The Value of Fiat Dollars in Relation to the Sale of Crude Oil

Petro-dollars
[courtesy Google Images]

The Washington Examiner

That article reported, in part, that:

“The oil and gas industry is seizing on recent comments by [U.S. Department of] Energy Secretary Ernest Moniz to push for an end to the United States’ 40-year-old ban on crude oil exports.

“The American Petroleum Institute says the U.S. energy boom has made the ban irrelevant, citing Energy Information Administration projections this week that domestic oil production would hit a near-record 9.5 million barrels per day by 2016.”

That’s interesting—especially the fact that the ban on sale of US crude to foreign countries began about 40 years ago.

Q:  If the ban on selling US crude oil to foreign countries is lifted, what’ll it mean?

A:  There’ll be more competition as foreign countries seek to purchase US crude.  More competition to purchase US crude oil will cause the prices of US crude and US gasoline to rise.

Q:  Will rising energy prices threaten the fragile US economy?

A:  Almost certainly.

Q:  Therefore, will the national government allow US crude oil to be sold to foreign countries (and thereby raise domestic energy prices) while the economy is still struggling?

A:  You’d think the answer would be No.

But, if so, why has the Secretary of the US Department of Energy advocated an end to the ban on the sale of US crude to foreign countries?  You’d think that somebody should’ve told the Secretary of Energy that we’re not going to do anything to increase energy costs and threaten the economy at this time.  It’s hard to imagine that a prominent officer of the US government would “accidentally” advocate a policy that’s likely to cause an additional drag on the US economy.

Therefore, I’m forced to suppose that the national government may be willing to intentionally risk degrading the economy further in order to support the oil industry prices and profits.

•  This increased risk is particularly interesting to me because the ban on the sale of US crude to foreign countries started 40 years ago—about A.D. 1973.

That’s an interesting era.

Q:  What else happened back about that time?

A:  The US dollar had lost its domestic gold-backing in A.D. 1933; lost its domestic silver-backing by A.D. 1968; and lost its international gold-backing when President Nixon closed the “gold window” in A.D. 1971.  Thus, by A.D. 1972, the US dollar had become an intrinsically worthless, pure fiat currency that was likely to suffer significant inflation and devaluation—and might even become worthless and expire.

However, the Nixon administration cut deals with Saudi Arabia and OPEC whereby those oil-producing countries guaranteed to sell their crude oil for only US dollars.  By means of these deals, Nixon created “petro-dollars” that, although intrinsically worthless, were implicitly backed by foreign crude oil.

I.e., because foreign oil-producing nations had agreed to sell their crude oil for only US dollars, before the other nations of the world could buy crude oil on the international markets, they had to first have intrinsically worthless US dollars.  The resulting international demand for dollars imparted an implied value to fiat dollars.  That implied value allowed fiat dollars to continue to: 1) spend as if they were backed by gold or silver; and, 2) continue to function as the “world reserve currency”.

•  Nixon closed the gold window in A.D. 1971, cut a deal with the Saudi’s in A.D. 1972, and banned selling US crude to foreign countries about A.D. 1973.  These three events may be unrelated, but it’s reasonable to suppose that part of the A.D. 1972 deal with the Saudi’s (and, later, OPEC) to support US dollars included a US promise to stop competing with the Saudis and OPEC in the international crude oil markets.

Thus, it appears possible that, in order to protect the fiat dollar, the US government prevented most US crude oil production from being sold on international markets.

More, because the US wasn’t selling in the international crude oil market, the fiat dollars that were being pumped into foreign countries and foreign crude oil markets would not come back to the US to purchase US crude oil.  (Perhaps, the US gov-co was not about to sell US crude for something as worthless as US dollars.)

The “petro-dollar” scheme worked brilliantly until A.D. 2000 when Saddam Hussein began to sell Iraqi crude for euros.  Doing so threatened the petro-dollar’s hegemony as the only “world reserve currency” and implied value.

Under the pretext of destroying Iraq’s Weapons of Mass Destruction (WMDs), our government invaded Iraq, hanged Hussein, supplanted the Iraqi currency with fiat dollars and subjected the Iraqi people to eight years of war.  But there were no WMDs.  Our government invaded Iraq for no valid reason that was publicly disclosed.

I have no doubt that the real reasons for the Iraqi War were: 1) to stop Iraq from selling its crude oil for currencies other than fiat dollars; and, 2) send a message to every other oil-producing country that if they dared to sell their crude for currencies other than dollars, they’d get a dose of the same “shock and awe” that terrified Iraq.    But if these were the true reasons, the invasion of Iraq failed.

Today, ten years after the A.D. 2003 invasion, the dollar’s value as measured on the US Dollar Index has declined from 125 to 80—a loss of 36%.  Given that the US Dollar Index calculates the value of the fiat dollar against six other fiat currencies that are also falling in value, the real loss in US dollar purchasing power over the past ten years is probably somewhere between 50% and 70%.  Thus, the invasion of Iraq did not succeed in protecting the value of the fiat dollar.

In the last five years, some nations have begun to follow Iraq’s example and are selling their crude oil and other products to other nations without any intervening use of fiat dollars.  As a result, the US dollar’s status as World Reserve Currency has been diminished.  The invasion of Iraq failed to fully protect the “world reserve currency”.

Because the fiat dollar has lost much of its purchasing power and is certain to continue to do so, the fiat dollar is no longer deemed to be “good as gold”.  People, institutions and governments that were once content to store their wealth in the form of fiat dollars are beginning to doubt that the dollar can protect their wealth and are therefore dumping dollars.  As a result, the flood of fiat “petro-dollars” that we pumped out into the world since A.D. 1972 have begun to stream back into the US as foreigners buy US land, resources, buildings and infrastructure.  The cultural norms of this nation will be compromised by the inflow of foreign-held dollars.  Our petro-dollars are coming home to roost.

•  The purpose for the previous stroll down memory lane is to illustrate that, since A.D. 1972, the perceived value of the US fiat dollar has been largely dependent on the dollar’s relationship to the sale of crude oil.  That relationship included a ban on the sale of US crude to foreign countries.

But today, the US oil industry and the US Secretary of the Department of Energy are advocating a restoration of the sale of US crude to foreign countries.

Q:  If that restoration takes place, will it constitute a break in the former agreements with the Saudi’s and OPEC?

Q:  If so, will those agreements therefore die?

Q:  If those agreements die, will the US fiat dollar lose its last vestige of support as a “petro-dollar”?

Q: Will the fiat dollar’s status as World Reserve Currency be further compromised?

A:  Yes, Yes, Yes, and, umm, Yes.

• But, more importantly, if (as implied by the US Energy Secretary’s remarks) the US is:

1) Preparing to allow the sale of US crude oil to foreign countries; and,

2) If such sales will strip the fiat dollar of much of its apparent value; then,

3) Does that mean that the US is approaching a moment when government will intentionally allow the value of the fiat dollar to fall dramatically?

If so, does government’s apparent intention to lift the ban on selling US crude to foreign countries signal that government is getting ready to let the fiat dollar die?

I.e., if the original, A.D. 1972 deal with the Saudi’s and OPEC included a promise to ban selling US crude on foreign markets, but the US government now opts to lift that ban, does that lift break the original deal?  If so, will the Saudi’s and OPEC begin to sell their crude for currencies other than fiat dollars?  If the US dollar is no longer required to purchase foreign crude oil, what will remain to sustain the illusion of fiat dollar value?  Without the implicit backing by crude oil, won’t the fiat dollar lose much more value and perhaps die?

If the gov-co is ready to intentionally precipitate that chain of events, does that signal that gov-co has decided to intentionally collapse the fiat dollar?