💵 Petrodollar in Peril

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ENERGY SECURITY

Petrodollar in Peril: is the reign of the world’s reserve currency nearing its end?

A month ago, I found myself, along with numerous startup founders, in a mad dash to withdraw funds from Silicon Valley Bank (SVB). This once-venerable institution, which long served as a cornerstone for venture financing, disintegrated in the blink of an eye, sending shockwaves through the tech world. But the SVB collapse did more than raise eyebrows about regional bank stability—it ignited a heated debate about a broader banking crisis and the US Dollar’s role as the global reserve currency.

Bank Runs: When Rain Clouds Gather on a Sunny Day

With an astounding $42 billion vanishing from its vaults in just six hours, the SVB collapse harkens back to Washington Mutual’s 2008 bank run, which saw $16 billion evaporate in nine days. Fast forward to 2040, and try to imagine a bank run unfolding in real-time.

The Siren Call of a Tech Visionary

Enter Balaji Srinivasan, the bold tech entrepreneur and futurist who made a jaw-dropping 40-to-1 bet on Bitcoin skyrocketing to $1 million. Srinivasan warned of US banks’ insolvency and an impending hyperinflation nightmare, prescribing a remedy that involved embracing Bitcoin, migrating to crypto-friendly jurisdictions, and waving goodbye to Uncle Sam. While his ideas might seem radical, they have set the stage for a broader conversation about the US Dollar’s fate.

The Energy Domino Effect

The ongoing debate surrounding a potential banking crisis, US dollar destabilization, and the specter of hyperinflation has led me to consider the potential ramifications for the energy markets. Could this be the start of the decline of the Petrodollar’s dominance?

Over the past month, a series of geopolitical and energy-related events have hinted at a seismic shift:

• China’s Yuan play: China’s CNOOC and France’s Total settled its first LNG transaction in Yuan, suggesting a possible move away from the US Dollar.

• Russia’s strategic pivot: Despite Western embargoes, Russia rerouted oil exports to eager buyers in India and China.

• Saudi Arabia’s new alliances: The Kingdom joined the Shanghai Cooperation Organization (SCO), expanding its political and security ties with China, India, and Russia.

• OPEC+ plays hardball: The surprise production cut serves as a giant middle finger to the US administration while the Fed grapples with inflation and the Strategic Petroleum Reserve runs dry.

• Japan defies sanctions: The country, heavily reliant on imported fossil fuels, broke US sanctions and purchased Russian oil above the cap.

• Yuan gains ground: The Chinese currency emerged as Russia’s most traded currency, replacing the US Dollar a year after US sanctions were imposed following the Ukraine invasion.

• Asian Fund exploration: Malaysia and China considered an ‘Asian Fund’ to reduce US Dollar dependency, with Malaysian Prime Minister Datuk Seri Anwar Ibrahim stating, “There is no reason for Malaysia to continue depending on the dollar.”

Eastward Shift: A New World Order Takes Shape

With the East banding together politically and economically, the US and its currency as the global reserve find themselves in a precarious position. As the BRICS alliance prepares for its September meeting, one can’t help but wonder: will Saudi Arabia join the club as the newest member, and what does this mean for the energy sector?

The Counterargument

Concerns over the US dollar’s devaluation have grown, but it’s important to consider counterarguments before drawing conclusions.

• The Chinese yuan, often considered a contender for replacing the US dollar as the global reserve currency, is pegged to the dollar, which helps maintain the dollar’s predominant position.

• Furthermore, China’s slowing population growth, strict immigration policies and authoritarian regime hinder the yuan’s chances of becoming the reserve currency.

• Historical context from Japan’s experience in the 1980s, when the yen was expected to replace the dollar as the world’s reserve currency, serves as a reminder that such predictions can be premature.

• Additionally, the US dollar remains relatively stronger than many other currencies despite inflation or central banking concerns, which are not unique to the United States.

• While these transactions represent a threat as a payment currency, it doesn’t really off-seat the USD as a reserve currency. There is no viable substitute today for the US treasury market.

Energy Transition: The Delicate Dance of Decarbonization and Demand

As you may know, I’m a firm believer in the “energy transition,” “energy addition,” or “energy innovation”—whatever you choose to call it. It’s the intricate interplay between decarbonization and meeting the world’s growing energy demands. Some might confuse this with the impending doom of fossil fuels like coal, natural gas, and oil. However, both sides of the equation can coexist and will for at least our lifetimes.

The truth is, the world is heavily reliant on fossil fuels. When I ask people about the global peak of coal demand, most are clueless, even those in the energy industry. It was in 2022, only to be surpassed by 2023. Peak coal is still a distant prospect, with peak oil and natural gas even further away – decades not years. These three slandered brothers provide 80% of global energy, and that mix doesn’t seem to be changing anytime soon, regardless of divestiture announcements.

The US Energy Advantage: A Gift We Shouldn’t Squander

The US has been blessed with an abundance of natural resources, from coal to natural gas and oil. Thanks to the Shale Revolution and the ingenuity of our independent producers, we’ve achieved energy independence through unparalleled extraction skills. Unlike the rapid replication of US-invented pharmaceuticals or tech overseas, our shale expertise has yet to be exported—at least not successfully.

For decades, the petrodollar system has been a cornerstone of the global economy. Under this arrangement, oil-producing nations, particularly those in the Middle East, sell their oil exclusively in US dollars. In return, they invest their surplus revenues in US assets, primarily Treasury bonds. This system has provided significant benefits to both parties: the US enjoys an increased demand for its currency and lower borrowing costs, while oil-producing nations secure a stable and widely accepted currency for their exports.

The Russian sanctions opened the door for oil barrels to trade in non-USD and now we’ll see if Saudi elects to follow. The largest buyers of long-term LNG contracts are Asian buyers and China has set a precedent of dealing in Yuan.

As we enter a new era of energy addition from renewable energy, powered by battery materials, photovoltaic cells, and electrolyzers sourced largely from China, it’s unlikely that the world’s future energy prospects will be tethered solely to the dollar for the next 50 years.

In today’s increasingly de-globalized landscape, it’s vital to recognize that de-dollarization might not be a black-and-white outcome or a swift transformation. As the world moves towards a more localized approach, we should anticipate energy trades to take place in currencies other than the USD. Monitoring the potential consequences of this gradual shift is crucial as we navigate these changing economic dynamics. It won’t go 100 to zero. The trend of the subtle shift is the one to follow.

The Petrodollar’s Precarious Position: A Multi-Trillion-Dollar Question

Is the Petrodollar’s reign nearing its end? That’s the multi-trillion-dollar question. As Lenin said, “There are decades where nothing happens; and there are weeks where decades happen.”

The future may be shrouded in uncertainty, but one thing is crystal clear: we’re witnessing history in the making.

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.