A recent article posted at Casey Research trumpets the view
that the petrodollar system is on its last legs and that when it dies — quite
possibly in 2017 — it will be a massively disruptive event for the US economy
and the financial world, leading to an explosion in the gold price. The
reality is that the so-called “petrodollar” is probably not about to expire,
but even if it were the economic consequences for the US and the world would
not be dramatic.
According to the “petrodollar system” theory, an agreement was reached in
1974 between the governments of the US and Saudi Arabia for the Saudis to do
all of their oil transactions in US dollars and influence other OPEC members
to do the same. In return, the US government vowed to support and protect the
Saudi regime. Also according to this theory, the US economy benefits because
the pricing of oil in US dollars creates additional global demand for US
dollars and US assets.
The agreement might have happened, but there is no good reason that it
would still be in effect. Considering the popularity of the US dollar in
global trade and the size of the US economy, an agreement between the Saudi
and US governments would no longer be required to entice the Saudis to price
their oil exports in dollars. It would be inconvenient for them to do
otherwise.
In any case, even if the “petrodollar” agreement happened and remains in
effect to this day it would not be of great importance. The reason is that
the international trading of oil accounts for only a minuscule fraction of
international money flows.
To further explain, global oil production is about 96M barrels per day
(b/d), but only part of this gets traded internationally. For example, US oil
consumption is about 19M b/d, but the US now produces about 10M b/d so the US
is a net importer of only about 9M b/d. The amount of oil that gets traded
between countries and could therefore add to the international demand for US
dollars is estimated to be around 50M b/d.
Assuming that all of the aforementioned 50M b/d of oil gets traded in US
dollars, at an oil price of $50/barrel the quantity of dollars employed per
year in the international trading of oil amounts to about 900 billion. In
other words, the maximum positive effect on global US$ usage of the
“petrodollar” system is about $900 billion per year.
Next, note that according to the most recent
survey conducted by the Bank for International Settlements, as of April
2016 the average daily turnover in global foreign exchange markets was about
$5.1 trillion. With the US$ estimated to be on one side of 88% of all FX
trades, this means that an average of 4.5 trillion US dollars change hands
every day on global FX markets.
Therefore, the quantity of US dollars traded per DAY on the FX markets,
primarily for investing and speculating purposes, is roughly 5-times the
amount of US dollars used per YEAR in the international oil trade. That’s why
the so-called “petrodollar” is not important.
In conclusion, here’s a suggestion: Instead of focusing on outlandish reasons
for buying gold, focus on the less exciting but vastly more plausible reasons
that gold’s popularity could rise.
