Benchmarked Crudely – Oil Soon to be Priced in Non-Dollars

n the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans [were] confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong.

These plans to unseat the now fickle US dollar as the benchmark currency for trading in petroleum will considerably reduce demand for the US dollar and, hence, lower its value. That will reduce the price of US exports, but it will make oil, among many imported commodities, more expensive, presumably for rather a long time. Given our tattered "safety net" and unwillingness to tax the wealthy or regulate big bidness, that may have a disproportionate impact on the poor and middle classes.

I can’t imagine what factors might have set these countries to worrying about the long term value of the dollar. Unless it has something to do with our unrestrained financial system that values asset-less creatures of investment bank super-computers as AAA investments; budget deficits that would make St. Ronnie squirm; crumbling infrastructure; manufacturing CEO’s who relocate their jobs to China faster than they pay themselves bonuses; and a public health system that leaves as many citizens untreated as there are citizens in most European countries and whose holes make it a threat to containment of global pandemics.

As a wild guess, background issues that could have influenced this decision might include the US treatment of the Middle East, two wars and noises for a third, a military that refuses to rein in generals that tout their "crusade" against Islam (not to mention a ham-tongued former president who implied the same), and racially-based visitor and visa policies that discriminate against all but a few largely white Western European countries.

This is a coordinated move, and US criticism and ire may focus publicly on Arab producing states, but everyone’s eyes will be on China. It holds the largest dollar reserves outside the US, is our prime economic partner and competitor, and is likely to be the greatest buyer of oil over the next century.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

I’ll leave it to our resident economists to comment about what this coordinated move away from the dollar really means, both for our long term economic outlook and for our short term "jobless" recovery. The UK’s Independent took note of one reaction the last time an Arab state priced its oil in a non-dollar currency:

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

How obtuse. Everyone knows our invasion of Iraq – and the incessant Village rumblings that we do "the same" to Iran (whatever that is; they must think we achieved victory) – knows that we did so to enhance the world’s freedom from fear and to maintain the purity of our precious bodily fluids. It had nothing whatever to do with oil.