The report by Robert Fisk in The Independent that a move to dislodge the dollar as the currency of oil trade was enough to generate ripples, all around, for it carried enormous repercussions — financial as well as political.
Dollar oil pricing was initially a practice encouraged after the World War II by the American oil majors and by their New York-based bankers. But then in the altered environment of the post-1973 oil embargo, an OPEC ministerial meeting in 1975 formalized the arrangement by making the US dollar the sole currency for oil payments.
Thus crude importers were obliged to use dollars to pay for crude, while exporters were left with billions of dollars which they often hold in reserve or reinvested in the US economy.
This obviously meant huge advantages for the US. It kept the currency presses running, knowing that the rest of the world was willing to hold whatever it printed. The scheme allowed the US to run enormous current account deficits for prolonged periods, with the rest of the world — the Japanese surplus, the Chinese reserves and the petrodollars — plugging these deficits by investing in US securities and other local financial assets.
Things seem to be extending too far. Last year, the US government borrowed more than ever in peacetime — some $1.4 trillion — 9.9 per cent of GDP. Furthermore, US deficits between 2010 and 2019 are now projected at $9.1-trillion. To bridge the gap, the Fed shocked the global markets earlier the year by unleashing the “nuclear option” for monetary policy — “Quantitative Easing (QE),” or printing an extra $1.1-trillion, in order to buy US T-notes and mortgage-backed bonds.
But despite the romance attached to the move, there appeared a number of potholes to the changeover from the dollar to a basket of currencies. Too much was at stake. When the campaign ‘Shock and Awe’ got underway in Baghdad, many asserted it was about defending the dollar. For a few months earlier Saddam had decided to switch over to the euro as the currency for its oil trade. The US could not allow Saddam’s decision to go unchallenged, A change from the dollar to the euro would have shaken the very foundations of the economy of the super power, and others could have followed suit too, so the threat had to be cut off at its very roots. And sooner, rather than later, Baghdad was under fire.
And years later when Iran simply threatened to go the same course, it was added to the “axis of evil”. The defense of the dollar is almost as important as oil, many underline. And hence denials from all corners were robust. SAMA (Saudi Arabian monetary Agency) Gov. Muhammad Al-Jasser underlined it as “absolutely incorrect” and that there was “absolutely no (such) talks” underway. The United Arab Emirates officials told Reuters that it would be sticking with the greenback. Kuwaiti Oil Minister Sheikh Ahmed Al-Abdullah Al-Sabah told reporters in Kuwait City that Gulf Arab states had no plans to drop the dollar for oil pricing.
Others too preferred to distance themselves. The Russian Finance Ministry is not holding talks on replacing the dollar for oil sales, Interfax news agency reported, citing Deputy Finance Minister Dmitry Pankin. Japanese Finance Minister Hirohisa Fujii told a news conference in Tokyo that he “doesn’t know anything about it.”
Indeed changing the currency of oil trade from dollar would be relatively easy — as Iran has already done — yet replacing the currency in which oil is priced would require massive efforts, analysts fear. Lack of convertibility for many Gulf currencies and China’s yuan tops the list of practical hurdles for making such a shift. Issues such as which currencies would be included in the basket and what ratios to use need to be sorted out. And thus despite some reactions to the contrary, the idea appeared far-fetched — at least for that time. People in responsible positions needed to be pragmatic and not romantic. But indeed, national interests could dictate oil producers to think otherwise too. Already increased investments on infrastructure projects to offset the impact of the global economic downturn and the growing negative perception of the US in this part of the world is impacting the dollar holdings of the producers’ too.
There are big projects, in fact mega-projects that are lined up for investment in Saudi Arabia. The Kingdom has drawn up a list of government and private investment projects in power, water, infrastructure and petrochemicals worth $624 billion. Saudi Aramco plans to spend at least $50 billion on projects including expanding oil production capacity, and developing refinery and chemical complexes.
All this requires money. And in view of the depreciating dollar, there have been voices in the region to look at the dollar linkage. Kuwait has already opted to move to a basket of currencies and the United Arab Emirates indicated plans to move at least one-tenth of its dollar reserves into euros.
A growing share of Venezuela’s oil profits are now being deposited in euros. Caracas is already engaging in non-dollar barter deals for oil within the Latin American region. Iran’s finance minister insists, “We believe that the dominance of the dollar in the global economy is to the detriment of everybody. We are not alone in this belief. Some other countries also accept this idea.”
Russia has in the past publicly raised the idea of shifting its oil trade away from the dollar, expressing the desire for a Russian bourse that would be trading in oil and gas in rubles.
China too has been suggesting that in the longer term, the dollar should lose its role as the globe’s top reserve currency. As recently as March it emphasized that the dollar be replaced by a new global reserve currency run by the International Monetary Fund.
The dollar hegemony is definitely under attack. Serious challenges to Washington’s financial domination are definitely creeping up. An engrossing battle to watch indeed — from all angles.