Iran Nuclear Deal, and the Petrodollar
So, there is currently a lot of speculation, both intellectual and financial going on over the fact that Trump just exited the Iran Nuclear Deal. While national security concerns over Iran’s military intentions and alleged non-compliance to the deal has been raised by Trump; commercial motivations regarding the Petrodollar are more likely the real reason Trump tore up the deal. Europe may stay in, but the Euro private sector would be hit by US sanctions if they deal with Iran; hence, making Iran’s partnerships in Europe unstable. Saudi Arabia’s Crown Prince MBS met with Trump recently, and Saudi Arabia wants crude to be more expensive per barrel in order to help Saudi-Aramco go IPO. The big commercial winner in the exiting of the Iran Deal is Saudi Arabia. Iran will be put back on sanctions, and that will limit Iranian oil exports globally; as consequence, the US and Saudi Arabia, via Saudi-Aramco can hike the price per barrel even higher, and this will: STRENGTHEN THE PETRODOLLAR. Bear in mind that China is not happy about Trump exiting the Iran Nuclear Deal. China wants the Yuandollar to surpass and replace the Petrodollar, but with oil exports being hiked up, it helps Saudi-Aramco; which in turn strengthens the Petrodollar. In other words, the US exited the Iran Nuclear Deal over global commercial considerations, and not actually for global security issues. Money Never Sleeps!
“Petrodollar Recycling
The petrodollar system also creates surpluses of U.S. dollar reserves for the oil producing countries, which need to be "recycled." These surplus dollars are spent on domestic consumption, lent abroad to meet the balance of payments of developing nations, or invested in U.S. dollar denominated assets. This last point, is the most beneficial for the U.S. dollar; as the petrodollars make their way back to the U.S., these recycled dollars are used to purchase U.S. securities (such as Treasury bills), which creates liquidity in the financial markets, keeps interest rates low and promotes non-inflationary growth. Moreover, the OPEC states are able to avoid currency risks of conversion and invest in secure American investments.
Below is a chart showing the flow of Gulf Cooperation Council (GCC) surplus capital:
Bloomberg, BOA Merrill Lynch by way of Financial Times" />
(For more, see: A Primer On Reserve Currencies.)
Recently there have been concerns of a shift away from petrodollars to other currencies, such as the Chinese yuan. These worries are not entirely without merit, as according to the Moscow Times, Gazprom Neft, Russia's third largest oil producer, has reiterated its commitment to sell crude in non dollar denominated terms. Furthermore, according to BNP Paribas, falling oil prices have decreased capital inflows from recycled petrodollars into the United States economy, as show in the chart below from BNP Paribas research.
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While, it will not happen overnight, a drying up of recycled petrodollars would drain the liquidity of American capital markets, which will increase the borrowing costs for governments, companies and consumers as sources of money become scarce.
The Bottom Line
After the 1970s, the world switched from a gold standard and gave birth to the rise of petrodollars. These extra-circulated dollars have helped elevate the U.S. dollar to the world reserve currency. The petrodollar system also facilitates petrodollar recycling, which creates liquidity and demand for assets in the financial markets.
Read more: How Petrodollars Affect The U.S. Dollar | Investopedia https://www.investopedia.com/articles/forex/072915/how-petrodollars-affect-us-dollar.asp#ixzz5F3nAw2U2
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https://www.investopedia.com/articles/forex/072915/how-petrodollars-affect-us-dollar.asp
http://www.euronews.com/2018/05/09/iran-fate-of-the-nuclear-deal
https://sputniknews.com/business/201805091064277627-putin-dollar-oil-traiding/
https://www.ft.com/content/112d1342-488f-11e8-8ee8-cae73aab7ccb