A system reset has begun, but not the way we thought

On 1^st May, the petrodollar system witnessed a monumental change.

It’s related to the Iranian conflict, but not a secret deal between the US and Iran that the media has neglected to report.

Nor is it some obscure financial transaction between nation blocs to bypass the US dollar.

The event is publicised but its impact won’t be evident for a while.

Those who understand what happened will probably concede that they didn’t see this coming.

I count myself as one of them. This one was never one on my bingo card on how the petrodollar system would play out.

Some of you may be wondering whether the US dollar is primed to finally collapse.

Is this the time for gold to go berserk and its price rises to over US$10,000?

Maybe we’ll see Bitcoin [BTC] hit US$1 million?

No. Neither of the above.

We’re not seeing the US dollar collapse from here. But the petrodollar system, as we know it, will change.

There are still a few things waiting to happen. These pieces will fall into place gradually.

Curious about what I’m talking about? Let’s delve into it.

Curtain call for OPEC as the UAE exits cartel

Last Tuesday, the United Arab Emirates announced that it would exit the Organisation of Petroleum Exporting Countries (OPEC), effective on Friday 1^st May.

The UAE is currently the seventh largest oil-producing nation in the world, at around 3.5 million barrels a year. It’s also one of the world’s wealthiest nations and a key powerbroker in the Middle East.

UAE exiting OPEC is significant because other member nations will look at how it fares from here. If the UAE thrives from this, they’ll all follow suit.

Before we proceed, what is OPEC?

The formation of OPEC arose from a tug-o-war between oil suppliers and buyers/distributors.

In 1960, five countries, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, formed a coalition aimed at wresting control from major oil firms in the US and Europe. Prior to this, major oil firms in the US and Europe controlled the oil markets through their market share and influence. These five nations decided to coordinate their oil production to influence the oil market and maximise their profits.

Over the next decade, these five countries co-opted other oil-producing nations into OPEC. Up until this month, there were 12 member nations. Several nations, including Qatar, Libya, Indonesia, Algeria, Nigeria, Gabon, Ecuador, etc. entered and exited this group during the last six decades.

The organisation shared data that helped them to coordinate oil production and manage global supply. Their decision would affect oil prices.

By definition, it was a cartel. A powerful one too.

Perhaps the greatest impact of OPEC occurred in the 1970s, leading to two Oil Crises. Their impact waxed and waned in the subsequent decades as countries entered and left the cartel. Moreover, Western nations, particularly the US, began increasing oil production to compete with OPEC. In 2014, the US fracking boom turned it into an oil-producing powerhouse. It even surpassed Saudi Arabia and Russia by 2018 to be the largest oil producer.

As OPEC nations saw their production drop due to ageing wells and increasing competition, they invited non-member nations to participate. Russia, Mexico, Kazakhstan, and Oman became the largest nations in what became OPEC Plus. Together, OPEC Plus contributes to nearly 40% of total oil production today.

Oil braced for a long-term decline

By exiting OPEC, UAE is no longer bound to follow a quota on oil production. And you can expect it to increase production from here.

The Iranian conflict affected the UAE because shipping activity in the Strait of Hormuz had plummeted to nearly zero for over two months. The Strait isn’t the only way for the UAE to export its oil. The Habshan-Fujairah pipeline runs from the UAE to Oman, bypassing the Strait of Hormuz. Around two million barrels of oil can flow through this pipe daily, partially alleviating the impasse created by the conflict.

However, the Iranians struck the Fujairah terminal three days ago. This signals the desperation of the more fundamentalist faction of the Iranian leadership to remain relevant by choking the global economy.

Meanwhile, the divide between the Iranian theocratic leaders and the civilian government escalates each day. The Iranian President, Masoud Pezeshkian, criticised the IRGC for being irresponsible in launching this strike. This suggests the tentative ceasefire could soon lead to a settlement and the Strait of Hormuz reopens. The IRGC is weakening each day the Strait of Hormuz is blockaded as this is their key source of revenue to keep them in power.

While the world focuses on the disruption in the Strait of Hormuz as potentially disastrous for the global economy, it appears countries have been making alternative plans to address it. The exit by the UAE from OPEC is a clear indicator that the global economy isn’t a static system but a dynamic one. Major moves can emerge and change how markets operate, and even the structure of the global order.

Many expect oil to remain elevated for longer because of events in the Strait of Hormuz over the last two months. However, few saw that oil tankers bound for the Strait were gradually rerouted to the US, and the UAE announced its exit from the cartel. Should this trigger OPEC’s dissolution, that could completely reprice oil as production rises into the coming years.

Many see US$60 a barrel of oil as a fantasy. What we might see is that this price level will be the ceiling.

Petrodollar’s transformation, not collapse

As a gold enthusiast who once believed our petrodollar system will imminently collapse, I’ve had to adjust my views over the past few months. The Iranian conflict has delivered many plot twists that few can keep track of, let alone understand the full implications for our system.

I don’t believe the petrodollar is about to collapse and that gold, Bitcoin or other currencies will take over as the reserve currency. However, the petrodollar is undergoing a major change.

UAE’s exit from OPEC and the potential dissolution of OPEC will likely cement the US as the leader of the global economy. US oil production is currently equal to Saudi Arabia and Russia, the next largest producing nations, combined. Moreover, Saudi Arabia and the UAE have become more aligned with the US, especially since the Iranian conflict. The US has also conditionally granted Russia access to the SWIFT system that it was shut out of in 2022 during this conflict, to provide backup for oil supplies to India. This may warm relations between two of the world’s biggest superpowers.

A negotiation with Iran after this conflict will likely mean its return to the SWIFT system and free passage in the Strait of Hormuz. This means a smoother flow of oil and greater availability for the world to tap, as Iranian oil has been sanctioned since 2012. Iranian oil flowed in the black market during this period and was effectively excluded from the global economy.

Putting these together, the petrodollar has received a time extension.

What then will happen to gold? Will we see King Dollar return and gold plunging just like in the 1980s and 2012-15?

No.

This is different to the 1980s, when the US sought to stifle Japan’s economic growth by imposing the Plaza Accord. The Trump administration does not want a strong US dollar. That would make it less competitive in the export market. The administration’s main goal now is to squeeze the Chinese economy through energy and manufacturing. The currency war is secondary.

Naturally, China isn’t going to take this sitting down. Despite writing The China Capitulation series earlier this year to reveal its vulnerabilities and dispel western myths about the country’s conditions, there’s no denying that China has strategies to avoid a total collapse. China has continued to reduce its US currency and bond reserves accumulated from its soaring current account surpluses, replacing them with gold. Gold’s rapid increase, driven significantly by Chinese buying among other factors, has helped partially offset the damage from the tariff wars and internal economic strife as its property markets collapse.

What is emerging is a bi-currency system comprising the US dollar and gold. The US dollar will still dominate in trade in this transformed global order as countries realign trade, foreign relations, and military alliances. The Iranian conflict has brought about significant changes. More will come beyond it.

Gold’s role in all this will become more important. Global orders, countries and societies change over time. However, gold remains as the backstop and keeps an account of these developments.

There’s much to explore in the world of gold, silver and precious metals assets. More than bullion bars and coins, there are exchange-traded funds (ETFs) and a myriad mining companies to help you preserve purchasing power and build your wealth.

I’ve recently published my book, Gold’s True Message: A Guide to Building Wealth in a Failing Monetary System. The book combines my insights into our financial system with my experience investing in the precious metals space. It’s a comprehensive guide that could serve you well for your journey.

To get your copy, please click here.

I hope you enjoyed today’s article. Enjoy the weekend ahead and wish you all a Happy Mother’s Day.