You’ve likely heard the term “petro-dollars.” It originated in the 1970s, when Secretary of State Henry Kissinger struck an agreement with Saudi Arabia requiring that any country that wanted to purchase oil from the Saudis would have to do so with U.S. dollars.
Since then, countries around the world have been converting their currency into dollars to buy oil from the Saudis, who, historically have been the world’s largest and least expensive producer of oil.
Kissinger’s deal created ongoing global demand for U.S. dollars, since countries that wanted to buy Saudi oil had to keep a large reserve of dollars on hand. In return, Saudi Arabia received an assurance that the U.S. military would back and protect the royal family, according to Palisade Research.
The Federal Reserve Board has responded to the resulting demand for dollars by continuously adding to the supply of U.S. dollars, according to FollowTheMoney.com.
China’s Response to Petro-Dollars
Now, after years of planning, China is retaliating with its petro-yuan, which began trading on the Shanghai International Energy Exchange, part of the Shanghai Futures Exchange at the end of March.
China is the world’s largest oil-importing and oil-consuming nation. Now Chinese and other foreign traders will be able to buy oil in yuan instead of dollars. The ability to trade oil in yuan instead of dollars will be especially helpful to Russia, Iran and Venezuela, which have been sanctioned by the U.S., according to Global Research.
“By removing themselves from the grip of the petro-dollar,” according to Zero Hedge, “China just hedged themselves from any potential sanctions by the U.S. in the oil markets – just like they did to Russia, Iran, and Venezuela.”
So the U.S. loses much of its leverage against some of the world’s most anti-American countries. And if a trade war develops with China, it will be that much more difficult for the U.S. to draw concessions.
Going for the Gold
“There’s a reason China and Russia have been buying and mining huge amounts of gold,” according to Palisades Research.
The petro-yuan is backed by gold.
Meanwhile, as the petro-yuan evolves, it is likely to reduce demand for the dollar.
“Investors worry that if China purchases fewer Treasuries,” Zero Hedge reported, “the U.S. government would have to find alternative buyers. That could prompt a rise in the rate of interest it pays and increase the cost of serving America’s vast national debt.”
And yet, as debt in the U.S. piles up, “this is the time where the Treasury needs someone to buy even more of (its) debt and bonds.”
And finally, keep in mind that China already holds $1.2 trillion in U.S. debt, making it the largest holder of U.S. debt. If China were to dump U.S. debt, “that would be a catastrophe – for everyone, including China,” according to Palisades Research.
“They know this – so it isn’t something they would do freely,” Palisades concluded. “But if they have to, they will.”
The dollar would plummet as a result. It may be a good time to invest in gold.