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?
(55 votes)
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are you indicating me you want to have sex with my grandma?
is that all? you waited 5 days for approval to tell me about you sexual orientation?
you see i have shoes. i dont wear them right now but the first thing after 5 days of your absence you could start by polishing my shoes.
great job for you and on your mental level! you are busy and silent and everyone else throws smiles at you. and its not that they are laughing about you, its that they are laughing with you. just keep polishing
Some facts to backup your comments, please.
Do you disagree that Russia andChina are dedollarizing?
At some point the Saudis join along snd then we are fucked with inflation.
Your American linguistic style is very good for someone living in Ukraine.
who is paying you to troll?
After 5 days 14 hours on ZH you have become an expert already.
I would say that the only momentum that your name represents is the momentum of the crap being expelled by you.
I guess you must also be Porky's Pig sty keeper if you live in Ukraine
This is true and as China intentionally debases the Yuan in an effort to shore up its economy it Fucks Putin and all the Yuan it has accumulated in the oil trade with China.
The fact is that ALL paper currency is a belief system and no one has faith in the Ruble and the Yuan is close behind.
The Ruble is at all time lows and will continue to dump, starting your own oil exchange will not prop up oil or the Ruble, like it or not they are both linked to the world supply and demand.
ahhh well then you have it, a fascist, supported by our fascist regimes.
Weird how we have the semi-communists opposed by now fascist nations, you know socialism of the poor versus socialism for the rich. Problem is that the middle class socialists get screwed, so its very hard for any real headway to be made for a free society, while the elitists win in any of the three brands of socialism.
Time for us to all to view the world by those that want freedom, and those that want a free ride, freedom only needs the majority of us to rise above the ignorance and greed.
LOOK!
A WELL-DISCIPLINED TROLL!
Remember that gorgeous looking girl in high school, big boobs and short skirt. Miss Popularity...all the boys wanted to date her. Her old man was rich and she drove a vette. Then after college you saw her one day, she been breeding everyone and was looking a little rough. Her old man went broke and she didn't fare well. Mentally, she was getting desperate to hang onto what she had been. She'd get clingy, phoning old flames, guys didn't answer after seeing the call display. No one actually wanted to be seen with her anymore in public, except for an occasional drunk.....
Does everyone know where I'm going with this symbolism?
To your divorce lawyer to file first ?
A rich but notorious Mexican boyfriend. She ended up fat and dissolutionaly happy.
So easy to see how the ordinary people of the world would have SO MUCH BETTER LIVING CONDITIONS under the regimes of high-achievers like Mao and Stalin than under the stumbling bunglers of the USA regime.
Can barely contain my excitement over the prospect of being under the boot heel of a regime that arrests, imprisons, tortures, disappears and kills its people vs just oppresses them financially, so much excitement to look forward to !!!!
The USA regime was fine until August 15, 1971.
Then it became the same as the rest.
Squid
You are suffering from the ignorance of never having lived under the russian or chinese regimes, which results in you making such a ludicrously absurd statement that USA regime, as much as it sucks, "became the same as the rest".
Obviously you are still just a juvenile.
OK, I thought the article was pretty good. It showed how paper is used on oil just as it is used to "fix" PMs, and I mean Fix like fixing a horse-race.
And, it all points back to the Global Squid of Goldman and its buddies.
The key to a "resolution" of the current fraud "system": end of the "Fraud Preserve" - [not] Federal [no] Reserve - financial hegemony and the subsequent "mark-to-market" "value" (sic) of United Snakes Treasury bonds.
The death of the dollar . . . . Heard alot about that last year, and then, with oil tanking all over place, the dollar - went to the moon.
Remember when the yuan was going to replace the dollar? That was so July 2015.
China was just added to the SDR's. Both Russian and China and Brics are going to trade using their own currencies. This article is exactly right. Stop buying US Bonds and the Wars will stop.
I believe Saudi Arabia is going to look east instead of west for trade partners and they too will get rid of the petro dollar.
tb
Look at all the wars that started over the petrodollar and oil. Sadaam was going to start a gold backed dinar and end the petro dollar. What happend next? War.
Asad in Syria was doing away with trading oil in petro dollars. What happend next? Regime change. Iran was trading oil for gold. What happend next? Sanctions.
I can't blame all these countries that want nothing to do with Dollars. Lets get this Global Currency Reset over and done with.
tb
Derivatives are going to crash this market and I have my popcorn ready
tb
Because of the two pillars mentioned in the article, the US through our diplomatic channels, has been able to force countries around the world to buy US goods and services instead of their domestic products at hugely inflated prices, partially due to hugely distorted exchange rates. This has afforded us the standard of living we have enjoyed since WW2.
The deterioration of dollar hegemony was revealed to me the other day while talking with a friend who works for a global manufacturer of a multi million dollar product. Normally they produce and sell 30-35 units a month. December they produced and shipped 4. Company issued a 1 week unpaid furlough to all employees. My friend said demand for their product was being cut into by competition from their European counterparts. He said they were seeing a "shrinking slice of a shrinking pie". This was unheard of at the apex of dollar hegemony.
Incidents like this are subtle indications of a shift in geopolitical trend. Hence the strained relations between US and Russia/China. Obama and the aspiring candidates know all this, but don't dare say a peep about it. If they were to try and level with the public, they'd probably end up dead. People are going to have to figure things out themselves and plan accordingly.
"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?"
Except, it will another great war before that happens. The neocons will not allow for dedollarization by Russia to happen. Hussein tried it, Ghadaffi tried it. They are both dead. Iran is trying it. Iran, Russia and Putin will be harder nuts to crack but they will take a shot at it anyway, sacrificing Europe and the ME. Both the US and SA want the petrodollar to remain king. For that it is necessary that SA gets control of the oil fields where Shia dominate. See that interesting map of the oil and gas reserves that featured the other day on ZH.
And it is all a bit of simplification in this article -and wishful thinking. A dedollarization would mean the collapse of the dollar. Many countries hold US debt. That would evaporate overnight. US could become debt free if they have enough foreign currency reserves or gold reserves to back that up. It is not as simple as this article suggests.
Pricing oil in rubles when Russian currency values are susceptible to exogenous shocks (from, say, Wall Street) seems more like making Russia into a pinata from which oil and profits can be beaten out of. But ultimately, ZH will report on any Russian news in the best possible light, which is weird because half of ZH seems to be pro-transparency in markets and half of ZH seems to be pro-Russia, which is the opposite of pro-transparancy.
Pricing oil in rubles when Russian currency values are susceptible to exogenous shocks (from, say, Wall Street) seems more like making Russia into a pinata from which oil and profits can be beaten out of. But ultimately, ZH will report on any Russian news in the best possible light, which is weird because half of ZH seems to be pro-transparency in markets and half of ZH seems to be pro-Russia, which is the opposite of pro-transparancy.
Pricing oil in dollars has not done Russia any good either, when market manipulators can attack the ruble or price of oil in an effort to bankrupt Russia. Russia needs to distance itself as much as possible from ties to European or American finances. I read another article yesterday that said the ruble was almost 70 pct undervalued. And the cut-off of VISA and SWIFT 2 years ago (temporary but scary) convinced the Russians they needed to come up with alternatives.
Seems it doesn't matter what the Russians do, somebody is going to be ticked off.
Meanwhile, Uncle Putin having gone for a jog on the ourskirts of Moscow, cries as the defense budget comes under the axe:
https://www.stratfor.com/sample/geopolitical-diary/russia-budget-cuts-fa...
And the rubble approaches 80 to the USD.....
The Ruble can be 1,000,000/USD and Russia will be fine. It simply would mean Russia would become far more independent in domestic consumption and the 145M market will be more or less cut off for westerners. Russia's economy is more tied to within and its domestic consumption. Russian products have now become far more competitive due to its currency devaluation and companies whom were not in certain markets in 2014, are now (Rostelsmash in Germany) and that means bigger money for Russians and Russian industries. If let's say Russia was a net importer (which it is not), then they would definitely have a lot of trouble. But let's also take into account other countries like China and their currency- it also has dropped in value quite a bit, same with currencies like Rial and Rand. Thus products from those countries are cheaper to purchase for Russians than from US. Russian currency isn't the only one dropping, many are. Look at the Krone as an example.
Russia's key strength here is her industrialized country. With all its inefficiencies and other issues, the lower the valued currency, allows greater competition as well as more drive for localization of production which is what is happening.
OT:
Russia to supply arms to Afghan military. US soon to get the boot.
https://www.washingtonpost.com/world/afghan-forces-to-receive-russian-ar...