Investors have been speculating for years about the demise of the “petrodollar” deal struck by Henry Kissinger and William Simon in 1974. Now, according to this article, the Saudis themselves are confirming that they may be getting ready to push the dollar to one side when it comes to setting the price for oil.
In 1974, the price of oil was skyrocketing, partly due to inflationary policies pursued by the Federal Reserve and partly due to an Arab oil embargo in response to U.S. aid to Israel in the Arab-Israeli Yom Kippur War of 1973. The world economy was under threat unless a way could be found to “recycle” the dollars the Arabs were receiving back into U.S. banks.
President Nixon and Henry Kissinger asked Treasury Secretary William Simon to negotiate with Saudi Arabia on this issue. The Saudis and other OPEC members agreed that oil would be priced in dollars (the “petrodollar”) and the dollars would be deposited with U.S. banks so they could be loaned to developing economies who could then buy U.S. manufactured goods and agricultural products.
The deal worked well for everyone and continued until today. Now, the U.S. Congress is considering legislation that would expose OPEC members to U.S. antitrust lawsuits.
Saudi Arabia has said that if that pending legislation becomes law, they will end the petrodollar deal. The result would be that oil could be priced in euros, yen, yuan or even gold.
The result for the U.S. dollar and U.S. economy would be catastrophic. The best protection for investors is to allocate part of your assets to gold as insurance against an unexpected collapse in the dollar.
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