Is the Petrodollar System Dead?

If So, What Does That Mean for the United States?

By now you have probably heard the breathless reports that the 1974 Petrodollar Agreement has been allowed to expire.¹ Obviously I’ve been sounding the alarm about the end of the Petrodollar for several years, so if it has officially ended I wouldn’t at all be surprised.

That said, I’m not sure that it has officially ended. Let’s do a review of some of the most recent sources for this claim:

• Ward Clark at Red State, writing on June 13, 2024, stated that “the petrodollar — a deal, not a currency — was born out of the late 1970s energy crisis. The United States, having just gone off the gold standard, struck a deal with Saudi Arabia — one of the largest producers of petroleum in the world — that meant the Saudis would price their oil exclusively in United States dollars and that any surplus revenues from their sales of petroleum would be invested in U.S. Treasury bonds. That agreement is now over.” Clark’s source is given as Nasdaq.com.

• Jim Hoft at The Gateway Pundit, also writing on June 13, asserted that “Last week Joe Biden allowed the 50-year-old petrodollar agreement between the U.S. and Saudi Arabia to expire.” Hoft’s source is Tipranks.com and BRICS News.

• Sonu Vivek at India Today, likewise reporting on June 13, claimed that “Saudi Arabia has decided not to renew its 80-year petrodollar deal with the United States, which expired on Sunday, June 9… This agreement, originally signed on June 8, 1974, had been a key part of US global economic influence.” Vivek names his source “as per media reports.”

OK. Then where did Nasdaq.com, Tipranks.com, and BRIC News get this information? And what are the “media reports” to which India Today references? Well….

• An anonymous journalist at thbsnews.net writing on June 12, stated that “Significant financial upheaval is potentially ahead of the financial world as Saudi Arabia has decided not to renew its 80-year petro-dollar deal with the United States. The deal, which expired on Sunday 9 June, was a cornerstone of the United States global economic dominance.” The anonymous writer gives no source for this claim.

• An anonymous journalist at BRICS News writing on June 12, claimed that “Saudi Arabia's 50-year-old petrodollar agreement with the United States has expired, with no new agreement in place. Saudi Arabia will now sell oil in multiple currencies, including the Chinese RMB, Euros, Yen, and Yuan, instead of exclusively in US dollars.” The anonymous journalist gives no source for this claim.

• Paul Hoffman, at Tipranks.scom and Nasdaq.com, writing on June 11, said that “The petrodollar’s dominance may be facing its most significant challenge yet. The agreement between the U.S. and Saudi Arabia expired on June 9, 2024. This expiration has far-reaching implications, as it has the potential to disrupt the global financial order.” Hoffman gives no source for his claim.

• Benjamin Njiri at ambcrypto.com, also writing on June 11, asserted that “Saudi Arabia did not renew its 50-year-old Petrodollar agreement with the United States of America, which expired on the 9th of June, stirring speculation about the potential impact on the global financial system… With no Petrodollar renewal, Saudi Arabia can sell its oil in whatever currency it wishes.” Njiri gives no source for this claim.

Since no source is given from any of the above, it raises the question: From whom did BRICS News, TBS News, Tipranks, Nasdaq, and Ambcrypto learn this world-shaking information? If they had inside sources they’d surely have said so, right?

With inside sources off the table, I looked elsewhere. After a bit of sleuthing (ok, actually just a helpful tweet from Hans G. Schantz), I learned the original source for the claim that Saudi Arabia is not renewing the 50-year Petrodollar agreement, a post that was made on June 3, 2024, went viral, and accumulated 486K views. It seems to be the ur-source for the current buzz:

Now I don’t know Black Swan Capitalist and I do not want to impugn his credibility. I have, from time to time, said things I knew to be factually true, but since my knowledge was based on private sources, I was blasted for “unsubstantiated rumormongering.” (Once I even got sued for defamation!) It’s not pleasant.

So let’s acknowledge that it is entirely possible that Black Swan Capitalist has access to confidential sources and has done us a service by alerting us to the dire situation at hand. But let’s also acknowledge it’s entirely possible he just heard a rumor on 4Chan and made a Tweet that went viral. Or that he just… made it up for clicks.

Whatever the case, I don’t begrudge the Black Swan Capitalist his tweet. More people need to be made aware of the petrodollar system, and if nothing else, climate activists have proven that fearmongering gets the word out. Moreover, the interest he sparked in the petrodollar led to my book Running on Empty becoming a #1 best seller over night!

Let’s assume that the petrodollar system has come to an end. What does that really mean?

What Does the End of the Petrodollar Mean, Anyway?

The petrodollar system, in its original conception, required that oil transactions with all oil producers be made exclusively in US dollars - no exceptions. This made the US dollar tremendously valuable worldwide, such that everyone on Earth wanted to export goods to us to get those sweet, sweet bucks. That, in turn, led us to financialize our economy, outsource our industry, and offshore our inflation.

This situation is reflected in the upper left quadrant of the table below. We occupied that quadrant from approximately 1974 until 2021, with brief exceptions in the early 2000s when Iraq and Libya decided to sell oil outside the petrodollar system and were destroyed for their temerity.

However, due to the economic effects of the Russo-Ukraine War, we have now moved into the upper-middle quadrant. Only some nations are complying with the petrodollar system; some nations are exchanging oil for other currencies. This shift has put US global hegemony in jeopardy. One would not be wrong to say that the petrodollar system has already ended! Historically we’ve always been willing to go to war to move back to the upper-left quadrant, but now attempting to do so will trigger World War III. That still might happen (indeed, I have predicted it’s likely to happen).

Assuming the world is not plunged into armed global conflict by 2025, we will likely proceed from the upper-middle quadrant to the middle-left quadrant; once the rest of the world realizes you can buy and sell oil with other currencies without being bombed or invaded by the US, it will begin to do so. Thereafter, the US dollar will no longer be the exclusive means by which oil can be purchased — but it will initially remain a means by which oil can be purchased.

Even when the quadrant shift occurs, it is likely that (because of inertia, confidence in the American economy, uncertainty about other regimes, etc.) the US dollar will initially remain the reserve currency for most of the world, and that most oil transactions will still take place in dollars. We’ll still be able to export some of our inflation and still continue to live beyond on our means on cheap imports. In the short term, the effects of moving into the middle-left quadrant, while severe on the poor segments of the American consumer, won’t be catastrophic; as such, the quadrant shift will likely not precipitate urgent reform.

In the absence of such reform, however, the middle-left quadrant will eventually lead us to the middle-middle quadrant. In this quadrant, some countries will still sell their oil for US dollars, but some countries will simply not sell their oil for dollars at all.

Why will this occur?

Well, remember that the US has an almost $1 trillion trade imbalance in goods - it imports much more than it exports. In typical circumstances, a trade imbalance leads to a decline in a currency’s value, driving the price of imports up and exports down, until a new trade balance is reached between imports and exports. However, in the case of the US, we presently lack the manufacturing capacity to restore our trade balance without drastically cutting imports. If that is not rectified (e.g. we don’t re-industrialize while reducing dependence on imports), our trade imbalance will drive the price of imports up without any rise in wages due to export demand. The result will be severe inflation for the domestic consumer that will cascade to every sector of our economy. Simultaneously, since dollars will be less necessary worldwide, there will be reduced global investment in dollar-denominated real estate, debt, and equity, which will cause asset prices to decline across the country.

This rather toxic combination of high inflation with economic recession is known as stagflation. The last time we were faced with it, we only escaped it by leveraging our military-industrial might to create the petrodollar! No such opportunity will present itself this go round.

If, faced with stagflation, we again fail to make the necessary economic reforms, then our economy will shift into the bottom-right quadrant. Our currency will become junk, like the German mark under the Weimar Republic or the Russian ruble under the Soviet Union. When our currency turns to junk, our FIRE-dependent economy will collapse into something akin to the Great Depression…

Only worse, much worse! At the time of the Great Depression occurred, the US was a net exporter and a net lender — we were the world’s manufacturing powerhouse and the world’s bank. This time we’ll be a net importer and net debtor, just as the United Kingdom was. How bad might it get?

To close off this article, I decided to pull some data together to put things into perspective. Consider:

• The US exports $2.05 trillion in goods and $1 trillion in services annually, for a total export value of $3.05 trillion. It imports $3.10 trillion in goods and $0.715 trillion in services annually, for a total import value of $3.815 trillion. Therefore, the US has a trade imbalance of $0.765 trillion ($765 billion).

• The US spends $0.61 trillion on oil annually and produces $0.39 trillion in oil annually. Therefore the US has an oil imbalance of $0.22 trillion in oil annually ($220 billion). Put another way, we rely on imports for 36% of our oil; we are only 64% self-sufficient. (In actuality, we’re worse off than that, because most of our refineries can’t process the type of oil we produce!)

• The US GDP (a fake statistic, but the best we have) is $27 trillion. Of that, only $4.43 trillion is agriculture, manufacturing, and so on — e.g. real things. The rest is stuff like “professional and business services,” “finance and insurance",” “health care,” and so on, much of which would not (in any rational system of national accounting) be considered contributions to productivity.²

• Since the US creates $4.43 trillion in goods and exports $2.05 trillion in goods, that means only $2.38 trillion in goods we consume are manufactured domestically. Since we import $3.10 trillion in goods, that means that of our $5.48 trillion in goods consumption, 57% is from foreign sources. And note that we cannot simply “eat our own dogfood” - our productive sectors are highly specialized and there’s no magic dial that can turn a cornfield into lithium mine.

In a worst case situation then, where the US dollar becomes worthless, we would be looking at losing access to 57% of our goods and 36% of our oil. That is incomprehensibly bad.

But - again - it’s not likely to get that bad in the near term, and there are still opportunities to turn it around. I think it’s likely we’ll have a “hard landing” from de-dollarization, but we can at least avoid total economic collapse. All we need is good leadership that makes sound policy decisions.

Unfortunately, it’s also unlikely we’ll have good leadership that makes sound policy decisions. Contemplate this on the Tree of Woe.

1. Let us caveat this whole article with the following: As far as I know, the written text of the agreement between Saudi Arabia and the United States has never been released. In fact, there might not even be a singular written agreement, merely a handshake that led to a number of closely-related policy agreements. So it is very difficult to assess whether “the” agreement could “expire”.

2. In contrast, the Russian GDP (under purchasing power parity) is $4.8 trillion, with 51.6% of it consisting of agriculture, manufacturing, mining, oil, or about $2.4 trillion overall. The people suggesting that Russia is doomed because it has “a GDP smaller than New York’s” are idiots, because when it comes to actually producing stuff Russia hits punches well above its weight class.