(This report, about a sensational write-up in The Independent newspaper that the Gulf oil states and a few other countries were discussing moving away from pricing oil in US dollars, was published in DNA edition dated October 7, 2009.)
A startling report in The Independent newspaper, published from London, claimed on Tuesday that the Gulf oil states along with China, Russia, Japan and France, were close to ending the pricing of oil in dollars. If confirmed as true, the report could have enormous implications for the dollar – even signal the beginning of its end – but economists are discounting the report for now as far-fetched.
In the article, titled ‘Demise of the Dollar’, Robert Fisk, The Independent’s veteran Mid East Correspondent, wrote, citing undisclosed Gulf Arab and Chinese banking sources that the “Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro gold and a new, unified currency planned for nations in the Gulf Coorperation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.”
According to Fisk, India too had shown interest in collaborating in non-dollar oil payments, but that China “appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.” It is China’s “extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions.”
Fisk claimed that “secret meetings” had been held by finance ministers and central bank governors in Russia, China, Japan and Brazil “to work on the scheme, which will mean that oil will no longer be priced in dollars.” He further claimed that US officials were aware that the meetings had taken place, but that they had not discovered the details. “The American are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs.”
Quoting Chinese banking sources, Fisk claimed that in the interim, while moving away from the dollar peg for oil, the transitional currency may be gold. If it is confirmed as true, the move would be ruinous for the dollar, but also for bearers of dollar reserves: the Gulf Arab states hold an estimated $2.1 trillion in dollar reserves, and China an additional $2 trillion.
But not everyone is convinced as yet that the ‘doomsday for dollar’ scenario is already at hand. “Fisk is increasingly associated with more radical theories, which weakens the credibility of the (latest) story,” says RBS economist Ben Simpfendorfer. In his estimation, the Gulf countries are “not yet ready to ditch their dollar pegs” since oil contracts negotiated in currencies other than the US dollar “would only add volatility to the Gulf countrie’ already volatile oil revenues.”
It would also be wrong, argues Simpfendorfer, to “overlook the importance of the Gulf region’s security links with the US and the restraints this imposes on the Gulf’s views towards the US dollar.” This is despite the fact that in the past 10 years, such restraints have weakened considerably.
Even so, Simpfendorfer concedes that “even a whiff” of speculation that oil contracts would be negotiated in currencies other than the US dollar “will further shake faith” in the dollar. “Moreover, even if oil contracts remain dollar-denominated, there will be growing speculation that other contracts between China and its major commodity suppliers will not, especially in emerging economies that are looking to attract more Chinese investment.”
In this context, the financial sector is generally more agile in observing growing global linkages whereas the political and military sectors tend to lag, he adds. Most Washington analysts and officials are bogged down in a whole host of issues – the Mid East conflict, the wars in Iraq and Afghanistan, and Iran’s nuclear program. “Most of them don’t have the bandwidth to think about how China fits into the picture.”
As a consequence, officials, “especially in the political and military sectors,” are not well positioned to respond to the global changes taking place, reasons Simpfendorfer. “Emerging powers are thus better able to impose their decisions – such as China signing commodity contracts in currencies other than the dollar or Asia’s strengthening trade links with Iran – without having to worry about a coordinated policy response from the established powers.”
Fisk claimed in his article, citing Chinese banking sources, that the discussions on pegging oil prices in currencies other than the dollar “have gone too far to be blocked now… The Russians will eventually bring in the rouble to the basket of currencies…” He further cites Chinese financial sources as saying they believed President Barack Obama was “too busy fixing the US economy” to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time.