End of the Petrodollar? Energy & Money's Future

Is This the End of the Petrodollar? One Expert Thinks So.

The world of finance can feel incredibly complex, but sometimes, understanding the basics comes down to one simple word: energy. As Luke Gromen, founder and president of Forest for the Trees, argues, energy is the base layer of money – and the shifting sands of the energy landscape could signal the end of the petrodollar as we know it.

In a recent appearance on the Bankless podcast, Gromen lays out a compelling case for why energy prices, particularly the rising cost of oil, are about to trigger a seismic shift in the global monetary system. Buckle up, because if Gromen is right, this is a financial earthquake you’ll want to be prepared for.

Why Energy Matters More Than You Think

We often hear about money’s role as a store of value, a medium of exchange, and a unit of account. What we don’t often hear is how deeply these functions are intertwined with energy.

• Energy is the ultimate finite resource. We expend energy to work, and work earns us money. Every loan, every purchase, represents a promise to expend future energy.
  
• Energy costs impact everything. When energy prices rise, our ability to repay debts is strained. This puts pressure on governments and financial systems, ultimately impacting global currencies.
• The Petrodollar system. For decades, the US dollar’s dominance has been linked to the agreement that oil would be traded primarily in dollars. This created a constant demand for dollars, propping up the US economy.

The Petrodollar Under Pressure

According to Gromen, several factors are converging to weaken the petrodollar system:

• Rising energy demand: As developing economies like China and India grow, their need for energy, particularly oil, will continue to skyrocket. This will strain a global energy market already grappling with the limits of cheap oil.
• The Shale Miracle fading: While the US shale boom temporarily boosted oil supply and strengthened the dollar, production has plateaued. Sustaining output requires higher oil prices – a recipe for inflation that could cripple the US economy.
  
• China’s strategic moves: China has been strategically building its gold reserves and making deals to purchase energy in yuan. This weakens the dollar’s dominance and sets the stage for a new global reserve currency backed by hard assets.
  

The US in the Crosshairs

Gromen argues that the US faces a difficult choice: defend the dollar or defend the bond market.

• Defending the dollar: Allowing interest rates to rise would strengthen the dollar but lead to a devastating economic downturn as the US struggles to service its massive debt.
• Defending the bond market: Printing more money to keep interest rates low might prevent a collapse of the bond market, but would lead to runaway inflation and further devalue the dollar.

Neither option is appealing. Gromen believes the US will likely continue to choose the bond market, further weakening the dollar and fueling inflation.

How to Prepare for a Post-Petrodollar World

The potential collapse of the petrodollar system and the rise of a new global reserve currency backed by energy and hard assets has significant implications for investors.

• The ⁶⁰⁄₄₀ portfolio is dead: The traditional investment strategy of 60% stocks and 40% bonds is no longer a viable option in an environment of high inflation and currency devaluation.
• Think outside the dollar: Diversifying into assets like gold, Bitcoin, and real assets like commodities and real estate can help protect your wealth from inflation.
• Consider real returns: Evaluate investment returns not just in dollars, but in terms of their purchasing power for essential goods, particularly energy.

Navigating the Uncertainty

The road ahead will likely be marked by volatility and uncertainty. Gromen advises investors to:

• Reduce leverage: Avoid taking on excessive debt, as rising interest rates and economic uncertainty could make it difficult to manage debt burdens.
• Stay informed: Keep abreast of developments in the energy market, geopolitical landscape, and monetary policy to make informed investment decisions.
• Think long-term: Don’t panic and make rash decisions based on short-term market fluctuations. Focus on building a resilient portfolio that can weather economic storms.

The energy crisis is not merely about the price at the pump. It represents a fundamental shift in the global balance of power and the potential for a new monetary order. By understanding the relationship between energy, money, and geopolitics, investors can position themselves to navigate the challenges and opportunities that lie ahead.