The Demise Of Dollar Hegemony: Russia Breaks Wall St's Oil-Price Monopoly
Submitted by William Engdahl via New Eastern Outlook,
Russia has just taken significant steps that will break the present Wall Street oil price monopoly, at least for a huge part of the world oil market. The move is part of a longer-term strategy of decoupling Russia’s economy and especially its very significant export of oil, from the US dollar, today the Achilles Heel of the Russian economy.
Later in November the Russian Energy Ministry has announced that it will begin test-trading of a new Russian oil benchmark. While this might sound like small beer to many, it’s huge. If successful, and there is no reason why it won’t be, the Russian crude oil benchmark futures contract traded on Russian exchanges, will price oil in rubles and no longer in US dollars. It is part of a de-dollarization move that Russia, China and a growing number of other countries have quietly begun.
The setting of an oil benchmark price is at the heart of the method used by major Wall Street banks to control world oil prices. Oil is the world’s largest commodity in dollar terms. Today, the price of Russian crude oil is referenced to what is called the Brent price. The problem is that the Brent field, along with other major North Sea oil fields is in major decline, meaning that Wall Street can use a vanishing benchmark to leverage control over vastly larger oil volumes. The other problem is that the Brent contract is controlled essentially by Wall Street and the derivatives manipulations of banks like Goldman Sachs, Morgan Stanley, JP MorganChase and Citibank.
The ‘Petrodollar’ demise
The sale of oil denominated in dollars is essential for the support of the US dollar. In turn, maintaining demand for dollars by world central banks for their currency reserves to back foreign trade of countries like China, Japan or Germany, is essential if the United States dollar is to remain the leading world reserve currency. That status as world’s leading reserve currency is one of two pillars of American hegemony since the end of World War II. The second pillar is world military supremacy.
US wars financed with others’ dollars
Because all other nations need to acquire dollars to buy imports of oil and most other commodities, a country such as Russia or China typically invests the trade surplus dollars its companies earn in the form of US government bonds or similar US government securities. The only other candidate large enough, the Euro, since the 2010 Greek crisis, is seen as more risky.
That leading reserve role of the US dollar, since August 1971 when the dollar broke from gold-backing, has essentially allowed the US Government to run seemingly endless budget deficits without having to worry about rising interest rates, like having a permanent overdraft credit at your bank.
That in effect has allowed Washington to create a record $18.6 trillion federal debt without major concern. Today the ratio of US government debt to GDP is 111%. In 2001 when George W. Bush took office and before trillions were spent on the Afghan and Iraq “War on Terror,” US debt to GDP was just half, or 55%. The glib expression in Washington is that “debt doesn’t matter,” as the assumption is that the world—Russia, China, Japan, India, Germany–will always buy US debt with their trade surplus dollars. The ability of Washington to hold the lead reserve currency role, a strategic priority for Washington and Wall Street, is vitally tied to how world oil prices are determined.
In the period up until the end of the 1980’s world oil prices were determined largely by real daily supply and demand. It was the province of oil buyers and oil sellers. Then Goldman Sachs decided to buy the small Wall Street commodity brokerage, J. Aron in the 1980’s. They had their eye set on transforming how oil is traded in world markets.
It was the advent of “paper oil,” oil traded in futures, contracts independent of delivery of physical crude, easier for the large banks to manipulate based on rumors and derivative market skullduggery, as a handful of Wall Street banks dominated oil futures trades and knew just who held what positions, a convenient insider role that is rarely mentioned in polite company. It was the beginning of transforming oil trading into a casino where Goldman Sachs, Morgan Stanley, JP MorganChase and a few other giant Wall Street banks ran the crap tables.
In the aftermath of the 1973 rise in the price of OPEC oil by some 400% in a matter of months following the October, 1973 Yom Kippur war, the US Treasury sent a high-level emissary to Riyadh, Saudi Arabia. In 1975 US Treasury Assistant Secretary, Jack F. Bennett, was sent to Saudi Arabia to secure an agreement with the monarchy that Saudi and all OPEC oil will only be traded in US dollars, not Japanese Yen or German Marks or any other. Bennett then went to take a high job at Exxon. The Saudis got major military guarantees and equipment in return and from that point, despite major efforts of oil importing countries, oil to this day is sold on world markets in dollars and the price is set by Wall Street via control of the derivatives or futures exchanges such as Intercontinental Exchange or ICE in London, the NYMEX commodity exchange in New York, or the Dubai Mercantile Exchange which sets the benchmark for Arab crude prices. All are owned by a tight-knit group of Wall Street banks–Goldman Sachs, JP MorganChase, Citigroup and others. At the time Secretary of State Henry Kissinger reportedly stated, “If you control the oil, you control entire nations.” Oil has been at the heart of the Dollar System since 1945.
Russian benchmark importance
Today, prices for Russian oil exports are set according to the Brent price in as traded London and New York. With the launch of Russia’s benchmark trading, that is due to change, likely very dramatically. The new contract for Russian crude in rubles, not dollars, will trade on the St. Petersburg International Mercantile Exchange (SPIMEX).
The Brent benchmark contract are used presently to price not only Russian crude oil. It’s used to set the price for over two-thirds of all internationally traded oil. The problem is that the North Sea production of the Brent blend is declining to the point today only 1 million barrels Brent blend production sets the price for 67% of all international oil traded. The Russian ruble contract could make a major dent in the demand for oil dollars once it is accepted.
Russia is the world’s largest oil producer, so creation of a Russian oil benchmark independent from the dollar is significant, to put it mildly. In 2013 Russia produced 10.5 million barrels per day, slightly more than Saudi Arabia. Because natural gas is mainly used in Russia, fully 75% of their oil can be exported. Europe is by far Russia’s main oil customer, buying 3.5 million barrels a day or 80% of total Russian oil exports. The Urals Blend, a mixture of Russian oil varieties, is Russia’s main exported oil grade. The main European customers are Germany, the Netherlands and Poland. To put Russia’s benchmark move into perspective, the other large suppliers of crude oil to Europe – Saudi Arabia (890,000 bpd), Nigeria (810,000 bpd), Kazakhstan (580,000 bpd) and Libya (560,000 bpd) – lag far behind Russia. As well, domestic production of crude oil in Europe is declining quickly. Oil output from Europe fell just below 3 Mb/d in 2013, following steady declines in the North Sea which is the basis of the Brent benchmark.
End to dollar hegemony good for US
The Russian move to price in rubles its large oil exports to world markets, especially Western Europe, and increasingly to China and Asia via the ESPO pipeline and other routes, on the new Russian oil benchmark in the St. Petersburg International Mercantile Exchange is by no means the only move to lessen dependence of countries on the dollar for oil. Sometime early next year China, the world’s second-largest oil importer, plans to launch its own oil benchmark contract. Like the Russian, China’s benchmark will be denominated not in dollars but in Chinese Yuan. It will be traded on the Shanghai International Energy Exchange.
Step-by-step, Russia, China and other emerging economies are taking measures to lessen their dependency on the US dollar, to “de-dollarize.” Oil is the world’s largest traded commodity and it is almost entirely priced in dollars. Were that to end, the ability of the US military industrial complex to wage wars without end would be in deep trouble.
Perhaps that would open some doors to more peaceful ideas such as spending US taxpayer dollars on rebuilding the horrendous deterioration of basic USA economic infrastructure. The American Society of Civil Engineers in 2013 estimated $3.6 trillion of basic infrastructure investment is needed in the United States over the next five years. They report that one out of every 9 bridges in America, more than 70,000 across the country, are deficient. Almost one-third of the major roads in the US are in poor condition. Only 2 of 14 major ports on the eastern seaboard will be able to accommodate the super-sized cargo ships that will soon be coming through the newly expanded Panama Canal. There are more than 14,000 miles of high-speed rail operating around the world, but none in the United States.
That kind of basic infrastructure spending would be a far more economically beneficial source of real jobs and real tax revenue for the United States than more of John McCain’s endless wars. Investment in infrastructure, as I have noted in previous articles, has a multiplier effect in creating new markets. Infrastructure creates economic efficiencies and tax revenues of some 11 to 1 for every one dollar invested as the economy becomes more efficient.
A dramatic decline for the role of the dollar as world reserve currency, if coupled with a Russia-styled domestic refocus on rebuilding America’s domestic economy, rather than out-sourcing everything, could go a major way to rebalance a world gone mad with war. Paradoxically, the de-dollarization, by denying Washington the ability to finance future wars by the investment in US Treasury debt from Chinese, Russian and other foreign bond buyers, could be a valuable contribution to genuine world peace. Wouldn’t that be nice for a change?
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Exactly right!!!
This story neglects one considerable line of thought and that is that should the U.S. Gov really have drastically less money to spend the very last budget to be cut will be the military industrial complex and the alphabet soup of agencies that fuel the wars and threats that justify these budgets. It'll be the domestic Gov employees that will get laid off first, so expect our domestic problems to get much worse (riots and revolutions) then countered by the military police state. Life in America is fucked when the petrodollar becomes just the dollar. It's not going to be a new era of freedom and peace for a long time and, I suspect, not until a major civil war has run its course.
Dare go da neighborhood
If I like me dollars, can I keep me dollars?
Yes you can Popeye. Your spinach too.
de-dollarization means war. what russia and china are doing is setting up a parallel money exchange system so the war can be conduxted without relying on ua controlled institutions. they make their own arms with their own money with their own oil.
i like the optimism of engdhal but it is a bit pollyannish given history.
And guess who has the gold reserves when the payment comes into question?
That's the American mindset, in reality we are the only country that strives for constant war, those countries are just trying to defend their interests.
So you want to keep the monopoly while preaching free trade and competition to everyone???
All nations on earth are entitled to trade in the currency they want. You might need to get this pattern out of your head that you can tell all people what to do.
If it breaks the back of the Wall Street Warlocks and the Brussels Bandits I'm happy.
Newsflash; Bankrupt countries do not make infrastructure investments.......
Explain that to a post-Wwimar Germany of 1933-1939.
Wasn't that due to the fact that in those days they just refused to pay for the Versailles raparations and took the Ruhr back? Doesn't explain everything but a bit.
And there was of course the spirit of renewal which is an open possibility for everyone. Just create a positive spirit of renewal, the bad days are behind us sort of thing!
We are all in this toogether, no, sorry, US cannot do that. Hope for change we can believe in has died. Privatise all roads and bridges - privatisation is the panacea!!!
World peace, unicorns and shit!
Russia must avoid the next global credit implosion.
While I do not agree with this author that debt will be defaulted, or a banks nationalised.
The banking fucks will hold on while it all goes down.
Russia is doing the right thing to "deleverage" from the fucking Titanic.
https://www.linkedin.com/pulse/global-credit-risk-john-m-cunningham
Agree - even Zimbabwe never defaulted - they just created even more 'money' to pay it off.
The article you linked, points out to 555 trillion or half a quadrillion of derivatives. I had googled the word "quadrillion" last year and got 100k hits just now I got half a million hits. People are checking.
These numbers are scarry. I wonder what will happened when the unraveling starts, knowing that there is not enough colateral in the world to cover numbers like that.
2008 was a staged dry run of de-dolarisation by crashing derivatives (a tiny fraction of them)
The "kill switch" has been then tested and has worked.
When the time is ripe, the 0.001% will exit dollar
using this "kill switch"/elephant in the room that is now more than 10 times the size of the global GDP
as a tool to exit and as an excuse for collapse
I would not release a gold backed currency into the world until all the worlds unbacked fiat currencies were unacceptable to buy gold. Also I don't like "backed" currencies with their counterparty risk and temptation to commit fraud. Embed slivers of gold in hard to counterfeit scrip and use bars/coins for larger denominations, thats real specie money, free of intermediaries.
Its complicated but only when the public refuses settlement except only by monetary objects that are specie will the ages of monetary scams end.
Yes, the dollar is bad, but would you rather have Yuan for your oil? Euros? Yen?
Really?
sschu
Precious metals.
I would rather have precious metals for my oil.
It doesn't have to be gold or silver - Platinum or Palladium etc will do just fine.
Slightly tangential but how about that record gold to oil ratio!
Saddam Hussein, Ghadaffi and Assad all agree! And that has worked out very well for them.
None of those three was realistically capable of reducing the North American continent to radioactive ash though.
Hussein just got pissed and went for it. Ghadaffi and Assad didnt want to live in a world like that. I also think rhat they both sacririficed themselves anf their countries for the sake of exposing Washingtons, Riyhads and Tel Avivs nafarious existence. For better or worse its all been laid out bare for the world to see.
Yes.
I might even offer a discount for direct payment in PM's...
Since my oil is tangible and finite I would only sell it for tangible and finite specie money (or quickly convert fiat money sales to specie money, same thing)
Gold backed foreign settlement broke down (liquidity) 100 years ago despite desperate measures to reinstate it. Hence the birth of the Forex markets we know today. We may be seeing the break down of that market. It is a precarious thing to have one major commodity (oil) as the majority of world trade.
if the Yuan or €s buy you what you plan to buy anyway there's no problem. Only for the banks who lose out on foreign currency conversion fees.
This AM:
German 10 year - .59%
Yen 10 year - .19%
$$ 10 year - 2.10%
The dollar is gaining value vs the other currencies. *
Yes, the least dirty shirt. But for now, this is a no brainer from an economic perspective.
* Subject to change on short notice.
sschu
In your "we ain't gonna study war no mo'" utopia, what do we do when war is waged against us?
>> ... what do we do when war is waged against us?
We die of course.
What did you expect?
After what our government has perpetrated over the last 15 years, Murikistan wont be getting out of this in one piece. Im just hoping the Great Lakes region goes to Canada. Murikistan willl be Balkanized within 25 years or less. This failed science project will he a very interesting college course in 50 years tops.
Now tell me, who'd wage war against the US to conquer that place? What is in America to wage war for? The German gold perhaps, but that's not enough.
We would do what we have always done.
In your warmongering utopia, who is threatening to attack us?
De-dollerization happens by deflation. Foreign currencies collapse and their debts are erased. USD become too strong, too expensive for financing.
The reduction in the price of oil is a strengthening of the dollar.
For sure domestically, since it takes less fiat to fill your tank. But, how about overseas?
FOREX reserves held by other countries can also buy oil cheaper since they are holding USD.
Those SHIBOR rates should float...
If you want to play with the " big dogs" you need to learn how to play in the tall weeds?
I wonder how much I left on the table since the 23 rub/usd? I didn't make shit on gold and silver but that is OK for a while. I am getting tired of that but it is stacked. That rub/usd was a hell of a forex play. I second guessed myself. I am an idiot. I think it still has upside.
They have used up that fiat anyway, its worthless .......
seem like US paranoia to me
Hint to Russia, U.S. is subsidizing Opec losses so they can sell oil at a loss through derivatives.
Hint:
Make it more expensive for the U.S. to do this by increasing Opec losses, dump your oil EVEN CHEAPER, if you make them lose more money thats more money U.S.Govt. Inc.has to paper over increasing the risk exposure.
Two can play at that game.
Costs are Costs.
Shake the monkeys out of the tree.
No worries, once Iran starts pumping to the international mkt, the $/bbl can only go down some more.
Gold-Backed Ruble, Yuan to Trigger Global De-Dollarization http://sputniknews.com/politics/20151205/1031294555/gold-ruble-yuan-global-dedolarization.html
Iran, India to settle outstanding crude oil dues in rupees http://indianexpress.com/article/business/business-others/iran-india-to-settle-outstanding-crude-oil-dues-in-rupees/
Russia and India move to settle in own currencies http://in.rbth.com/economics/finance/2015/11/18/rusia-and-india-move-to-settle-in-own-currencies_541991
Indonesia to Use Yuan in Trade With China From 2016 http://www.plenglish.com/index.php?option=com_content&task=view&id=4366281&Itemid=1
You might enjoy this article - https://www.corbettreport.com/the-great-decoupling-how-the-west-is-engin...
Russia might as well insist upon payment in pumpkins. Nobody has that amount of rubbles floating around the cookie jar so some sort of FX intermediary swap will have to be arranged.
In the middle of a gas war is a bad time to start insisting that you will only honor your own company's credit card. Lots of other stations will be anxious to suck up the business on whatever terms the customer finds most convenient.
' get thee to a nunnery tara '
Get thee back to thy Patrice Lumumba Friendship University reunion.
Simple fact: Nobody has that kind of rubble stash lying around to spend on oil. Demand rubbles. Demand pumpkins. Demand payment in diamonds or Martian cadawallas. Doesn't matter. It's still going to see some widely-traded currency involved to settle the transaction.
Like it or not, it's one of the reasons why the dollar is used in the oil business. People earn a lot of dollars through trade and there are massive amounts of them sloshing around the planet so it is possible for everyone to trade the dollars they already hold for the oil they need without getting into complicated fx regimes on a daily basis.
Imagine having to go to the fx markets every time you fill up your tank.
Meh, it's high time Exxon-Mobil "earned" all those FRNs by actually doing something useful for the typical consumer.