in today Money Morning…Russia bets on gold, breaks with petrodollar…renewable energy decreases the need for the petrodollar…and more…
“The economic law that honest exchange requires only things of real value like money cannot be abrogated. The chaos that will one day result from our 35-year experiment with global fiat money will necessitate a return to a currency of real value. We will know that the day is approaching when the oil-producing countries will demand gold, or its equivalent, for their oil instead of dollars or euros.‘
Speech by Ron Paul “The End of Dollar Hegemony”
The quote above is an excerpt from a speech given by American author and retired politician Ron Paul to the United States House of Representatives in 2006.
In his talk, Ron Paul explains how the current global system was built around the petrodollar and provides an excellent summary of how we got here. I couldn’t help but remember it this week. If you’ve never heard of it before, you can read the full transcript here.
The petrodollar system began in the 1970s when US President Richard Nixon ended gold convertibility, fearing the United States was running out of gold. The US dollar then became a fiat currency backed by nothing.
How do you maintain confidence in the US dollar and global demand for that currency when it’s not backed by anything?
By using it for a commodity, and in this case, oil.
This is when the current petrodollar agreement came into being. OPEC has agreed to price barrels of oil in US dollars in exchange for protection. Anyone who wanted to buy oil would have to buy US dollars first, making the USD the global currency for commodities.
The money from the sale of oil would then be invested in US Treasuries, creating more demand for US debt, which, in turn, keeps borrowing costs low.
This system works as long as the USD maintains its dominance in world trade.
Russia bets on gold, breaks with petrodollar
Since invading Ukraine, Russia has been virtually cut off from the financial world.
Sanctions have been imposed, including banning the country from the SWIFT banking system and even freezing central bank assets.
As the ruble began to tumble, Russia attempted to defend its currency by raising interest rates from 9.5% to 20% and imposing currency controls.
But in late March, Russia took another step. The Bank of Russia said it would start buying gold from Russian banks at a price of 5,000 rubles per gram to support the economy until June 30.
To defend the currency and circumvent sanctions, Russia said that from April 1 it would only accept rubles for Russian gas from “hostile countries” instead of euros and US dollars.
Now everyone knows that Russia is an energy powerhouse. As the world’s third-largest oil producer and second-largest exporter of crude oil, around 40% of Europe’s gas supplies and 25% of its oil come from Russia.
And, this week, Russia added that only accepting rubles is a “prototype” that could be extended to other goods it exports.
These moves supported the ruble as the currency rallied to pre-invasion levels against the US dollar.
Now Europe is considering further sanctions after the conflict escalates, even threatening to introduce an energy embargo.
Germany, in particular, faces great pressure as it obtains around 55% of its gas from Russia. Germans have been told to turn down the thermostat and drive slower – a stark reminder of the United States in the 1970s.
We’ll see what happens. At least for now, they both need each other. Europe needs Russian energy and Russia needs exports for money.
But the conflict serves as a catalyst for renewable energy.
Renewable energy lessens the need for the petrodollar
The fact that a major energy producer like Russia is moving away from petrodollars is a shock to the system.
But in my mind, it’s a system that’s already coming to an end as renewables take off.
In fact, renewable energy reached a major milestone last week. According to Ember, wind and solar generated 10.3% of global electricity for the first time in 2021.
At a time when inflation is biting, renewable energies are deflationary but also less centralized. It is not based on a small group of oil-producing countries, but rather on cheap and decentralized energy production.
This means that eventually fewer US dollars will be needed in exchange for fossil fuels around the world, thus less dependent on a single global reserve currency.
Of course, it will take time, but I bet the energy transition could happen much faster than many think.
Better,
Selva Freigedo,
For silver morning
Selva is also the editor of New energy investor, a newsletter that looks for opportunities in the energy transition. To find out how to subscribe, click here.
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