Tuesday, September 26, 2017

Oil Producers Are Moving Away From the USD

The pact between Nixon and Saudi Arabia back in 1973 set the dollar up as the exclusive settlement currency for oil exports, following the collapse of the Bretton Woods Agreement in 1971. Since then, the very few countries that threatened to sell oil for other currencies, notably Iraq under Saddam Hussein, and Libya under Colonel Gaddafi, have met with unfortunate accidents. The only countries to successfully challenge the dollar’s oil hegemony have been Russia, China and Iran, but not without adverse consequences. And now, Venezuela is ditching US Imperialism by selling her oil for a range of currencies, excluding US dollars.

Perhaps Venezuela hasn’t been listening. The experiences of Iraq and Libya sent a clear message to other countries about the consequences of denying dollar hegemony. In the case of Iran, the Americans even leant on SWIFT through the EU, the supposedly independent interbank settlement system, to freeze out all transfers involving Iran in 2012. Iran’s currency all but collapsed under this pressure. But tactics of this sort create more resentment than anything else, and have undermined goodwill among non-aligned countries. The Russians, powerful enough to survive America’s financial wrecking tactics, have now set up their own rival to SWIFT, as well as other moves to make them entirely independent of the dollar.

Increasingly, the Russians and Chinese, as well as the Shanghai Cooperation Organisation which they lead, are encouraging oil producers to sell oil for consumption in Asia for Asian currencies, principally the yuan. To achieve this objective China is developing capital markets to improve the yuan’s liquidity and acceptance as a trade medium. However, she knows that she must offer something more than an alternative to the dollar than the yuan, with its shorter and less certain track record. And this is where physical gold comes in, sound money that is no government’s liability, universally recognised as such even by those that publicly deny its monetary credentials.

China long knew gold would be central to her geopolitical strategy as well as her own long-term security. In the last few years, she has dominated physical markets. She is the largest gold mining nation by far. There can be no doubt she has accumulated substantial undeclared gold reserves since 1983, when the central bank was first appointed for this purpose. She is on the verge of offering oil producers the facility in the Shanghai futures markets to swap oil for yuan and yuan for gold, sourced from outside China. There can be little doubt that oil producers will see this as an attractive alternative to the dollar. Russia and Iran are already signed up. Other countries, such as Venezuela, heavily dependent on Chinese oil demand, appear to be in the process of doing so. But the real prize will be Saudi Arabia.

Saudi Arabia needs money, and if Western capital markets do not provide it in return for a minority stake in Aramco, there’s little doubt the Chinese will strike a deal. The policy of turning the world’s oil suppliers away from the dollar and in favour of the yuan for exports to China has made significant progress in recent months. The next key development will be the full implementation of a yuan futures contract for oil, and that could be introduced in the coming months. When that happens, the dollar’s function as the sole reserve currency will effectively cease.