That’s right, the 50-year-old petrodollar agreement between the U.S. and Saudi Arabia is no more, expired, kaput.
The agreement was formed in the 1970s after the Arab oil embargo created gas lines and inflation in the United States. The idea was that the U.S. would protect Saudi Arabia militarily, and buy its oil. In exchange, the Saudis would only accept U.S. dollars for its oil.
This deal would buoy U.S. T-bills and lower interest rates. The deal was a win-win. The U.S. gained a stable source of oil and a captive market for its debt. Saudi’s secured economic and overall security.
But things have changed in the last half a century. The U.S. is now a net exporter of oil and is the fastest-growing oil producer (in volume terms) in the world.
The Saudis are now rich with a formidable military. They are selling most of their oil to China, and very little to the U.S., and have partnered with Russia in developing a non-US-based financial system.
Why it Matters
One of the favorite narratives regarding the Petrodollar deal was that it caused the U.S. dollar to become the world’s reserve currency. If this was true in the past it is no longer the case.
First of all, central banks keep money in Euros, Yen, and gold as well as the dollar. Secondly, being a dominant reserve currency has more to do with America’s 13 aircraft carrier strike forces than Saudi oil sales.
Here is the sum of the popular argument via Nasdaq.com:
“The global demand for dollars to purchase oil has helped to keep the currency strong, making imports relatively cheap for American consumers. Additionally, the influx of foreign capital into U.S. Treasury bonds has supported low interest rates and a robust bond market.”
I would also argue that the sales of actual oil in U.S. dollars from the U.S. will also bolster the dollar.
Trump May Want a Weak Dollar
A few weeks ago I attended a Free Speech Summit in Mar-a-Lago, Florida. The dinner speaker was Trump’s former Trade Secretary Robert Lighthizer.
That’s your humble editor, Christian DeHaemer on the right. Lighthizer on the left.
Lighthizer, who very well may be the next Treasury Secretary, would argue that the dollar has been too strong for too long and that the trade deficit with China and others is hurting U.S.-based businesses.
Lighthizer grew up in the Rust Belt of the U.S. and saw firsthand how cities like Pittsburgh and Detroit were hollowed out and left for ruin — largely due to an emphasis on free trade and the jobs we exported overseas. Families lost income, jobs, homes, and marriages. Communities were destroyed as young people moved away. Hope was abandoned, suicides soared.
Lighthizer believes that current trade rules are unfair and leave the U.S. at a severe disadvantage compared to the rest of the world. Part of that tilted landscape has to do with the trade deficit and the strong dollar.
Wall Street would argue that a strong dollar reduces the cost of borrowing money thus increasing capex, and reduces the cost of imports which benefits consumers. Lighthizer believes that the time has come to support U.S. manufacturing and strong jobs instead of Chinese plastic geegaws and private equity takeovers.
According to Politico.com:
“Lighthizer “frequently” brought up currency devaluation during Trump’s first term, said one former administration official with knowledge of the discussions, as did Trump economic adviser Peter Navarro. But they faced opposition from Wall Street-aligned officials like Treasury Secretary Steven Mnuchin and former National Economic Council Chair Gary Cohn, and the idea never got off the ground. Trump even reportedly squashed a dollar devaluation proposal from Navarro during a White House meeting.
“Lighthizer brought that up all the time because he felt like tariffs weren’t enough to achieve the objective” of rebalancing trade with the rest of the world, said one of the former Trump administration officials. “Mnuchin didn’t want to do it.”
I don’t know how all of this is going to end. But the fight will be renewed with a Trump victory. I suspect that the forces of globalization and free trade are on their heels.
The slow, heavy pendulum is swinging back toward a form of modern mercantilism with global trade blocks based on vertical integration within closer geographic spheres of influence.
I’ll keep you updated,
Christian DeHaemer
Outsiderclub.com
What I’m reading:
https://www.politico.com/news/2024/04/15/devaluing-dollar-trump-trade-war-00152009
https://www.nasdaq.com/articles/us-saudi-petrodollar-pact-ends-after-50-years
https://en.wikipedia.org/wiki/Robert_Lighthizer
https://www.outsiderclub.com/three-stocks-for-the-uranium-bull-market/
