The end to petrodollars?

Whether petroleum is priced in dollars or not is a subject that some big players take very seriously.  Both Saddam Hussein and Muammar al-Gaddafi sought to change the rules on how they would be paid and look what happened to them.  More than a few people think their violent deaths were linked to their anti-dollar desires.  Of course, I personally have no way of knowing what caused the USA to use up some of its most expensive ordinance to kill those two, but that is as good a reason any you might hear on CNN.  Let me explain.

Hubbert's 1956 chart

Around 1970, give or take a few months, USA oil production peaked just as King Hubbert had predicted in 1956.  Suddenly this country entered a world where we were going to be ever more reliant on imported oil.  And by 1970, we had invented a host of ways to burn said oil from the interstate highway system to bombing the Ho Chi Minh trail with B-52s flown from Guam. So along with a bunch of other trade problems, the USA had started to hemorrhage cash.  Now technically, these dollars were redeemable in gold but when the French actually tried to covert their dollar holdings, Nixon slammed shut the gold window.  The official world gold standard had ended.

The value of money is based on two essential things—the ability to convert the paper (or electronic impulse) into something of value like gold, or, the ability of a society to convert common elements into something of greater value through their clever actions.  If you cannot mine gold or drill for oil on your territory, you better be able to make something like a Lexus if you want a valuable currency.

In the absence of a gold standard, the world quickly replaced it with an "oil standard."  And because oil was priced in dollars, this meant anyone who got his hands on a dollar could convert it into something far more valuable than gold—oil!  But what this really meant was USA could produce dollars that were instantly valuable world-wide.  Our "irresponsible" trade deficits became the engine for international economic development.

Needless to say, the idea that one country could create an almost unlimited supply of "free" money caused no small amount of envy in the rest of the world.  And the folks with the greatest ability to do something about the dollar's dominance are the oil-producing states.  After all, they have goodies that make the dollar valuable in the first place.

But dumping the dollar, even IF you have a vast arsenal of nuclear weapons, will be very difficult and dangerous.  Even so, the Russians are talking about it although the reader might note that in the second article, some oil guys who are familiar in how oil deals are structured seem to think that dumping the dollar would take 10-15 years.  My guess is that if anyone can dump the dollar, it would be Russia.  It's not going to be Ecuador or Venezuela, after all, no matter how much they may wish it would happen.  The main reason is because the USA has endless desires that the dollar stays on top and is willing commit infinite atrocities to ensure that happens.

Russia prepares to attack the petrodollar

4 April, 14

The US dollar's position as the base currency for global energy trading gives the US a number of unfair advantages. It seems that Moscow is ready to take those advantages away.

The existence of “petrodollars” is one of the pillars of America's economic might because it creates a significant external demand for American currency, allowing the US to accumulate enormous debts without defaulting. If a Japanese buyer wants to buy a barrel of Saudi oil, he has to pay in dollars even if no American oil company ever touches the said barrel. Dollar has held a dominant position in global trading for such a long time that even Gazprom's natural gas contracts for Europe are priced and paid for in US dollars. Until recently, a significant part of EU-China trade had been priced in dollars.

Lately, China has led the BRICS efforts to dislodge the dollar from its position as the main global currency, but the “sanctions war” between Washington and Moscow gave an impetus to the long-awaited scheme to launch the petroruble and switch all Russian energy exports away from the US currency .

The main supporters of this plan are Sergey Glaziev, the economic aide of the Russian President and Igor Sechin, the CEO of Rosneft, the biggest Russian oil company and a close ally of Vladimir Putin. Both have been very vocal in their quest to replace the dollar with the Russian ruble. Now, several top Russian officials are pushing the plan forward.

First, it was the Minister of Economy, Alexei Ulyukaev who told Russia 24 news channel that the Russian energy companies must should ditch the dollar. “ They must be braver in signing contracts in rubles and the currencies of partner-countries, ” he said.

Then, on March 2, Andrei Kostin, the CEO of state-owned VTB bank, told the press that Gazprom, Rosneft and Rosoboronexport, state company specialized in weapon exports, can start trading in rubles. “ I've spoken to Gazprom, to Rosneft and Rosoboronexport management and they don't mind switching their exports to rubles. They only need a mechanism to do that ”, Kostin told the attendees of the annual Russian Bank Association meeting.

Judging by the statement made at the same meeting by Valentina Matviyenko, the speaker of Russia's upper house of parliament, it is safe to assume that no resources will be spared to create such a mechanism. “ Some ‘hot headed' decision-makers have already forgotten that the global economic crisis of 2008 - which is still taking its toll on the world - started with a collapse of certain credit institutions in the US, Great Britain and other countries. This is why we believe that any hostile financial actions are a double-edged sword and even the slightest error will send the boomerang back to the aborigines,” she said.

It seems that Moscow has decided who will be in charge of the “boomerang”. Igor Sechin, the CEO of Rosneft, has been nominated to chair the board of directors of Saint-Petersburg Commodity Exchange, a specialized commodity exchange. In October 2013, speaking at the World Energy Congress in Korea, Sechin called for a "global mechanism to trade natural gas" and went on suggesting that " it was advisable to create an international exchange for the participating countries, where transactions could be registered with the use of regional currencies ". Now, one of the most influential leaders of the global energy trading community has the perfect instrument to make this plan a reality. A Russian commodity exchange where reference prices for Russian oil and natural gas will be set in rubles instead of dollars will be a strong blow to the petrodollar.

Rosneft has recently signed a series of big contracts for oil exports to China and is close to signing a “jumbo deal” with Indian companies. In both deals, there are no US dollars involved. Reuters reports, that Russia is close to entering a goods-for-oil swap transaction with Iran that will give Rosneft around 500,000 barrels of Iranian oil per day to sell in the global market. The White House and the russophobes in the Senate are livid and are trying to block the transaction because it opens up some very serious and nasty scenarios for the petrodollar. If Sechin decides to sell this Iranian oil for rubles, through a Russian exchange, such move will boost the chances of the “petroruble” and will hurt the petrodollar.

It can be said that the US sanctions have opened a Pandora's box of troubles for the American currency. The Russian retaliation will surely be unpleasant for Washington, but what happens if other oil producers and consumers decide to follow the example set by Russia? During the last month, China opened two centers to process yuan-denominated trade flows, one in London and one in Frankfurt. Are the Chinese preparing a similar move against the greenback?
We'll soon find out. more

Lawmakers call on oil and gas producers to ditch ‘dirty, bloody dollar’

RT April 03, 2014

A group of Lower House MPs are urging Russian oil and gas producers and traders to stop using the US dollar. They say this means sharing profits with the USA, and making Russia vulnerable to western sanctions.

“The dollar is evil. It is a dirty green paper stained with blood of hundreds of thousands of civilian citizens of Japan, Serbia, Afghanistan, Iraq, Syria, Libya, Korea and Vietnam,” one of the authors of the motion, Mikhail Degtyaryov of the conservative nationalist party LDPR said in an interview with Izvestia daily.

Degtyaryov also said that Russia already had a bilateral agreement with China allowing payment in national currencies and this proved that such step was possible.

“Our national industrial giants will not suffer any losses if they choose to make contracts in rubles or other alternative currencies. Russia will benefit from that. We should act paradoxically when we deal with the West. We will sell rubles to consumers of our oil and gas, and later we will exchange rubles for gold. If they don’t like this – let them not do this and freeze to death. Before they adjust, and this will take them three of four years, we will collect tremendous quantities of gold. Russian companies will at last become nationally oriented and stop crediting the economy of the US that is openly hostile to Russia,” the MP said.

Degtyaryov is known for drafting an official bill banning the US dollar in Russia. He told reporters that this document has been recalled from parliament and amended with a ban on the euro and promised to re-submit the new draft to the Lower House in the near future.

On Wednesday the head of leading state-owned bank VTB, Andrey Kostin, also urged Russia to start transitioning to ruble payments with all its trading partners, including China and Western Europe. Kostinalso said the switch should begin as soon as possible, and that exporting companies should lead the way in adopting the change. According to the banker the plan could help to lower the country's dependency on “the whims of US and EU authorities”.

However, industry experts have warned against hasty moves saying that sometimes the transition to a different currency was simply impossible. The head of the Trade and Industry Chamber’s committee for financial markets, Yakov Mirkin, said that at present the international practice was to calculate oil and gas prices in US dollars as the international reserve currency. “We cannot swim against the current. This is how the whole thing works. Maybe such a thing will be possible in 10 or 15 years, but not today,” Mirkin noted.

Head of the PR department of the Russian state oil corporation Rosneft, Mikhail Leontyev, said that his company was bound by contract obligations and the fast switch to a different currency was simply impossible. more