The weakening of the petrodollar

J. Keith Johnson Senior Writer, The Gold Informant
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In last week’s article, I discussed the implications of Western banks manipulating gold prices and how such ventures may be resulting in the transfer of wealth from West to East:

It’s a catch-22. Suppress gold and watch it flow eastward, guaranteeing the ultimate demise of Western economies; or accumulate, which will necessitate greater drops in the value of Western currencies.

A reader, Arturo, commented that the article failed to discuss the petrodollar:

The writer of this article fails as many do to mention the US dollar is tied to oil.

This was a good observation, on one hand. On the other, the article was focused on one aspect of the challenge. Space and time did not permit nailing down every aspect of the discussion.

For those unfamiliar with the petrodollar, here’s the short version. In 1973 the U.S. entered into an agreement with the house of Saud. In return for U.S. protection from Russia, Saudi Arabia agreed to trade only in U.S. dollars. Thus, the petrodollar was born, basically converting the greenback, two years separated from gold, to a blackback or oilback. While this article reveals how the petrodollar is becoming unraveled, I’ll ponder a few more details that have come up since it was written.

What’s happening currently centers on Iran. However, it’s been in the works for some time as nations have sought ways to trade outside of the confines of U.S. currency. It’s well known that BRIC countries have been trading amongst themselves, avoiding the restraint of greenbacks. What many don’t realize is that European countries are finding ways to circumvent the Iran embargo as well, through various channels and mediums of exchange.

Switzerland has made it clear that the Iranian Central Bank will continue to conduct business there as usual. Rudolf Christen (Swiss Federal Department of Foreign Affairs) says Iranian oil will continue flowing into the country uninterrupted.

In preparation for the embargo, Iran has actually taken a proactive approach, cutting back exports to some European countries, most notably Britain and France. On a more aggressive level, they’ve put pressure on southern European countries, which are much more dependent upon Iranian oil, to protest the sanctions. Switzerland may offer a middleman through which these countries can continue to receive shipments from Iran.

But few saw the end-around that Germany would pull off. Though a member of the E.U., Germany has developed means to continue trade with Iran without so much as a hiccup. Cash is being traded, directly, circumventing SWIFT. A system of barter that sidesteps conventional currency channels is being implemented. Transfers are being made through neutral intermediaries such as Armenia, Belarus, Azerbaijan and Turkey.

As the largest European exporter to Iran, Germany stands to lose the most from the sanctions. The Islamic Republic relies heavily on quality industrial equipment, among other things. It’s to their mutual benefit to continue trading.

While legal, obviously these efforts undermine the intent of the sanctions. The results are obvious. European nations are being encouraged to thumb their noses at American policy, even if the E.U. toes the line. Thus, they are thumbing their noses at the petrodollar.

We’ve read of India trading gold for Iranian oil. Other countries will do the same in order to protect their own interests. And with each trade that doesn’t involve dollars, another nail is hammered into the petrodollar’s coffin.

The world is shrinking. American dominance is flagging. Over the next few years we should expect the petrodollar to lose dominance even as the greenback’s reserve currency status diminishes. World banks will turn to precious metals and various currencies or currency baskets in pursuit of more flexibility and profitable trade.

J. Keith Johnson’s Austrian and libertarian perspectives on current socioeconomic and geopolitical affairs are fueled by his insatiable desire to both discover and share the truth. A Goldco Direct affiliate, you’ll find his commentary on The Gold Informant website, as well as various Internet financial and news sites.