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Serious Threats to Petro Dollar

Serious Threats to Petro Dollar

What Are Petrodollars?

Petrodollars are crude oil export revenues denominated in U.S. dollars. The term gained currency in the mid-1970s when soaring oil prices generated large trade and current account surpluses for oil exporting countries. Petrodollars are the primary source of revenue for many OPEC members & other oil exporters.

Global crude oil exports averaged approximately 70 million barrels per day in the two years before the COVID-19 pandemic. That pace would generate annual global petrodollar supply of more than $2.5 trillion assuming an average price of $100 per barrel.

Oil sales and the resulting current account surpluses were denominated in dollars because the U.S. dollar was—and remains—by far the most widely used currency. The U.S. dollar's global popularity does not depend on the goodwill of oil exporters. It is based on U.S. status as the world's largest economy and goods importer, with deep, liquid capital markets backed by the rule of law as well as military power.

The Petrodollar system has been put in place since the 70s when the U.S. was a net importer of oil. A natural relationship was formed between Saudi Arabia and the U.S., where the former would sell its oil in exchange for the dollars earned to be reinvested into the U.S. Treasury market and security promises. The dollar has been the world's reserve currency and the currency basis for all commodities that have to be bought and sold in dollars.

Enter 1973 with then-Secretary of State Henry Kissinger. The bargain was intriguing: America had the world’s strongest military and Saudi Arabia exported the world’s most oil.

Mr. Kissinger charismatically and strategically persuaded the Saudi Arabian King to exclusively sell oil globally in dollars only. The demand for US dollars was now deemed irresistible.

Big Oil: It is no secret that one of the keys to America’s economic dominance has long been oil. It was only a few years ago that America became a net exporter of oil, meaning that we have a demonstrated surplus. This was primarily due to the practice of hydraulic fracturing, or “fracking.” However, this has also come with its own set of consequences, namely the environmental devastation of land, water, and air surrounding drilling sites.

Petrodollar Recycling: Oil exporters prefer the U.S. dollar because it is the pre-eminent global currency for global investments. That makes it the most convenient store of value for accumulated oil revenue, which needs to earn a rate of return to be useful.Many oil exporters now invest their petrodollars in stocks, bonds and other financial instruments through sovereign wealth funds. Norway's sovereign wealth fund had assets of about $1.4 trillion at the end of 2021. With a 72% allocation to stocks, the fund holds nearly 1.5% of the world's publicly listed shares.

Dirty History of Petrodollars

1. USA invaded Iraq under the false guise of weapons of mass destruction.

2. Egypt, which USA had supported and financed for 30+ years former dictator Hosni Mubarak with over $60 billion, but in 2011 the US helped provide assistance in overthrowing the same Mubarak.

3. In Libya where USA helped topple former ally Muammar Gaddafi but America was bombing the same Libyan military that the US-trained and funded.

4. Same fate for Hugo Chavez (Venezuela)

5. Iran’s Economy was destroyed on the pretext of Nuclear programme

6. Now and currently it is Syria against the Syrian dictator, Bashar al-Assad.

7. As of recently, the OPEC nations – led by Saudi Arabia – have been artificially pushing the price of oil down. Investors should see that the Syrian regimes backers i.e. Russia and Iran are suffering with the lower oil prices.

8. Five out of the 10 fastest-growing state economies in the USA are oil-producing states. In fact, it would be safe to claim that the entire growth since the 2008 recession has been from the energy sector.

Fossil fuels lobby, Oil cartel OPEC+

OPEC which is a multinational organization comprised of 13 member nations producing 40 % of the world’s crude oil.

The fossil fuels lobby includes paid representatives of corporations of fossil fuel industry (oil, gas, coal), as well as related industries like chemicals, plastics, aviation & transportation. Because of their wealth and the importance of energy, transport and chemical industries to local, national and international economies, these lobbies have the capacity and money to attempt to have outsized influence over governmental policy. These lobbies have been known to obstruct policy related to environmental protection, environmental health and climate action.

Outside OPEC, there are major crude oil-producing countries. The top five oil producing countries (2022) are as follows:

1) US (11.88 million barrels per day),

2) Russia (10.28 mbpd),

3) Canada (5.23 mbpd),

4) China (4.09 mbpd),

5) Brazil, (3.02)

List of top crude oil exporters in the world

As per 2019 data, the following is the list of the top crude oil exporters.

1. Saudi Arabia ($145bn)

2. Russia ($123bn)

3. Iraq ($73.8bn)

4. Canada ($67.8bn)

5. US ($61.9bn)

List of top five consumers of crude oil is as follows

1. US (20.54 mbpd),

2. China (14.01 mbpd),

3. India (4.92 mbpd),

4. Japan (3.74 mbpd),

5. Russia (3.70 mbpd)

Oil lobby’s Governmental influence in USA

The largest oil and gas companies that are sometime collectively referred to as Big Oil, and their industry lobbyist arm, the American Petroleum Institute (API), have spent large amounts of money every year on lobbying and political campaigns, and employ hundreds of lobbyists, to obstruct and delay government action to address climate change.

Keeping oil prices high @ Seven Powerful Sisters

Using the evolving and increasingly sophisticated econometric tools, they described and ‘mapped’ the global economy and its total energy requirements well into the future. Having engineered the transformation of the economy of USA from coal-driven rail to oil-driven transport, they became increasingly concerned that their carefully constructed edifice of world oil domination might collapse if too much oil were to suddenly flood the market.

Seven largest oil companies -- Anglo-Iranian (BP), Royal Dutch Shell, Standard of New Jersey (Exxon), Standard of New York (Socony Mobil), Gulf Oil, Texaco, and Standard of California (Socal, later Chevron) — controlled 88% of the oil reserves outside the United States and the Soviet Union.

What was not so openly stated was that the major US & UK oil companies enjoyed a freedom of action during the postwar period that scarcely any other American corporations enjoyed. They were more or less given free reign over the structures and operations of world oil markets, something that would later have ominous consequences, leading the world into countless wars and conflicts over oil.

Global Petro-Politics

Petroleum politics have been an increasingly important aspect of diplomacy since the rise of the petroleum industry in the Middle East in the early 20th century. As competition continues for a vital resource, the strategic calculations of major and minor countries alike place prominent emphasis on the pumping, refining, transport, sale and use of petroleum products. The term "petro-aggression" has been used to describe the tendency of oil-rich states to instigate international conflicts. There are many examples including: Iraq's invasion of Iran and Kuwait; Libya's repeated incursions into Chad in the 1970s and 1980s; Iran's long-standing suspicion of Western powers. Some scholars have also suggested that oil-rich states are frequently the targets of "resource wars."

Multibillion-dollar inflows and outflows of petroleum money have worldwide macroeconomic consequences, and major oil exporters can gain substantial influence from their petrodollar recycling activities. The evolving geopolitics and geoeconomics of energy are fascinating ... and troubling, especially for Europe.

Russia-Ukraine crisis opens new era of petro politics

Russia's invasion of Ukraine could mark the start of a new era of petro politics, an uncomfortable parallel to the last inflationary period America faced.

Why it matters: Americans are likely to continue to face rising energy prices in the coming months, as Russia — the world's third-largest crude oil producer and largest natural gas producer — faces the prospect of sanctions.

The U.S. dollar's global popularity does not depend on the good will of oil exporters. It is based on U.S. status as the world's largest economy and goods importer, with deep, liquid capital marketsbacked by the rule of law as well as military power.

How Deep Is Europe's Dependence on Russian Oil?

List of countries that depend on Russian oil

Netherlands (16.5%),

Germany (6.91%),

Belarus (5.29%),

Poland, (5.06%),

Italy (4.83%),

Finland (3.59%),

Turkey (2.99%),

In 2020, Europe, including Turkey, imported about:

Ø 185 billion cubic meters (bcm) of Russian gas:

Ø 168 bcm of pipeline gas and

Ø 17 bcm of liquefied natural gas (LNG)

This equates to about 36 % of Europe’s total gas demand of 512 bcm. In 2021, Europe imported the same amount and in the same pipeline/LNG proportion, now approximately 34 % of the higher 540 bcm of demand.

Meanwhile, the European Union imported 155 bcm of Russian gas in 2021, consisting in 142 bcm of pipeline gas and 14 bcm of LNG.

The EU depends on Russian gas for 45 % of its imports and around 40 % of its consumption.

To put these numbers in perspective:

· Russia is by far Europe’s largest supplier. The second largest source of external gas supply in 2021 was LNG from various nations (excluding Russia), at 90 bcm. Other pipeline suppliers such as Algeria, Azerbaijan, Iran, and Libya contributed about 60 bcm. Europe’s domestic gas production is about 190 bcm.

· Russia’s pipeline gas exports to Europe are equivalent to about a third of global LNG trade as of 2021. If Europe were to replace all Russian pipeline gas with LNG, it would need to import about 275 bcm (based on Europe’s balance in 2021): this represents more than 53 % of the global LNG trade. Europe would also need to find alternative LNG sources to replace Russian LNG.

· Russian pipeline gas exports are in the same range as the current gas use in Europe’s power sector. If Europe wanted to replace the equivalent of Russian gas imports with renewables, it would need to build an additional 370 gig watts (GW) of wind to replace this gas (on top of 215 GW installed as of 2020). Europe has installed on average 14 GW of wind capacity per year between 2015 and 2020. Alternatively, Europe would need to add another 105 GW of nuclear capacity, close to the existing capacity installed in 2021 (115 GW).

How did Europe become so dependent on Russian gas?

There are essentially 3 reasons for this persistent dependence on Russian gas:

1. Europe’s natural gas production started to decline rapidly after 2010.

2. Europe’s gas demand has stabilized over the past five years.

3. Alternative supplies fail to close the growing import gap.

Can Germany survive without Russian gas?

What are Europe's options in case of Russian gas disruption?

US cannot keep selling Gas to Europe. They sell 69% Surplus to Mexico and 30% Surplus to Canada. Those are fixed markets. There is simply not even 10% Surplus that US has to sell to EU.

Every Gas producer has its own Clients and Contracts. EU is stuck with Russia. Experts say - the price for 90 days consumption of LNG compared to Piped Gas would be roughly $ 540 Billion against $ 86 Billion. For a year that’s $ 2.25 Trillion against $ 365 Billion.

Imagine paying 600% more for your gas! It will make European industries uncompetitive and civil unrest when the consumers realised how much their pocket is affected and how stupid is their government. It’s simply impossible for EU to survive beyond 100 Days of bravado, stupidity and lack of wisdom.

New World Energy Order

As fossil fuels become less desirable, and the world shifts to renewable energy, the influence of oil on the world economy will continue to diminish.

Most popular renewable energy sources currently are: Solar energy, Wind energy, Hydro energy, Tidal energy, Geothermal energy, Biomass energy

Renewables are getting cheaper.

Cheap energy is today one of the key decisive factors for Greenfield investment. Western companies, especially from Europe (BASF is given as an example) are moving production to places where there is abundant and affordable energy, preferably clean but even if not that may not matter as long there is no carbon club/carbon border adjustment mechanism.

Global oil trade is de-dollarising slowly but surely

China wants to rewrite the rules of the global energy ma

The decline of fossil fuels will accelerate with the advent of new technologies.

The fancy word everyone is using for this is de-carbonization.

· Reduce energy use by conservation

· Reduce energy use by improving efficiency

· Switch to low-carbon or no-carbon fuels and energy sources

· Capture and sequester CO2

· Hydrogen rush could shift world energy order: The energy transition's current darling, hydrogen, has moved from the world of engineering to politics. Governments around the world have already committed more than USD 70 billion to stimulate the hydrogen industry.

Serious threats to Petro Dollar

1. Oil importing Countries are bypassing the Dollar

2. A New World Energy Order Is Emerging from Putin’s War on Ukraine

3. Russia has put conditions on Europe that they will supply Gas & Oil only in Rubles and Rubles is now linked to Gold.

4. Top crude oil producer distances itself from petrodollar hegemony.

5. Saudi Arabia was considering trading oil in Yuan for its sales to China

6. Geopolitical shifts are underway as fresh alliances are forged and old grievances inflamed.

7. Russia and China signed a massive energy deal, a $400 billion contract to supply gas.

8. The emerging-market BRICS – made up of Brazil, Russia, India, China, and South Africa – have started bypassing the dollar altogether. The nations have established a competitor to the Western-backed IMF, The New Development Bank.

9. With China, Russia, India, Iran, Venezuela, Saudi Arabia & UAE deciding to conduct Oil & Gas not in Dollar but in mutual currency, there appears to be serious challenge to Petro Dollar.

10. Russia’s leverage as an oil producer (who cuts off supply) will cause almost immediate price shocks to the western world. A good part of the population could immediately be unable to heat their homes.

11. Swap line would bypass the dollar and will lead to a challenge to Dollar’s hegemony

CA Harshad Shah, Mumbai


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