Worse than an Iranian nuclear attack?
Oil consumers are entangled in a web of supply fears that span the globe. In Venezuela,
President Hugo Chavez threatens to divert oil supplies from the US to China, which faces
severe gasoline and diesel shortages these days. Attacks on Iraqi oil installations have
slowed exports there. Ecuador's oil industry is still recovering from a strike, while
Nigerian oil companies are in the middle of efforts to avoid a strike there.
Until now, oil has been solely priced, traded and paid for in the greenback on markets in
both London and New York
Weaned off the almighty commodity, the US dollar can have a deeper impact on the US
economy than a direct nuclear attack by Iran. The permanent demand for dollar-denominated
paper stems substantially from the fact that until now almost all resources of the world
are quoted in it. While this led to the eurodollar (US dollar-denominated deposits at
foreign banks or foreign branches of American banks) market in the 1970s, the new terms of
trade could ring in the demise of the dollar as the premier reserve currency.
With the world economy depending so much on oil, the black gold itself can be seen as a
reserve currency that will be handed out against only the best collateral in the future.
Last month, the Federal Reserve Bank of San Francisco published a paper about the progress
of the diversification of central banks' reserves around the world. It concluded that the
dollar's position is on the decline in many countries. China, the new industrial giant,
has officially declared that it will diversify a part of its forex holdings into oil by
building a strategic petroleum reserve. Construction of storage tanks has begun this year
and will take several years until completion. China has not yet said how many barrels of
oil it wants to store. The implications for the oil market can only be guessed as China
wants to use its future reserves to smooth out spikes in oil price.
Iran holds a strong hand as the No 2 producer of crude behind Saudi Arabia, pumping 5% of
the world's oil demand. Politicians there will also keep in mind that dollar deposits
might become a burden in the future, if the US steps up its current war of words to the
level of economic sanctions in the attempt to halt construction of Iran's nuclear power
plants. Money in the bank does not help when you have no access to it. Substituting Iran's
domestic oil demand partly with nuclear power will place the country in a win-win
situation. Cheaper nuclear energy and increases in oil exports from the current level of
roughly 2.5 million barrels a day will result in a profitable equation for Iran.
Only one major actor stands to lose from a change in the current status quo: the US, which
with less than 5% of the global population, consumes roughly one third of global oil
production. Oil in euros would benefit millions more in the EU and its trading partners,
though. And it would loosen the grip the US has on OPEC members. Thinking of the rapid
growth of hostilities between the US and Arab nations in recent years, a renunciation of
the dollar appears to be more than just an Arab daydream.
As this development poses a very real danger to the superior status of the greenback and
the interests of the US, the "president of war" can be expected to take a strong
line against the winds blowing from the Middle East. One may be reminded that
Saddam Hussein had entered into discreet talks with the EU, proposing to sell his oil for
euros. That was in the year before the first oil war of this century.
The IOB could help the euro to become the interim primary reserve currency before China
and India rise to the first two slots in the global economic ranking in the next few
decades. A decline of the dollar's position in oil trading might also open the floodgates
in other commodity markets where the dollar is the medium of exchange but where the US has
only a minority market share. A global economy driven by tough efficiency demands in the
light of thin profit margins almost everywhere is a good primer for accounting changes in
other commodity markets as well. This process could begin in resources like steel and
energy and spread to all other resources that are marketed globally. The world outside the
US has a lot to gain from it.
http://www.atimes.com/atimes/Global_Economy/GH26Dj01.html |
