Will Bitcoin Replace the Petrodollar?
- The system built on the petrodollar is in decline.
- Bitcoin may become the native currency of the energy industry.
- A new system based on a “petrobitcoin” may emerge.
In response to the US’s support of Israel in the Yom Kippur War, oil-producing Arab nations led by Saudi Arabia imposed an oil embargo in 1973, which made oil prices quadruple. This embargo was particularly painful for the US as it worsened a serious stock market downturn and high inflation. As a result, the US initiated important diplomatic overtures to blunt the weaponization of oil. In 1974, the US and Saudi Arabia reached a historic arrangement. The US would provide Saudi Arabia with extensive security and military aid, while Saudi Arabia would sell its oil in US dollars and then secretly invest those “petrodollars” back into the US through the purchase of Treasuries. This arrangement created a codependence that would redefine geopolitics for half a century and re-confirm the US dollar’s status as the global reserve currency after it went off the gold standard.
The End of an Era
The vast majority of global oil sales are still settled in US dollars (~80%). Having the world’s primary source of energy, as well as other major commodities, priced in US dollars helps prop up the dollar as the world’s reserve currency. This status quo is being challenged on many fronts. Since some time, Russia, the world’s second oil producer and the largest natural gas producer, and China have started to move away from the dollar. In February, Russia and China agreed on a 30-year gas deal to be settled in euros. In March, as a result of the heavy sanctions imposed on Russia, Putin announced that “unfriendly” countries would have to pay for their natural gas in rubles. Later in March, even Saudi Arabia, a key player in the US’s petrodollar system, is reported to be actively considering the use of the yuan for oil sales to China. China currently purchases 25% of Saudi Arabia’s oil and Saudi Arabia is its top supplier. This move would have enormous repercussions on the oil industry and the US dollar’s reserve-currency status. Even the EU, the world’s top energy importer, has been trying to chip away at the dollar’s dominance in the energy sector. With active challenges emanating from all fronts, the decline of the petrodollar is highly probable.
The Bitcoin Era
Apart from the euro and the yuan, the energy sector may also be underpinned by Bitcoin in the future. In addition to its intrinsic qualities as a safe, censorship-resistant and convenient payment rail, Bitcoin is already starting to trickle into the energy sector. Major global oil companies, such as ExxonMobil and ConocoPhillips, are piloting projects to mine Bitcoin in order to cut their emissions and reduce waste. This process involves capturing the natural gas that is normally flared at oil extraction sites and using it to power on-site Bitcoin mining. With this process, energy companies will generate profits on gas that was previously wasted and which vastly contributed to CO2, methane and black carbon emissions. According to Bloomberg, ExxonMobil is already considering expanding this Bitcoin pilot project to other sites in Alaska, Nigeria, Argentina, Guyana and Germany. It is very likely that ExxonMobil and ConocoPhillips will initially convert any Bitcoin immediately into fiat. As Bitcoin grows in value and adoption, however, it is also possible that they will start gradually developing a Bitcoin treasury. At first, it could be a few percentage points of the Bitcoin they generate, but that number could grow. This Bitcoin could then be used to settle trades with oil-producing nations that may undertake similar Bitcoin mining measures and which may be motivated to dethrone the dollar as the world’s reserve currency. In this increasingly possible scenario, a system based on a “petrobitcoin” may become a reality.
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