Dethroning of the US Petrodollar by Omar M. Almahmoud

The US Petrodollar: The Beginning and The End

In the 1970s, the US struck an agreement with the Saudis to sell oil only in US dollars. This agreement led to other countries following suit, making the US dollar the only currency used to purchase oil in the global market. The “Saudi” created US dollar, specifically the Petrodollar, has played a crucial role in the global economy for decades. Its status as the world's reserve currency has allowed the US to wield immense economic power, influence, and leverage across the world stage. In theory, as well, the US has been purchasing Saudi oil in exchange for US-printed pieces of paper called US dollars backed by nothing, and in this time and age with keyboard strokes and digits stemming from a US IP address.

To understand this perspective, we must first understand what the petrodollar system is. Since the 1970s, the US dollar has been the world’s reserve currency, backed by the vast reserves of gold in Fort Knox. However, in the early 1970s, President Richard Nixon ended the gold standard, ushering in a new era of a dollar backed by no hard asset or any commodity. The US then went on to ensure that people and nations have to have a reason to need the US dollar thus the need of the Petrodollar came into existence.

Under this agreement with the Saudis, countries used the US dollar to purchase oil. As oil is the world’s most traded commodity, this meant that the US dollar was now inextricably linked to the global oil industry. This system gave the US dollar an enormous advantage over other currencies, as it was no longer tied to a physical commodity, but rather to oil, which is essential to the global economy.

If the Saudis decide to shift to their own currency or other currency for oil transactions the fate of the US Dollar and the US global position as a superpower would be questioned.

3 Principles of the Changing World Order

Ray Dalio is a famous American investor and founder of Bridgewater Associates, the world's largest hedge fund. His book, "Principles," is a New York Times bestseller. In his book, he states that the reason for the rise and fall of global economic powers is the presence or absence of sound economic policies. Dalio believes that every country needs to focus on building strong institutions, strong property rights, and sound regulations. He also believes that a focus on productivity, education, and innovation is essential for a country's success.

Dalio, has been studying the rise and fall of empires and economies for decades. In his book, “The Changing World Order,” Dalio argued that the world is on the brink of another major shift, similar to the one that occurred in the 1930s. In this new world order, countries will no longer rely on the US dollar as the world’s reserve currency.

Dalio believes that this shift is driven by three factors. First, the American economy is in decline, and its debt levels are unsustainable. Second, China’s economy is growing, and it will soon become the world’s largest economy. Finally, globalization has created a more interconnected world, where countries are no longer dependent on the US for trade and finance.

However, not all countries will succeed in this new world order. According to Dalio, the key to success is understanding the principles of how nations rise and fall. In his book, “Principles for Navigating Big Debt Crises,” Dalio outlined a framework for understanding the causes and consequences of big debt crises. By analyzing the past, Dalio has identified common patterns that indicate when a country is on the brink of a crisis.

Dalio’s framework is based on three principles. First, debt cycles are inevitable, and they can be both positive and negative. Second, the severity of a debt crisis depends on the level of debt, the quality of the collateral, and the ability to service the debt. Finally, the resolution of a debt crisis depends on a country's ability to balance competing interests and maintain social cohesion.

Dalio’s framework provides valuable insights into why some countries succeed while others fail. Successful countries manage their debt levels and maintain a healthy financial system. They also balance the interests of different stakeholders and promote social cohesion. In contrast, failed countries suffer from excessive debt levels, a weak financial system, and social unrest.

New Nation Players & Digital Currencies

In recent years, countries such as China and Russia have been challenging the hegemony of the US dollar. They have been diversifying away from the dollar and moving towards other currencies like the yuan and the ruble. As the value of the dollar continues to decline, more and more countries are looking at alternatives to the US dollar as a reserve currency.

China has been steadily growing its economy over the past decade, and its yuan is becoming a more attractive currency for international trade. China's Belt and Road Initiative, which aims to build infrastructure and trade routes throughout Europe and Asia, could further boost the yuan's standing in the global economy. Additionally, China and Russia have been stepping away from the dollar in recent years, opting to use their own currencies in trade deals to avoid US sanctions.

Furthermore, advances in technology could also impact the role of the US dollar in international trade. Cryptocurrencies, such as Bitcoin, offer a new way for people to transfer value across borders without relying on traditional currencies. These digital currencies are generated through mining, and they run on blockchain technology, which is decentralized, public ledgers that allow secure peer-to-peer transactions without the need for intermediaries. Due to this technology, cryptocurrencies can be quickly and efficiently transferred across borders without the fees and regulations that come with standard banking and currency transactions. Also, unlike the US dollar, the owner of cryptocurrencies can exert complete control over it, without relying on the government to issue and back the currency.

The dethroning of the US petrodollars as a reserve currency is a controversial one, to say the least, and Ray Dalio’s changing world order perspective adds to the bleak forecast of the US Dollar. While there are certain risks associated with this shift, there could also be opportunities for a more balanced global economic system. As global leaders, CEOs, and business owners, it’s important to be aware of these changes and prepare for any potential consequences that may arise. Only time will tell how the global economy will evolve, but one thing is certain: the rise and fall of the US petrodollar system will remain a hotly questioned topic for years to come. I can summarize 3 reasons to conclude my thoughts.

Reason 1: Rising Debt and Inflation

The US has been running a deficit for years, and the recent pandemic has only exacerbated the situation. As the deficit continues to rise, it raises concerns about the stability of the US dollar as the global reserve currency. Additionally, as inflation rises, the value of the dollar decreases, which will further undermine its status.

Reason 2: Shift to a Post-Western World

As China continues to rise in economic power, it is increasingly challenging the US's position as the number one global superpower. China as well as Russia have been working on creating their own payment systems and reserve currencies, which could undermine the role of the US dollar. Additionally, as other countries diversify their investments and strengthen their own currencies, it could be a sign that the world is shifting to a post-Western world.

Reason 3: Digital Currencies

The rise of digital currencies such as Bitcoin and Cryptocurrencies have the potential to disrupt the global financial system. Although these currencies are not currently tied to any country, this could change in the future. If a major country were to create its own digital currency, it could potentially challenge the role of the US dollar as the global reserve currency.

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