The Petro-Dollar Collapse

Another attack on the dollar could come from the seldom discussed and widely misunderstood relationship between the dollar and oil.

Ron Paul explains this relationship in the following speech on the House Floor.

Ron Paul – The End of Dollar Hegemony: Dollar Backed by Oil [February 15th, 2006] (09:54)

Ron Paul – The End of Dollar Hegemony [FULL SPEECH] [February 15th, 2006] (34:49)

After Nixon closed the gold window, the dollar was no longer backed by gold, and many think that the dollar is backed by nothing. I would argue that the dollar is actually backed by oil and the military superiority of the United States, which is necessary to maintain that backing. A deal was made with OPEC in the 1970’s to price oil exclusively in dollars. Since every economy in the world needs oil in order to grow, they therefore need US dollars to buy that oil. As the oil price goes higher, countries now need to accumulate more and more dollars in order to afford the more expensive oil. Even though countries like China have trillions of United States dollars, with oil at $150 a barrel, they would need to have a lot of dollars in order to be able to afford to import all the oil they are going to need to grow. When the price of oil was being projected at over $200 a barrel, many predicting much higher numbers in the long run, the countries around the world would be unable to dump dollars because then they would not be able to import any oil. Looking at the dollar from this perspective, a rise in oil prices should fundamentally increase the value of the dollar, since the commodity backing the dollar is increasing in value. Conversely, a fall in oil prices should fundamentally weaken the value of the US dollar. If oil prices fall to $50 a barrel, countries like China no longer have any use for the trillions of US dollar reserves; because they do not need as many in order meet the oil demand in their country. For this reason, the current expansionary monetary policy combine with the fall in oil prices puts the dollar in a very vulnerable position.

If the dollar to oil relationship (petro-dollar) is maintained, a total collapse in the value of the dollar may be impossible. Devaluation is possible through increasing the supply of oil, reducing the demand for oil, or an inflationary monetary policy where the Federal Reserve prints money at a much faster rate than oil is being pumped out of the ground and being consumed. With excess money printing, like we are seeing today, this should cause the value of the dollar to go down, but also cause the dollar value of oil to go up. Foreign countries will have to make sure they buy enough dollars in order keep up with the rising price of oil. So as long as oil is priced in dollars, it prevents a global run on the dollar. Because as the dollar is devalued, oil becomes more valuable in terms of dollars, requiring the countries to buy more dollars in order to be able to afford the more expensive oil.

So if anyone was still wondering what the real reason was for the invasion of Iraq, they can look no further than Saddam Hussein's decision in the year 2000, to price oil in Euros instead of dollars. Hugo Chavez in Venezuela was considering this move as well, but was then faced with a CIA sponsored coup in an attempt to overthrow the government and prevent them from making this policy decision to stop accepting dollars for their oil. And of course, the most recent oil producing country to stop accepting dollars is Iran, who is now selling their oil for Euros and Yen. Since Iran is such a big oil producing country and are allied with Russia, another large oil producing country, they together could destroy the petro-dollar, causing the US dollar to collapse. If large oil fields open in Northern Russia and Indonesia, for instance, and are allowed to price oil in any foreign currency without risk of US invasion, then the petro-dollar would be destroyed. The United States has over 700 military bases spread out over 130 countries, which are used to police the world, protect US interests in foreign countries, and maintain the dollar oil relationship. If the economic situation deteriorates to the point where the US government is no longer able to maintain their trillion dollar a year empire, the troops would have to come home and the world would be liberated from the petro-dollar stranglehold the US held over the world for the last few decades, which allowed for the imbalances and the phony consumer based American debt economy.

The system that was set up allowed the US government to expand the money supply and run trade and budget deficits for decades. The excess dollars were exported out of the country and were accumulated by people and businesses and stored as reserves in Central Banks around the world. Back when the United States had a sound economy and produced a lot of goods for export, the US dollar was very valuable because it could be converted into gold at a fixed rate of $35 per ounce, it could be used to buy the high quality products that the United States exported, and it could be used to invest in profitable and productive businesses.

These days, the only thing of value that can be bought with US dollars is oil. The world already lost a fortune investing in dot-com stocks and mortgage backed securities, so other than buying oil, there is not very much use for paper dollars. Of course the OPEC countries are the ones who are stuck accumulating vast quantities of these dollars without them being able to buy much with them. The original OPEC deal set up in the 1970’s to price oil in dollars was contingent on the Arab states investing a portion of their dollars back in the United States by loaning the dollars back to America under generous terms and buying up the debt. Dollars that were not used to buy up debt could be spent on US produced military equipment (to strengthen their control over the citizens of their country) and financing the socialistic economies and the lavish lifestyles and magnificent palaces of the princes and sheiks. Can this giant Ponzi scheme go on forever?