Is the U.S. Dollar Becoming the New Petro Dollar?

With OPEC oil cuts and U.S. oil production and exports surging, is the US dollar set to replace the Saudi- backed petro dollar?

Is re-dollarization already underweigh?

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The Dollar Empire Strikes Back

Back in December 2014, in A BLACK SWAN EMERGES COVERED IN CHEAP OIL, we remarked on the developing U.S. shale oil production:

“If shale oil takes off, the U.S. solves three issues:

– becomes energy independent;
– creates jobs; and
– no longer needs Saudi Arabia to create demand for the dollar because the export of shale creates its own demand for dollar and replaces much of the Saudi Arabian demand.”

The Importance of the Petro Dollar

The petro dollar has lent support to the U.S. Dollar and demand for U.S. Treasuries since the early 1970’s after President Nixon reneged on the U.S. Treasury obligation to convert foreign central bank held U.S. dollars in to gold as provided in Breton Woods Agreements. The petro dollar agreements provide broadly that Saudi Arabia and the other OPEC nations will price their oil in dollars and accept only dollars in payment in exchange for their oil and the U.S. would provide the Saudis military protection and hardware. These agreements, established in the early 1970’s, created the “petro dollar” (or petrol dollar) and have engendered consistent global demand for the U.S. dollar and its dollar denominated securities like U.S. Treasuries for the past forty years.

The demand for petro dollars enables the United States to maintain and expand a massive welfare/warfare state as the deficit spending the United States does is financed through the issuing of debt securities, much of it purchased by foreigners. Thus, the dollar is a very important strategic asset to the United States that must be protected by maintaining demand for it and its dollar denominated debt securities.

Attack on the Petro Dollar

The petro dollar has been under attack in recent years as de-dollarization initiatives ranging from the setting up by China of an Asian Infrastruture Bank, the Belt and Road Initiative, the China International Payment System, Yuan Clearing Banks and swap facilities, began to gain traction. In addition, during 2015 and most of 2016, foreign central banks were net sellers of U.S. Treasury Securities and net purchasers of gold.

With de-dollarization in full swing, many commentators insisted the dollars days were numbered and it would be “game over” soon for the greenback.

Shale Oil Led Re-Dollarization

Surging oil exports, as we noted in 2014 would create demand for dollars and the need to hold dollar denominated reserves in U.S. Treasuries in order to buy oil from the U.S. In addition, since the petro dollar agreements are still in place foreign countries also need dollars to buy oil from Saudi Arabia.

The charts below demonstrate the massive surge in U.S. crude oil exports.

Annual U.S. Exports of Crude Oil 2006 - 2016

U.S. exports of crude oil in 2016 reached 6,236 thousand barrels per day up from 294 thousand barrels per day in 2006.

U.S. Exports of Crude Oil by Month January 2013 - April 2017

U.S. exports of crude oil in the first four months of 2017 were 3,697 thousand barrels per day, or an average of 924.25 barrels per day with an annualized run rate of 11,091 thousand barrels per day, or a 78% increase from 2016’s 6,236 thousand barrels per day.

The PIRA Energy Group estimates that US crude oil exports will grow to 2.25 million barrels a day by 2020 and boost the U.S into the top ten oil exporting nations. In 2016, Saudia Arabia exported 7.5 million barrels a day.

Plenty more where that came from

The United States now produces more crude oil on an annual basis than Saudi Arabia.

U.S. vs saudi arabia crude oil production 2006 -2016

Saudi Arabian oil production has been hindered due to OPEC agreed production cuts, while U.S. oil production surges.

U.S. vs. Saudia Arabia crude oil production January 2017 - March 2017

U.S crude oil production continues to surge in 2017.

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russian holdings US treasuries 2014 - 2017 April

Russian holdings of U.S. Treasuries have been increasing.

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Chinese Us Treasury Holdings 2014 - 2017

Chinese holdings of U.S. Treasury Securities are on the rise.

Are rising U.S. oil exports and higher U.S. interest rates renewing demand for the dollar and U.S. Treasuries?

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