On Friday, June 16, 2006 Samuel Brittan wrote in the Financial Times (page 11) that “the most likely trigger for a dollar collapse would be a US housing market setback.” I read this with gratitude that someone was actually addressing this important global threat but I had to respectfully disagree. The greatest threat to the role of the US dollar as the international reserve currency, and indeed the global economy itself, is a sudden end to petrodollar hegemony.
After the US abandoned the gold standard in 1971 with the end of the Bretton Woods System there were signs that the US dollar was beginning to weaken. In a deal with the US government, Saudi Arabia ensured that OPEC would continue to trade oil using the US currency and then initiated the OPEC “oil embargo” of 1973-74. As the price of a barrel of oil quadrupled, countries around the world needed US dollars in order to purchase oil. This began a cycle that is known as “petrodollar recycling.” The United States mints new currency for poor countries to borrow in order to purchase oil, and OPEC uses their profits to purchase US treasury bonds. This monetary current maintains artificially low lending rates in the US (one reason for the success of US businesses but also our net-zero savings rate). This system also ensures that poor countries constantly remain in debt to the US through the IMF/World Bank, making them subject to “structural adjustments” that require elimination of social services and privatization (which in turn primarily benefits US corporations).
As the price of oil approaches $100 a barrel, the threat to US petrodollar hegemony comes from the relative strength of the Euro. Several players within OPEC have spoken about shifting to a petroeuro system. These include plans for the Iran Oil Bourse which would rival the US and UK monopoly on oil commodity trading markets and the 2000 shift by Saddam Hussein to the petroeuro (he was subsequently removed from power under the guise of WMDs, or was it spreading democracy…? Shortly after the invasion the petrodollar system was reinstalled in Iraq). While a shift away from the petrodollar system seems inevitable it must be done in a multilateral fashion, perhaps shifting to a basket of currencies. In fact on November 12th an article in the Financial Times (Wealth Flows into Currencies, page 2) talked about the little-discussed basket of currencies, which OPEC already uses as a reference metric.
The relatively high price of oil these days is leaving oil-rich countries with a surplus of US currency, which they typically invest in US Treasury Debt, which triggers lower long-term interest rates. If a sudden shift to the petroeuro were to occur it could trigger a massive sell-off of US treasury bonds, which would in turn greatly devalue the US dollar, much more than Mr. Brittan’s “dollar depreciation of at least 20 percent” due to a “housing market setback.” If nothing else this looming threat gives us additional incentive for a switch to sustainable domestic renewable energy, as if fundamentalist Islamic terrorism and global climate catastrophe were not enough.
Additional Recommended Resources:
Petrodollar Warfare, William R. Clark (http://www.petrodollarwarfare.com/)
Lives per Gallon, Terry Tamminen (http://www.livespergallon.org/)
A Crude Awakening (http://www.oilcrashmovie.com/)