The End Of The Petrodollar Matters

November 6, 2014

During the early 1970s, the US made a deal with Saudi Arabia that if they would price their oil exports only in US Dollars, we would guarantee their security. With Saudi help, all other oil exporters were convinced/coerced into pricing their oil only in US Dollars. Thus began the Petrodollar reign.

So long as dollars were needed in the oil trade, all world central banks would hold dollars as reserves, allowing the US FED to print more paper dollars. The resulting price inflation thus became spread out among all the countries of the world, and the US domestically had slowed what would have been galloping inflation.

one petrodollar

Today, the Petrodollar system appears to be in trouble. Much of the arab world is turning toward radical Islam – the 9-11 terrorists were Saudi. Our partners are becoming our enemies.

China and Russia are flexing their economic muscle, challenging the US as the only superpower. China, as the world’s manufacturer, has been arranging currency swap deals through most of the world. If Australia, for example, can buy and sell with China in Australian dollars and Chinese yaun (renminbi), then the US dollar isn’t needed.

Russia is a prodigious producer and exporter of oil and natural gas. Europe is dependent on Russian energy to the point that, if the recent supply deal hadn’t been reached, most Europeans would have found themselves shivering in the dark this winter. If Russia doesn’t want dollars, or if the US prevents the use of dollars (yes it’s true!), then no dollars are needed here either.

When US dollars are no longer needed in world trade, and the Petrodollar system breaks down, then world central banks won’t need to hold US dollars as reserves.

There is strong reason to believe that, when this happens, many of those dollars will return home to the US causing us two big problems:

  1. The value of the dollar in international trade – the US dollar exchange rate – will fall drastically. In the short term, the trade deficit will worsen, sending even more unwanted US dollars abroad. Even as the dollar falls, foreigners will become less inclined to accept dollars in payment of US imports. Supply of all the foreign goods we’ve become used to will dwindle.
  2. As foreigners’ holdings of US dollars return home, the effect will be the same as if the FED were  printing new dollars. All the old inflation which was exported to other countries will return to the US with those dollars. US producers, facing less competition from imports priced based on higher foreign exchange rates, will have a greater ability to raise prices – and they will.


The likely result will be a quick acceleration of prices (the CPI will take off). As the value of each dollar already in the US Economy becomes diluted with all the returning dollars, the value of Americans’ life savings will decline even faster than it already has for many years.

As the government continues to run budget deficits, it will continue to need purchasers for Treasury debt. If foreigners no longer are willing to buy, and American’s already can’t afford it, then the FED will need to print even more fiat paper dollars. As has been the case throughout history, the situation could run out of control – a major disaster for our country.

Unless the US changes course quickly, we could be in for very sad times ahead.


For more on the decline of the Petrodollar, please see Nick Giambruno’s article at, Ron Paul Says: Watch The Petrodollar.

Robert (Bob)  Shapiro is self-taught in Austrian Economics and has consulted briefly for the governments of Mexico, Greece, Portugal and Spain. He has traded Gold & Silver and their stocks since 1970. Bob Shapiro’s blog is

The symbol for silver ‘AG’ comes from the Latin word ‘agentum’ meaning silver.