ANALYSIS: Shifting from dollar use in oil exportation: End of the dollar’s reign?


JF-Expert Member
Feb 11, 2007
ANALYSIS: Shifting from dollar use in oil exportation: End of the dollar’s reign?

Dar es Salaam

SHIFTING sands are being noticed in a breadth of countries, led chiefly by US rivals or critics, namely Iranian President Mahmoud Ahmadinejad, and Venezuelan President Hugo Chavez, to stop quoting the price of oil in US dollars. That by itself would not be important if China wasn’t reducing its stock of US dollar reserves by up to 15 % in the coming year, which is plenty of money since one per cent of the reserves equals 14.5bn dollars, bringing the tally of offloading dollars into the market to around 200bn or higher. Russia is also planning to sell oil using its own rubles, and China floats a plan to use the yuan to conduct foreign trade. Is it hell?

There are other affirmative moves where countries begin trusting their own currencies, like the Gulf Cooperation Council whose business (oil exports) has for decades been tied to the dollar, but now seeks to prop up the riyal and dinar, into a Gulf dinar. Noticeably however, Iran isn’t expected to join in, despite the fact that a thawing of relations is beginning, as Saudi King Abdullah had specially invited the Iranian president for this year’s pilgrimage to Mecca, as a special guest. The key issue is to find a solution to intractable problems in as far apart strategic issues as Afghanistan, Iraq, Lebanon, Palestine and the biggest of all world headaches, Iraq.

Those who have spent 30 to 40 years figuring out the ultimate collapse of the US as lynchpin of ’’international monopoly finance capital’’ could be whetting their appetites for the big news, of the fall of King Dollar from international marketplaces. Yet it is hard to piece the fragments of what is taking place to get either the direction of motion in current initiatives, or alternatively, the big picture about the place and role of the US currency in global markets at present. When that is resolved, so can the wider issue about US influence come up, whether it is fundamentally defused.

At first glance, there is more of a ’’theory of chaos’’ as analysts like Steven Hawking prefer to call the universe, that is, a sort of ’big bang’ touched off by chronic trade deficit of the US, a kind of implosion of its economy, and a historical weakening of the dollar. That means it drags down all currencies pegged to it, and all prices of exports tied to the dollar, the principal of which is petrol, or rather oil, but unlike in October 1973, this weakening (some call it devaluation) isn’t followed by a price hike. There has been a persistent rise in prices, but not equaling the depreciation.

A number of parallels can be made with the 1973 situation to help explain current pressures, and perhaps with the benefit of hindsight try to make out that comes up in that situation. First, the 1973 rise in prices owing to the devaluation of the dollar stemmed from the Vietnam War, as the US committed large numbers of troops in all of South East Asia, flooding those countries with dollars, which flowed back to the US to claim goods and properties. At the same time, reconstructed Europe was in a variety of areas undercutting the US in world trade, and Japan was rising, rapidly.

This time around it is the Iraq war and stupendous expenditure of money that has brought the US economy to heel, to a clear downturn, in a parallel situation of the massive exports of capital to the Far East and increasingly, to South Asia. Since the ’’ crisis of 2000 many hubs have developed around the world to duplicate or imitate the famed Silicon Valley in the US, so that people now talk not any longer of ’Hyderabad’ as an Indian city but even more so of ’Cyberabad,’ on account of how the likes of Microsoft, Intel, Apple-Macintosh or frame builder IBM settled there.

All these companies resell their goods to the United States which now becomes a large ’’trade deficit’ though the beneficiaries aren’t just foreign countries while the US economy falls on its knees, or rather nurses. The other contributing factor was clever house loans which turned out to have some spiral mechanisms unknown to the ’beneficiaries,’ many of whom were being pushed to surrender their dwellings. But it will not reach that point as the rent arrears are being suspended or cancelled for the central government to reimburse various banks, pension funds, etc. It is a vast and complicated arrangement which nonetheless touched off a lending crisis.

Superficially, the housing loans crisis is strictly local, touched off by lending habits that Americans know best how it operates - the man eat man phenomenon and all that - but in reality it is different. It has to do with the flow of massive amounts of funds from all over the world into the United States, even when its bank deposit rates were much lower than what is offered elsewhere in the world. Economics were for several months late last year predicting that a correction was necessary as a cut off point had to come up, between low US deposit returns and massive flows.

When this ’correction’ came up it was in the form of housing loans, whose reason is predictably that the banks were awash with money, and loaned even to the most unlikely clients, with some kind of spiral ’embedded’ into the contract, as it looked far too nice to be true. Where indeed there will be no bail out from federal funds, it would appear that plenty of property will be changing hands, in which case some effect of ’globalization’ would be felt deep in the United States. It is an elementary consequence of being the most open economy in the world among the larger units.

So, what does the crisis represent in this context, both of massive flows of funds, a lending crisis, shifting of oil exports from dollars, and unsettled issues about the war in Iraq? The point that is being missed in the jamboree about the ’collapse’ of the US dollar is that these measures are chiefly defensive in character, that neither Iran nor Venezuela is capable of raising prices the way they got OPEC to do back in 1973. Failing to raise prices as of old they try to falsify prices by quoting in rubles, yuan, peso, euro, any big currency offered in the market, so as to cite more dollars.

In that case it is evident that it is the critics of the United States and of the dollar who are confused, not the dollar itself. World pricing mechanisms are working perfectly as the US has other partners to keep prices both low (exports of goods) and high (raw materials), namely in its Chinese counterpart. Offloading 200bn dollars erodes prices for manufacturers, raises them for raw materials; dollar credits are issued in all directions and competition intensifies. The winner isn’t the new currencies or the movement to boycott the dollar, but globalization itself, the US paying a small price.
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