A recent article posted at Casey Research trumpets the view that the petrodollar system is on its last legs and that when it dies — quite possibly in 2017 — it will be a massively disruptive event for the US economy and the financial world, leading to an explosion in the gold price. The reality is that the so-called “petrodollar” is probably not about to expire, but even if it were the economic consequences for the US and the world would not be dramatic.
According to the “petrodollar system” theory, an agreement was reached in 1974 between the governments of the US and Saudi Arabia for the Saudis to do all of their oil transactions in US dollars and influence other OPEC members to do the same. In return, the US government vowed to support and protect the Saudi regime. Also according to this theory, the US economy benefits because the pricing of oil in US dollars creates additional global demand for US dollars and US assets.
The agreement might have happened, but there is no good reason that it would still be in effect. Considering the popularity of the US dollar in global trade and the size of the US economy, an agreement between the Saudi and US governments would no longer be required to entice the Saudis to price their oil exports in dollars. It would be inconvenient for them to do otherwise.
In any case, even if the “petrodollar” agreement happened and remains in effect to this day it would not be of great importance. The reason is that the international trading of oil accounts for only a minuscule fraction of international money flows.
To further explain, global oil production is about 96M barrels per day (b/d), but only part of this gets traded internationally. For example, US oil consumption is about 19M b/d, but the US now produces about 10M b/d so the US is a net importer of only about 9M b/d. The amount of oil that gets traded between countries and could therefore add to the international demand for US dollars is estimated to be around 50M b/d.
Assuming that all of the aforementioned 50M b/d of oil gets traded in US dollars, at an oil price of $50/barrel the quantity of dollars employed per year in the international trading of oil amounts to about 900 billion. In other words, the maximum positive effect on global USD usage of the “petrodollar” system is about $900 billion per year.
Next, note that according to the most recent survey conducted by the Bank for International Settlements, as of April 2016 the average daily turnover in global foreign exchange markets was about $5.1 trillion. With the USD estimated to be on one side of 88% of all FX trades, this means that an average of 4.5 trillion US dollars change hands every day on global FX markets.
Therefore, the quantity of US dollars traded per DAY on the FX markets, primarily for investing and speculating purposes, is roughly 5-times the amount of US dollars used per YEAR in the international oil trade. That’s why the so-called “petrodollar” is not important.
In conclusion, here’s a suggestion: Instead of focusing on outlandish reasons for buying gold, focus on the less exciting but vastly more plausible reasons that gold’s popularity could rise.