http://www.huffingtonpost.com/alastair- ... 45914.html
The Fed consistently managed Fed funds rates to keep oil prices steady, even when it required mid-teens interest rates and back-to-back recessions in 1980-1982. Since U.S. Fed funds rates were managed to preserve U.S. creditors' and oil exporters' purchasing power in oil terms, the system proved acceptable to most nations.
While the petrodollar arrangement worked well for nearly 30 years, the arrangement began to wobble around 2002-2004. . . Oil prices began steadily rising in 2002 and 2003 while Fed funds rates remained low to mitigate the fallout from the 2001 U.S. recession/tech bubble.
As a result, the number of barrels of oil that could be purchased for a face value U.S. Treasury bond declined sharply. . . After maintaining a range of 55-60 barrels of oil per U.S. Treasury from 1986-1999, a $1,000 face value U.S. Treasury went from buying 60 barrels of oil in 1999 to under 30 by early 2004
The U.S. economy had now become so dependent on low interest rates that it could never again manage to keep oil prices steady relative to U.S. treasuries without blowing up the global financial system. The U.S. economy had now become too "financialized" to withstand anything more than a token interest rate hike.
The petrodollar system, which had allowed the U.S. dollar to supplant gold as the backing for the oil trade from 1973-2002, was broken.
Energy producers began to accumulate real assets (such as real estate), and returned to purchasing physical gold in lieu of U.S. treasuries. Finally this year, the long established re-circulation of petrodollars back into the U.S. financial system came to an end -- according to BNP. "The oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012," Reuters reported. "This will be the first year in a long time that energy exporters will be sucking capital [and liquidity] out," noted David Spegel, global head of emerging market sovereign and corporate research at BNP.
WHY THE ROUBLE OR YUAN INSTEAD OF THE DOLLAR?
And why should producers opt for roubles or yuan? Well, both China and Russia have recently been big buyers of physical gold. Russia's present gold reserves would back 27 percent of the narrow rouble money supply. That is a high ratio -- far in excess of any other major country, and also in excess of the U.S. Fed's original stipulated gold coverage minimum. Moreover, Russia is a large net exporter of goods and energy, notwithstanding sanctions. So Russia's gold reserves, by implication, are likely to continue to grow, rather than decline.
In the longer term, holding roubles or yuan may allow producers to escape the damaging inflationary effects of a dollar system now dependent for its stability on low interest rates and monetary expansion.
These prospective changes are still speculative, but are potentially highly significant. The petrodollar has lasted for over 41 years, and has been the driving force behind America's economic, political and military power. It would be ironic, indeed, were the tensions with Russia inadvertently to become the driver of America finally losing its petrodollar card.
