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Ron Paul, the (retired) Republican
Senator concluded a speech before Congress in 2006 thus:
The chaos that one day will ensue from
our 35-year experiment with worldwide fiat money will require a return to
money of real value. We will know that day is approaching when oil-producing
countries demand gold, or its equivalent, for their oil rather than dollars
or euros.*
To most people even today this is
probably a pie-in-the-sky comment, but they would be wrong not to consider it
more seriously in the light of subsequent events.
The possibility of the demise of the
petrodollar is increasing quite rapidly for two reasons. Firstly, US oil
consumption has fallen from 38% of the World’s total in 1965 to less
than 20% today, while Asia/Pacific consumption has increased threefold to
over 33%. Furthermore due to shale oil production US oil imports are expected
to reduce further in the coming years, perhaps eliminating her oil deficit
entirely, negating the need for petrodollars. This leaves the Arab nations
with a stack of useless dollars.
The chart below shows the enormity of
their problem.
In the thirty years before 2000, total
energy export revenue ignoring compounding interest totalled
$3.5 trillion and in the thirteen years since then over $8 trillion. With
interest, and despite accelerated infrastructure spending since the late
1990s that still leaves enormous currency balances in Middle-Eastern hands,
likely to be a number like $8-10 trillion with a large element of it still in
dollars.
Secondly, America’s failure to
support Mubarak in Egypt, the volte-face over Syria and now the
détente with Iran have altered long-term relations with Saudi Arabia,
forcing her to reconsider strategic options for the future and to look after
her own interests. Saudi Arabia and Israel find that America is no longer
prepared to be the regional policeman. And when she unsuccessfully courted
Russia for help over Syria and got nowhere, it must have only heightened the Saudi’s
sense of insecurity.
One could argue it all comes down to
the money, but the other reality is US electoral fatigue after Iraq and
Afghanistan; so a logical reassessment shows the region’s future on
both trade and strategic grounds is increasingly focused towards Asia and
Europe, not the US.
The currency replacement for the
petrodollar need not concern us for the moment. What is more interesting is
the regional attitude to gold, which was acquired in large quantities up to
the mid-1990s, as insurance against this eventual outcome. Interestingly, I
have discovered from contacts in the Swiss refining industry that some of
this gold in LBMA 400 ounce gold bars is now being recast into the new
Chinese 9999 standard of 1 kilo bars.
It is not immediately clear why Arab
gold is being recast. However, taking into account the significant shift in
the region’s trade and strategic options it becomes clear that gold
held for eventual resale into dollar-denominated markets makes no sense at
all, particularly when there are enormous dollar balances that will also have
to be addressed.
However, the Arabs know that if they
sell their dollars they will risk undermining the whole fiat currency regime.
It is therefore quite possible they will seek as an alternative to take at
least a portion of their oil revenue in gold or its equivalent, as Ron Paul
suggested; so he had a point seven years ago and the foreign exchanges should
now begin to anticipate this event.
There is a lesson for us in this: when
we are distracted by China’s accelerating demand for gold and her
conflicting desire not to trigger a financial crisis, the unexpected catalyst
for monetary chaos may well be the actions of the Middle-Eastern potentates
who cornered the gold market thirty years ago.
*This speech was recently commented on and drawn to my attention by Casey
Research.
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