adplus-dvertising
Connect with us

Business

The Oil Price War Won't Dethrone The Dollar – OilPrice.com

Published

 on



The Oil Price War Won’t Dethrone The Dollar | OilPrice.com

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

More Info

Trending Discussions

Premium Content

Dethrone The Dollar

With the oil price war between Saudi Arabia and Russia showing no signs of relenting, some analysts are now warning that the standoff could extend much longer.  Saudi policy now appears to revolve around inflicting pain on both OPEC and non-OPEC producers over the short term, with a long-term view to returning to its former role as the swing producer and price setter. 

With the Arab nation recently claiming that it’s ‘very comfortable’ with $30 oil, it might make good on its threat to maintain a 12 million bpd output clip for a whole year with minimal increase in spending by drawing upon its considerable reserves.

Given this backdrop, some pundits are now beginning to seriously consider the specter of a collapse by the decades-old petrodollar system. With Saudi Arabia–a key U.S. ally upon which the petrodollar was founded–having thrown the gauntlet on the U.S., a collapse by the petrodollar system could mean mass devaluations across major oil-producing regions.

But what are the odds that this could become a reality any time soon?

Short Overview of the Petrodollar

Defined simply, petrodollars are dollars paid to oil-producing countries in exchange for their oil. Being a global currency, most international transactions, including energy products, are priced in U.S. dollarsThe petrodollar system traces its roots back to the early 1970s when it replaced yet another monetary system–the gold standard.

In the final days of World War II, a meeting between all 44 Allied nations member states was held in Bretton Woods, New Hampshire, where a relatively young and economically nimble United States emerged as the leader in the new global economic order, replacing the former hegemon: a war-torn and debt-ridden Great Britain.

The historic meeting also created an international gold-backed monetary system–the U.S. held most of the world’s gold supply and agreed to redeem any dollar, for its value in gold, any currency that was pegged to the dollar.

The system worked well at first; however, it was not long before its shortcomings became apparent. After all, the global gold supply grows only slowly, which means being on the gold standard curtailed government spending and inflation. 

The system also put the U.S. under undue pressure regarding the balance of payments–in 1971, stagflation in the U.S. prompted many nations, including the United Kingdom, to redeem most of their U.S. dollars for gold. On August 15, 1971, President Richard M. Nixon shocked the world when he officially ended the international convertibility from U.S. dollars into gold, effectively bringing an end to the gold standard.

Worried about the resultant trade deficit by having to pay vast amounts for necessary imports, the U.S. and Saudi Arabia soon returned to the negotiating table. The petrodollar system was created in 1973, whereby the United States and Saudi Arabia struck a deal that would see every barrel of oil purchased from Saudi Arabia denominated in U.S. dollars. 

Related: Saudi Arabia And The U.S. Could Form The World’s Newest Oil Cartel Under this new arrangement, any country that bought Saudi oil could only do so using USD. In exchange, the U.S. offered weapons and military protection for Saudi oil fields from neighboring nations. By 1975, all OPEC nations had agreed to U.S. deals identical to Saudi’s– pricing their own oil supplies in U.S. dollars in exchange for weapons and military protection.

Thus, the petrodollar system was born, which created an immediate artificial demand for U.S. dollars across the globe. As global oil demand increased, so did the demand for U.S. dollars.

Petrodollar Recycling

The petrodollar system was escalated in 1979 when the United States and Saudi Arabia negotiated the United States-Saudi Arabian Joint Commission on Economic Cooperation, wherein the two nations agreed to use only U.S. dollars for oil contracts. In effect, the U.S. dollars would be recycled back to America by doing business with U.S. companies in a system known as petrodollar recycling.

Since then, most oil-exporting countries started recycling their petrodollars through sovereign wealth funds. Through these funds, these nations invest in non-oil related businesses that lower their dependence on oil. The largest petrodollar recyclers ranked by assets are:

  1. Norway Government Pension Fund Global  $1.186 trillion
  2. China Investment Corporation $940. 604 billion
  3. Abu Dhabi Investment Authority $696.660 billion
  4. Kuwait Investment Authority $592.000 billion
  5. Hong Kong Monetary Authority Investment Portfolio $539.865 billion
  6. GIC Private Limited $440.000 billion
  7. SAFE Investment Company $417.844 billion
  8. Temasek Holdings $375.383 billion
  9. Qatar Investment Authority $328.000 billion
  10. National Council for Social Security Fund $324.996 billion

Data Source: Sovereign Wealth Fund Institute

These oil-producing countries use these funds to provide a cushion to fall back on during hard times and can help lower volatility in their own economies as well as the global economy. 

There’s a dark side to it, though.

According to the Bureau of International Settlements, up to 70% of OPEC’s investable reserve funds could be unaccounted for. Mind you, BIS only reports on OPEC members, so non-OPEC funds are fully unaccounted for. 

The U.S. Treasury suspects that the unaccounted-for funds are invested in regional stock markets, construction loans, regional stock markets, hedge funds, and private equity funds. Some could also be finding their way into the U.S. market where they are invested through foreign intermediaries, which are untraceable.

These hidden petrodollars can increase global volatility due to their sheer size. For instance, dumping of U.S. Treasuries by a large holder can trigger a significant decline by the dollar–as was feared during the U.S.-China trade war.

Collapse of the Petrodollar?

RT Keiser Report believes that Russia’s got the upper hand in the current geopolitical oil game while U.S. shale and the American dollar are going to suffer greatly.

Today is the end of the petrodollar. We are going to see the rise of the ruble-dollar or the Chinese-Russian oil-based dollar.”

Keiser contends that “…the era of the U.S. holding the world’s reserve currency is finished”. 

There’s no doubt in anyone’s mind that U.S. shale producers could be among the first victims of the ongoing oil price war (Chevron Corp. recently cut its Permian Shale production by 20%); but neither Saudi Arabia nor Russia will come out unscathed, either. 

The Saudi government has already announced a raft of austerity measures, including a 5% cut to its 2020 budget. Meanwhile, although Russia seems to be in a better patch due to its low debt levels and ample sovereign wealth reserves clocking in at over $100 billion, it’s still likely to end up with a deficit this year due to the effects of the oil price war– not counting those by the coronavirus pandemic.

Related: US Oil Turns Its Back On The Permian As Prices Crash

But more importantly, reports about the impending collapse of the petrodollar are greatly exaggerated.

The United States has repeatedly used the power of petrodollars to enforce its foreign policy but is largely none the worse for wear because of it.

In 2014, Russia and Iran signed a five-year trade deal with each other worth $20 billion which involves the sale of Iranian oil and is not priced in dollars.

Iran and Venezuela have inked oil contracts in their own currencies instead of petrodollars in defiance due to Washington sanctions.

China and Russia have repeatedly called for a replacement of the U.S. dollar as a global currency, with China launching yuan-denominated oil futures in 2018.

These rogue nations have not exactly caused a dollar collapse; on the contrary, the dollar index has been routinely taking out multi-year highs in recent years.

Dollar Index 10-Year Change

Source: Investing.com

There appears to be some profound misconceptions about the importance of oil as a commodity; that oil somehow underwrites the global financial system and is directly responsible for the dollar’s hegemony. But the truth is that since the 1980s, the dollar has become the global reserve currency mainly because of the strength and dynamism of the U.S. economy. 

Exporters sometimes accept payment in other mediums — planes, tanks, construction services, etc. — but their central banks nearly always demand dollars for reasons entirely unconnected to oil because the U.S. dollar is underwritten by the U.S. taxpayer, founded upon decades of broadly consistent macro-economic policy management and easily exchangeable.

In fact, a bigger threat to the petrodollar’s dominance is the rapid shift to renewable energy. Europe appears to be largely winning in the rush to clean energy with the United States lagging behind the E.U. and China. Less fossil fuel consumption might weaken demand for the dollar, but probably not cause its collapse until a suitable substitute is found.

By Alex Kimani for Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today


Back to homepage

<!–

Trending Discussions

–>

Related posts

Let’s block ads! (Why?)

728x90x4

Source link

Business

Roots sees room for expansion in activewear, reports $5.2M Q2 loss and sales drop

Published

 on

 

TORONTO – Roots Corp. may have built its brand on all things comfy and cosy, but its CEO says activewear is now “really becoming a core part” of the brand.

The category, which at Roots spans leggings, tracksuits, sports bras and bike shorts, has seen such sustained double-digit growth that Meghan Roach plans to make it a key part of the business’ future.

“It’s an area … you will see us continue to expand upon,” she told analysts on a Friday call.

The Toronto-based retailer’s push into activewear has taken shape over many years and included several turns as the official designer and supplier of Team Canada’s Olympic uniform.

But consumers have had plenty of choice when it comes to workout gear and other apparel suited to their sporting needs. On top of the slew of athletic brands like Nike and Adidas, shoppers have also gravitated toward Lululemon Athletica Inc., Alo and Vuori, ramping up competition in the activewear category.

Roach feels Roots’ toehold in the category stems from the fit, feel and following its merchandise has cultivated.

“Our product really resonates with (shoppers) because you can wear it through multiple different use cases and occasions,” she said.

“We’ve been seeing customers come back again and again for some of these core products in our activewear collection.”

Her remarks came the same day as Roots revealed it lost $5.2 million in its latest quarter compared with a loss of $5.3 million in the same quarter last year.

The company said the second-quarter loss amounted to 13 cents per diluted share for the quarter ended Aug. 3, the same as a year earlier.

In presenting the results, Roach reminded analysts that the first half of the year is usually “seasonally small,” representing just 30 per cent of the company’s annual sales.

Sales for the second quarter totalled $47.7 million, down from $49.4 million in the same quarter last year.

The move lower came as direct-to-consumer sales amounted to $36.4 million, down from $37.1 million a year earlier, as comparable sales edged down 0.2 per cent.

The numbers reflect the fact that Roots continued to grapple with inventory challenges in the company’s Cooper fleece line that first cropped up in its previous quarter.

Roots recently began to use artificial intelligence to assist with daily inventory replenishments and said more tools helping with allocation will go live in the next quarter.

Beyond that time period, the company intends to keep exploring AI and renovate more of its stores.

It will also re-evaluate its design ranks.

Roots announced Friday that chief product officer Karuna Scheinfeld has stepped down.

Rather than fill the role, the company plans to hire senior level design talent with international experience in the outdoor and activewear sectors who will take on tasks previously done by the chief product officer.

This report by The Canadian Press was first published Sept. 13, 2024.

Companies in this story: (TSX:ROOT)

The Canadian Press. All rights reserved.

Source link

Continue Reading

Business

Talks on today over HandyDART strike affecting vulnerable people in Metro Vancouver

Published

 on

 

VANCOUVER – Mediated talks between the union representing HandyDART workers in Metro Vancouver and its employer, Transdev, are set to resume today as a strike that has stopped most services drags into a second week.

No timeline has been set for the length of the negotiations, but Joe McCann, president of the Amalgamated Transit Union Local 1724, says they are willing to stay there as long as it takes, even if talks drag on all night.

About 600 employees of the door-to-door transit service for people unable to navigate the conventional transit system have been on strike since last Tuesday, pausing service for all but essential medical trips.

Hundreds of drivers rallied outside TransLink’s head office earlier this week, calling for the transportation provider to intervene in the dispute with Transdev, which was contracted to oversee HandyDART service.

Transdev said earlier this week that it will provide a reply to the union’s latest proposal on Thursday.

A statement from the company said it “strongly believes” that their employees deserve fair wages, and that a fair contract “must balance the needs of their employees, clients and taxpayers.”

This report by The Canadian Press was first published Sept. 12, 2024.

The Canadian Press. All rights reserved.

Source link

Continue Reading

Business

Transat AT reports $39.9M Q3 loss compared with $57.3M profit a year earlier

Published

 on

 

MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.

The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.

The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.

Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.

On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.

Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.

This report by The Canadian Press was first published Sept. 12, 2024.

Companies in this story: (TSX:TRZ)

The Canadian Press. All rights reserved.

Source link

Continue Reading

Trending