold in the world must be done using U.S. dollars. Once upon a time, the U.S. dollar was backed by gold. This was called the “gold standard.” However, the dollar was removed from the gold standard in 1971 by President Richard Nixon, meant the United States would no longer convert dollars to gold at a fixed value.

Asa result, the value and purchasing power of the dollar began to plummet.

In addition, this meant countries could not exchange the dollars held in their local banks for gold either. This also included oil-producing countries who saw their revenues fall dramatically along with the value of the American dollar.

A short time later (October 19, 1973), President Richard Nixon requested $2.2 billion dollars in military aid to support Israel during the Yom Kippur War.

This angered the Arab members of OPEC, who promptly stopped selling oil to America and its Israeli allies. (OPEC is an abbreviation for the Organization of the Petroleum Exporting Countries). This turn of events caused a recession and eventually stagflation, which is a combination of high inflation, high unemployment and little economic growth.

During this time, gas rises rapidly increased, and a 55mph speed limit was imposed to decrease gas consumption.

This image has an empty alt attribute; its file name is petro-dollar-2-728.jpg

To help ease the worsening economy in America, the United States and Saudi Arabia negotiated a deal that included the following terms:

  1. Saudis must agree to sell ALL their oil in U.S. dollars.
  2. Saudis would purchase U.S. debt securities with the surplus proceeds.

In exchange the U.S. would provide the following to the Saudis:

  1. Protection for the country’s oil fields.
  2. Provide military equipment.
  3. Guaranteed protection from Israel.

By 1975, all OPEC nations were part of this agreement to sell their oil in U.S. dollars. For more information, check The United States-Saudi Arabian Joint Commission on Economic Cooperation.

Who are the members of OPEC?
The members of OPEC

The Benefits of Petrodollars

The use of petrodollars was great for the American economy. In addition to being the world reserve currency, this benefitted America for three important reasons:

  • The demand for US dollars drastically increased around the world
  • America was given the ability to print dollars at will to buy oil
  • The demand for US bonds increased worldwide

As long as the world continues to use petrodollars, the demand for the dollar around the world will remain strong. This will enable the U.S. to continue to print money and buy oil and other products. But is there a chance the use of petrodollars will come to an end?

Saudi Arabia is key for the petrodollar deal, but recent events have questioned how long the agreement will last:

In 2019, Saudi Arabia Threatened to Ditch USD Oil Trades if NOPEC Passes. Per the article:

The time of the United States dollar (USD) being the world’s main reserve currency is reportedly in jeopardy, as Saudi Arabia is threatening to sell its oil in currencies other than the USD if Washington passes a bill that exposes OPEC members to US antitrust lawsuits, according to a report from Reuters.

Read the article HERE.

Recently, Saudi Arabia made a deal with Russia for an arms deal:

Saudi Deputy Defense Minister Khalid bin Salman announced on Twitter on August 24 that he signed the agreement with Russian Deputy Defense Minister Alexander Fomin “aimed at developing joint military cooperation between the two countries.”

Read the story HERE.

How will this deal with Russia impact the petrodollar deal with the United States? Time will tell.

Many years ago, the American economy was a producer-driven economy. Factories employed millions of Americans, with many goods being shipped around the world. Today, the U.S. has become primarily a consumer–driven economy.

Ask yourself the following:

  • How many service-oriented businesses do you see in your area?
  • How many fast food, gas stations, grocery stores or office buildings are in your neighborhood?
  • Where are your clothes made? Your electronics or furniture? Are they made in the USA or other countries?
See the source image
Chevrolet assembly line. 1928.

As you ponder these questions, they should make you think. The majority of the products we use are made overseas. In addition, America continuously runs trade deficits, meaning we consume more than we produce:

The US trade deficit is rising at an alarming rate.
The US continuously runs trade deficits.

If the world decides to cease using petrodollars, what is their incentive to use American dollars? This is a very important question that people must ask themselves. We cannot assume the world will always use/need American dollars.

One reason would be to purchase U.S. bonds, but the U.S. currently has a budget deficit of over $25 trillion dollars. There is talk that the U.S. won’t be able to repay this debt. In addition, interest rates for I bonds are extremely low, at 3.54%. This is important, because the inflation rate is currently at 5.4% In other words, bonds are NOT keeping up with the rate of inflation. You would actually lose money if you kept them in bonds.

The incentive for countries to buy our bonds is practically nonexistent.

If the world stops using petrodollars, the demand for American dollars will plummet. This could cause the value of the dollar to fall, causing the price of goods and services to increase dramatically. This would cause havoc on the stock market and the American standard of living for years.

Supply Shortages, Vaccine Mandates and Stagflation

Another major concern is the growing supply shortage problems seen in the United States and around the world. When supplies of popular goods decrease, the price of those goods tend to increase. While this is normal, prices could increase even more in America due to a reduction in the dollar’s purchasing power.

This combination of events can lead to stagflation, which is “persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.

None of this bodes well for the dollar and the American economy.

Action Steps: How To Protect Yourself

To decrease the effects of a falling dollar, there are several things a person can consider doing:

#1. Look Into Cryptocurrencies.

Concerns about the dollar has fueled the interest in alternatives to the dollar. These would include cryptocurrencies and precious metals, such as gold and silver. Bitcoin has ballooned to over $60,000 per bitcoin, gaining credibility around the world as a potential dollar replacement.

On September 7, 2021, El Salvador became the first country in the world to accept Bitcoin as legal currencyCNBC reports the Central American nation’s Bitcoin law took effect on September 7th, letting Salvadorans use the cryptocurrency in physical and online shops.

#2. Invest in Precious Metals.

Many wealthy investors, central banks, and governments around the world have been buying gold. Many countries, including China and Russia increased their gold reserves in 2021.

Central banks are quietly accumulating gold by the ton.

In April, Hungary tripled their gold reserves, buying over 60 tons of the precious metal:

Hungary’s central bank raised its gold reserves to 94.5 metric tons from 31.5 tons, citing “long-term national and economic policy strategy objectives.” This marked one of the most significant central bank gold purchases in decades.

Read the full article HERE.

In addition to gold, silver has been used as money for thousands of years, and is believed to be a hedge against inflation along with gold.

Option #3. Create Multiple Streams of Income.

Another strategy is to increase your revenue streams by finding ways to become a producer and create multiple streams of income. When selling a product or service you own, you can raise your prices to keep up with inflation and the cost of living. Another benefit is you can accept alternative forms of payment, such as the yuan, bitcoin, gold or silver.

By creating multiple streams of income, you aren’t relying on one paycheck to survive. The average person has one job and one source of income that is fixed that only pays twice per month (1st and 15th). This can be a problem as prices rise, potentially causing a “middle class squeeze.”

Instead of two checks per month, a person with multiple streams of income, could receive money twice per week or even more.

Another strategy is to increase your revenue streams. Find ways to become a producer and create multiple streams of income. By selling a product or service, you maintain control of your income. If inflation rises, you can raise your prices accordingly. Another benefit is you can accept alternative forms of payment, such as in the yuan, bitcoin, gold or silver.

The Time is NOW

No one knows what will happen, but it’s critical we are prepared for the unexpected. Start working on a plan of action. Learn everything you can about the dollar, various assets that retain their value and creating multiple streams of income.

Get more tips in my books Invest For Success: Millionaire Wealth Strategies Not Taught in School and Planting Seeds: the Children’s Guide to Entrepreneurship. The sooner a person understands what’s going on, the better they can prepare for what will happen next.

2 Replies to “Crisis in America: Is the End of the Petrodollar System Near?”

Leave a Reply