The End Of An Era: Is The US Petrodollar Under Threat?
By Andrew Topf | Tue, 28 October 2014 22:39
Recent
trade deals and high-level cooperation between Russia and China have
set off alarm bells in the West as policymakers and oil and gas
executives watch the balance of power in global energy markets shift to
the East.
The
reasons for the cozier relationship between the two giant powers are,
of course, rooted in the Ukraine crisis and subsequent Western sanctions
against Russia, combined with China's need to secure long-term energy
supplies. However, a consequence of closer economic ties between Russia
and China could also mean the beginning of the end of dominance for the
U.S. dollar, and that could have a profound impact on energy markets.
Rein of the USD
Before
the 20th century, the value of money was tied to gold. Banks that lent
money were constrained by the amount of their gold reserves. The Bretton
Woods Agreement of 1944 established a system of exchange rates that
allowed governments to sell their gold to the U.S. Treasury. But in
1971, U.S. President Richard Nixon took the country off the gold
standard, which formally ended the linkage between the world's major
currencies and gold.
The
U.S. dollar then went through a massive devaluation, and oil played a
crucial role in propping it back up. Nixon negotiated a deal with Saudi
Arabia whereby in exchange for arms and protection, the Saudis would
denominate all future sales of oil in U.S. dollars. Other OPEC members
agreed to similar deals, ensuring perpetual global demand for
greenbacks. The dominance of the U.S. "petrodollar" continues to this
day.
Russia and China Cozy Up
Recent
news coming out of Russia, however, suggests that the era of U.S.
dollar dominance could be coming to an end, due to increasing
competition from the world's second largest economy and primary consumer
of commodities, China.
China
and Russia have been furiously signing energy deals that indicate their
mutual energy interests. The most obvious is the $456 billion gas deal
that Russian state-owned Gazprom signed with China in May, but that was
just the biggest in a string of energy agreements going back to 2009.
That year, Russian oil giant Rosneft secured a $25 billion oil swap
agreement with Beijing, and last year, Rosneft agreed to double oil
supplies to China in a deal valued at $270 billion.
Since
Western sanctions against Russia took hold in reaction to the Russian
land grab in Crimea and the shooting down of a commercial airliner,
Moscow has increasingly looked to its former Cold War rival as a key
buyer of Russian crude -- its most important export.
Liam
Halligan, a columnist for the Telegraph, says "the real danger" of
closer Russian-Chinese ties is not a bust-up between China and the U.S.,
which could threaten crucial shipping routes for China-bound coal and
LNG, but its impact on the U.S. dollar.
"If
Russia’s 'pivot to Asia' results in Moscow and Beijing trading oil
between them in a currency other than the dollar, that will represent a
major change in how the global economy operates and a marked loss of
power for the U.S. and its allies," Halligan wrote in May.
"With China now the world’s biggest oil importer and the U.S.
increasingly stressing domestic production, the days of dollar-priced
energy, and therefore dollar-dominance, look numbered."
While
no one is arguing that could happen anytime soon, considering the
dollar remains the currency of choice for central banks, Halligan's
proposition is gathering strength. In June, China agreed with Brazil on a
$29 billion currency swap in an effort to promote the Chinese yuan as a
reserve currency, and earlier this month, the Chinese and Russian
central banks signed an agreement on yuan-ruble swaps to double trade
between the two countries. Analysts says the $150 billion deal, one of
38 accords inked in Moscow, is a way for Russia to move away from U.S.
dollar-dominated settlements.
"Taken
alone, these actions do not mean the end of the dollar as the leading
global reserve currency,” Jim Rickards, portfolio manager at West Shore
Group and partner at Tangent Capital Partners, told CNBC.
“But taken in the context of many other actions around the world
including Saudi Arabia's frustration with U.S. foreign policy toward
Iran, and China's voracious appetite for gold, these actions are
meaningful steps away from the dollar."
Rise of the Yuan
It
is no secret that Beijing has been looking to promote the yuan as an
alternative reserve currency. Having that status would allow China cheap
access to world capital markets and cheaper transaction costs on
international trade, not to mention increased clout as an economic power
commensurate with its rising proportion of world commerce.
However,
the Chinese have a problem in their plans for the yuan. The government
has not yet removed capital controls that would allow full
convertibility, for fear of unleashing a torrent of speculative flows
that could damage the Chinese economy.
However,
"[It] is clear that China is laying foundations for wider acceptance of
the yuan," said Karl Schamotta, a senior market strategist at Western
Union Business Solutions," as quoted
in an International Business Times article. IBT pointed out that "more
than 10,000 financial institutions are doing business in Chinese yuan,
up from 900 in June 2011, while the pool of offshore yuan, non-existent
three years ago, is now near 900 billion ($143 billion). And the
proportion of China’s exports and imports settled in yuan has increased
nearly sixfold in three years to nearly 12 percent."
Conspiracy Theory Spoiler Alert
Adding some vivid color to this story, Casey Research energy analyst Marin Katusa speculated in a recent column
that the death of Total CEO Christophe de Margerie, whose private jet
collided with a snowplow in Moscow, may not have been an accident.
Instead, Katusa muses that the mysterious circumstances surrounding his
death and the unlikely odds of being hit by a snowplow at an airport,
could have more to do with de Margerie's business interests in Russia
than being at the wrong place at the wrong time.
According
to Katusa, de Margerie was "a total liability" due to Total's
involvement in plans to build an LNG plant on the Yamal Peninsula along
with partner Novatek. The company was also seeking financing for a gas
project in Russia despite Western sanctions.
"It
planned to finance its share in the $27-billion Yamal project using
euros, yuan, Russian rubles, and any other currency but U.S. dollars,"
Katusa writes, then entices the reader with this: "Did this direct
threat to the petrodollar make this 'true friend of Russia'—as Putin
called de Margerie - some very powerful and dangerous enemies amongst
the power that be, whether in the French government, the EU, or the
U.S.?" That
may be a stretch, but Katusa's U.S. dollar reference shows that any
developments that point to a move away from the dominance of the
greenback are not going un-noticed.
By Andrew Topf of Oilprice.com