Welcome to our Friday mailbag edition!
Every week, we receive great questions from your fellow readers. And every Friday, I answer as many as I can.
This week, the conversation turns to the BRICS expansion I’ve been writing about (catch up here and here)… competition for the U.S. in the natural gas markets… and the inner workings of the global monetary system…
What are your thoughts on the Saudis joining the BRICS and dumping the petrodollar?
– Charlie P.
Thanks for writing in, Charlie.
This question couldn’t have come at a better time, with the BRICS gaining more and more attention lately.
As a reminder, BRICS represents the world’s leading developing countries. It’s short for Brazil, Russia, India, China, and South Africa.
On August 24, the BRICS announced six new member countries at its annual leader’s summit in Johannesburg, South Africa.
Iran, Ethiopia, Egypt, Argentina, the United Arab Emirates (UAE), and Saudi Arabia, as you pointed out, will join Brazil, Russia, India, China, and South Africa in the BRICS+ bloc from January 1 next year.
So, it’s no longer just Brazil, Russia, India, China, and South Africa.
And that’s a big deal. Here’s why.
The BRICS bloc is a global energy powerhouse. And we know that events in global energy markets can significantly affect energy prices right here in our own backyard.
BRICS countries currently account for about 68% of the world’s coal production, 21% of oil production, and 25% of natural gas production.
And guess what… the share of global fossil fuel production will grow even further with the BRICS’ recent expansion.
By adding three of the world’s largest oil producers – Saudi Arabia, Iran, and the UAE – the group is solidifying its role in a major global trade sector: oil exports.
This puts the BRICS in a unique position to challenge Western dominance. And one major way that it’s looking to do that is by reducing dependence on the U.S. dollar.
For the most part, the BRICS countries still primarily use the U.S. dollar for their transactions. But that could soon change with the addition of Saudi Arabia, Iran, and the UAE.
You can be sure that the expanded BRICS alliance will make every effort to reduce U.S. dollar transactions in the global oil market… or even consider replacing the dollar with an alternative currency.
This move could siphon off a portion of U.S. oil trade. That’s the petrodollar trade you mention.
This would be a direct challenge to the U.S. dollar’s exclusive role in oil markets. Today, over 90% of all oil traded globally is priced in U.S. dollars. This is why the dollar is often referred to as the “petrodollar.”
If BRICS manages to cut down the use of the dollar in global oil transactions, that would be a major blow to the petrodollar. It would mean less demand for the U.S. dollar in international markets.
This could cause the dollar’s value to drop. And it could affect its status as a global reserve currency and make it less appealing to investors and central banks.
To be clear, the “dumping of the petrodollar” is not a scenario that will unfold overnight or even in the near future.
Yes, Brazil’s president floated the idea of BRICS nations having their own currency for trade and investment at the recent summit.
But many people were quick to point out the practical challenges, given the significant economic, political, and geographical differences among member countries.
Plus, the BRICS group lacks the institutional power and framework to issue any currency.
BRICS is not a binding organization like NATO. It can’t mandate its members to do anything, nor does it have UN-like sanctioning power.
It’s like a members-only club for countries that have a bone to pick with the U.S. and the West in general.
Now, don’t get me wrong – there’s a real desire in some parts of the world to reduce U.S. dominance and move away from the dollar.
The recent BRICS expansion is an important step in that direction, and it suggests a potential challenger to the U.S. dollar.
But as I’ve been writing, there’s an even more imminent threat.
As regular readers know, the Federal Reserve, the White House, and the financial elite are set to enact the biggest change to our money since 1971.
I’ve found evidence that they’re colluding to virtually “ban” cash – leading to the end of the dollar as we know it.
If you missed my recent video presentation with all the details, including my playbook for protecting and growing your wealth as this overhaul unfolds, click here to learn more.
How can the U.S. compete in the LNG markets when Iran and especially Qatar dominate supply?
– Gary & Kathie
Hi, Gary & Kathie! Thanks for writing in about liquefied natural gas (LNG). This is a great time to provide an update.
For readers not aware, LNG is how natural gas can be transported via ocean around the world.
In the U.S., natural gas is sent to terminals along the coast (mostly the Gulf and East coasts) where the gas is cooled to its liquid form at -260 degrees Fahrenheit.
It’s then loaded onto specialized ships for transport around the world. By converting it to a liquid, the volume of natural gas is about 600 times smaller than its gaseous state which makes transfer by ship economically viable.
LNG has also become a focal point for energy security following Russia’s invasion of Ukraine, and Europe being cut off from Russian natural gas supplies. And natural gas-producing countries around the world are stepping up to fill the supply gap with LNG.
But I think your question should be more about who can compete with the U.S.
That’s because the U.S. is already the top producer of natural gas globally. It has become a force to reckon with in the export market.
U.S. natural gas exports hit 6.9 trillion cubic feet last year, which is a 326% increase over the past decade. We’ve been exporting more natural gas than we import since 2017, so this isn’t a new development.
You’re right that other nations like Qatar and Australia dominated the LNG market in the past.
But thanks to ongoing investments in building more LNG infrastructure and our massive domestic shale reserves of natural gas, U.S. LNG exports have increased every year since 2016.
And the U.S. isn’t just set to become the top LNG country in the world… That’s a feat already accomplished.
The U.S. led the world in LNG export volumes back in the first half of 2022. It gave up that title briefly due to a fire at a large export terminal.
But the nation retook the top spot in the first half of this year, averaging 11.6 billion cubic feet of LNG every day… more than any other country including Qatar and Australia.
And it’s a lead that’s expected to grow.
Over the shorter term, the Energy Information Administration (EIA) is projecting that U.S. LNG volumes will reach over 15 billion cubic feet per day by the end of 2024 as two new export terminals come online.
That’s more than 30% higher compared to current output.
Over the longer term, another report sees additional LNG investments topping $100 billion by the end of this decade. That’s because global LNG demand is expected to increase by another 57% through 2035.
While Qatar and Australia are trying to keep up with their own LNG investments, the U.S. is expected to maintain global LNG leadership over at least the next five years based on planned projects and those under construction.
So I’m comfortable in saying that the U.S. should maintain its number one status in the LNG market for the foreseeable future.
And the exciting thing for investors is that there are many ways to play LNG demand for both share price appreciation and dividend income.
At my Energy Distortion Monitor advisory, we’ve already locked in four natural gas winners since last year. And we’re sitting on four other open gains, including two picks with a dividend yield of about 6% each.
Click here to learn more about this energy megatrend, along with my favorite ways to play it.
Where do countries borrow their money from in large quantities? If it’s the IMF, aren’t its funds raised by countries giving money to keep the IMF in control?
So how do countries so indebted fund the IMF so the IMF lends it back to the indebted countries? Does any debt really get paid back or does it over time just create a new monetary system to wipe out all the debt… Then, we start again?
– Craig L.
Thanks, Craig! It’s a great question, and the answer is multifaceted.
First things first, countries borrow money from various sources, not just the International Monetary Fund (IMF).
These include other countries, international organizations like the World Bank, private banks, and financial markets.
When a country faces financial challenges or needs to invest in infrastructure or social programs, it often seeks external financing to bridge the gap.
That’s where the IMF comes in.
Countries usually borrow from the IMF when they face financial problems. For example, they might need help managing balance of payments issues, implementing reforms, handling crises, or boosting policy credibility.
Even a strong U.S. dollar can wreak havoc on countries’ finances.
We saw this in 2022, when Egypt, Pakistan, and Ghana asked the IMF for bailouts.
A strong dollar made their own currencies weaker. And it made it harder for them to repay dollar-denominated debt and to trade for goods and raw materials. The IMF stepped in as a financial lifeline.
Now, it’s true that the IMF’s funds come from contributions made by its member countries.
When a country becomes a member of the IMF, it commits to providing a certain amount of money to the institution.
These contributions, often called quotas, are a bit like membership fees. The size of a country’s quota is determined by its economic size and financial strength.
So, you might be wondering, how does this work? How can heavily indebted countries contribute money to the IMF while they’re struggling with their own financial problems?
It’s an interesting dynamic.
It’s like contributing to a collective emergency fund. It’s a way of showing solidarity and being part of a global financial safety net.
When a country invests in the IMF, it’s essentially saying, “I’ll pitch in to help stabilize the global economy and provide assistance to other countries in times of need.”
Now, here’s where it gets a bit more complex.
Above, I mentioned that countries might borrow from the IMF when they face balance of payments problems. That means they’re struggling to pay for their imports or service their foreign debt.
The IMF steps in with financial support to help these countries stabilize their economies. This support often comes with conditions, such as implementing economic reforms to address underlying issues.
But, to your point, it might seem like a circular process. How can countries in debt contribute to the IMF, which then lends them money back?
It’s not a one-to-one exchange.
When countries contribute to the IMF, they’re essentially pooling their resources with other member countries to create a global financial safety net.
They don’t contribute with the expectation of receiving their contributions back in the form of loans.
As for debt repayment, that’s another complex issue. Some debt does get paid back, while in other cases, countries may negotiate with their creditors to restructure their debt.
Debt restructuring involves changing the terms of the loans, like stretching out the time to pay back or reducing interest rates. All of this is aimed at making things easier for the country that borrowed the cash.
I wrote about the IMF, the World Bank, and central banks’ roles in the global monetary system in my 2018 book, Collusion. I’ve shared a few excerpts in these pages, which you can read here.
And that’s all for this week’s mailbag! Thanks to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. Write me at [email protected].
Happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins