The oil industry began in Texas and so oil is priced in dollars. In 2009, however, the Independent reported what would be a highly-profound move: the Gulf States, China, Japan, France and Russia were negotiating to end dollar-denominated dealings in oil. Use would instead be made of a basket of currencies including the euro, Chinese renminbi, Russian rouble, Japanese yen, gold and a new single currency of the Gulf Cooperation Council.
The Indie discovered from sources in the Gulf States and Hong Kong that meetings had been held between finance ministers and central bank governors. Transition would occur in 2018. The newspaper said the United States was aware of the meetings, but not their details. Chinese banking sources were reported to have said that gold could be used as a transitional currency. As Robert Zoellick, president of the World Bank, said in Istanbul before meetings of the IMF and World Bank at the time, one legacy of the world economic crisis could be that economic power relations would change.
Brazil and India have also displayed interest in non-dollar oil payments. The Chinese believe the United States pressured the United Kingdom to not adopt the euro to prevent a move away from the dollar. Iran had recently announced that it would price its foreign currency reserves in euros rather than dollars, although the last Middle Eastern oil producer to price oil in euros instead of dollars, Iraq, was invaded months after announcing the decision. Last year, Christine Lagarde, the Economy Minister of France, then head of the Group of 20 countries, said it would work to move the global financial system to one based on a number of currencies.
In 2007, it was reported that at a meeting in Riyadh, OPEC had discussed the possibility of no longer trading its oil (which is 40% of that in the world) in dollars after a proposal by Iranian, Ecuadorian and Venezuelan delegates. The Saudi Arabian foreign minister, Prince Saud Al-Faisal, reportedly said that even word of such a move could further weaken the dollar.
This year, China announced that it would sell oil in its own currency. The change was barely noticed in the United States, as it coincided with the final week of the Democratic convention. US sanctions against Iran will be ineffective, as the Islamic Republic can now simply sell its oil to China.
Russia was named as one of the top three emerging equity markets by Paul Marson, the chief investment officer of the 200 year-old Swiss bank Lombard Odier Darier Hentsch; the country surpassed Saudi Arabia as the world’s largest oil producer in 2006. It signed an agreement with China on September 7 to sell potentially unlimited amounts of oil to China, and not in dollars.
Since the dollar is declining, oil prices are rising faster and OPEC’s revenues are declining. Many movements in the price of oil are due to fluctuations in the dollar, as Pavel Erochkine of the Centre for Global Studies told Resource Investor. Economists at Lombard Odier Darier Hentsch said high oil prices were a “tax on growth.” When oil costs more than $100 a barrel, panicked headlines ensue and there is pressure on OPEC to produce more. Petrodollars allow the United States to run enormous trade deficits. Erochkine said pricing oil in another currency was “perfectly practical,” and that he had studied the oil market for years and saw technical issues but no insoluble problems.
Leo Drollas, chief economist of the Centre for Global Energy Studies in London said the idea of not pricing oil in dollars was a “red herring” which should be “put back in its box,” particularly given the current misfortunes of the euro. The ruble has been declining, and Prime Minister Dmitry Medvedev ordered Russia’s central bank to increase intervention to prevent sharp depreciation that would damage the economic stability, which is key to the rule of President Vladimir Putin. $200 million a day was expended in this manner. Bahattin Buyuksahin, a senior oil market analyst of the International Energy Agency in Paris, said it was “just politics.”
If oil were priced in a basket of currencies, reweighting would be perpetual, creating opportunities for arbitrage, where traders profit from small changes in exchange rates. Drollas said that the yuan could become one of the currencies used to price oil, but that was “some way off.”
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