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?)



      Source link

      Business

      Saudi Arabia, Russia Push Negotiations for Global Oil Pact – Yahoo Canada Finance

      Published

      on


      (Bloomberg) — Saudi Arabia, Russia and other large oil producers are racing to negotiate a deal to stem the historic price crash as diplomats said some progress was made on Sunday.

      The talks still face significant obstacles: a meeting of producers from OPEC+ and beyond — delayed once — is only tentatively scheduled for Thursday. Russia and Saudi Arabia want the U.S. to join in, but U.S. President Donald Trump has so far shown little willingness to do so.

      Oil diplomats are trying to stitch together a meeting of G20 energy ministers for Friday, as part of the effort to bring the U.S. on board, according to two people familiar with the situation.

      Crude prices have fallen 50% this year, as the economic effects of the pandemic have knocked out about a third of global demand. The price crash is so dramatic that it’s threatening the stability of oil-dependent nations, the existence of U.S. shale producers, and poses an extra challenge to central banks.

      Even the International Energy Agency, which represents nations that consume oil, is calling for action. And oil officials know that if a deal to cut output in an orderly way isn’t reached, the slump in prices will force some producers to shut down operations as storage on land and at sea is filling up.

      The aim of talks, first revealed by Trump last week, is to cut oil production by about 10% — the biggest ever coordinated reduction. Oil rallied on Trump’s comments last week, but then pared those gains as the diplomatic intricacies became clearer.

      Cut Together

      Saudi Arabia and Russia both say they want the U.S., which has become the world’s largest producer thanks to the shale revolution, to join the cuts. But Trump had only hostile words for OPEC on Saturday, and threatened tariffs on foreign oil.

      “If the Americans don’t take part, the problem which existed before for the Russians and Saudis will remain — that they cut output while the U.S ramps it up, and that makes the whole thing impossible,” said Fyodor Lukyanov, head of the Council on Foreign and Defense Policy, a research group that advises the Kremlin.

      It’s not clear if Russia and Saudi Arabia will require the U.S. to publicly commit to cut production — a challenge in the private, fragmented American industry — or if a compromise gesture would be enough. Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank, said Moscow would like the U.S. to lift some sanctions as a compromise.

      Russia and Saudi Arabia — which sparred publicly between themselves over the weekend — have also disagreed about how they would calculate the cuts, according to a person familiar with the talks.

      But in another sign of progress, Norway — which hasn’t joined any production cuts since 2002 — signaled over the weekend it was ready to reduce unilaterally its output if others did. And a senior official from the oil-rich Canadian province of Alberta said it will dial into the oil meeting this week. Iraq’s oil minister said he was optimistic about a deal.

      Any agreement will require diplomatic agility at a time when nations are devoting massive resources to fighting the pandemic itself. It’s also a battle of wills between Putin, Saudi Crown Prince Mohammad bin Salman, and Trump. On all sides, there are maneuvers to avoid blame if negotiations fail.

      Trump said Saturday at a White House press briefing he’s opposed OPEC his whole life, and characterized it as a cartel, or monopoly. “I don’t care about OPEC,” he said. He threatened to use tariffs if needed to protect the domestic oil industry, even as he predicted that Saudi Arabia and Russia would come to an agreement.

      Meanwhile Saudi Arabia postponed its monthly price-setting event for exported oil. Saudi Aramco’s official selling prices for May will be pushed to Thursday, according to people familiar with the situation. The OPEC meeting has also been tentatively rescheduled for Thursday.

      The move allows the company to have a better idea of how negotiations are going before setting the prices that are its key weapon in its battle for market share. Last month, it also delayed the event in the midst of wrangling at OPEC+ and responded to the breakdown in those talks with a historic price cut — launching the price war negotiators are now trying to unravel.

      (adds G20)

      <p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="For more articles like this, please visit us at bloomberg.com” data-reactid=”29″>For more articles like this, please visit us at bloomberg.com

      <p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Subscribe now to stay ahead with the most trusted business news source.” data-reactid=”30″>Subscribe now to stay ahead with the most trusted business news source.

      ©2020 Bloomberg L.P.

      Let’s block ads! (Why?)



      Source link

      Continue Reading

      Business

      Ontario's hardware stores shift to curbside pickup, delivery during COVID-19 pandemic, – CTV News

      Published

      on


      OTTAWA —
      Ontario’s hardware stores, cannabis retailers and non-essential construction sites are now required to stay closed due to the COVID-19 pandemic.

      The Ontario Government reduced the list of essential businesses allowed to remain open to 44 categories, including grocery stores, pharmacies, convenience stores and LCBO and Beer Stores.

      Hardware stores and cannabis retailers are no longer allowed to stay open for in-store shopping, but can offer online service and curbside pick-up. All non-essential stores must stay closed for two weeks.

      Here’s a look at how stores have adjusted their business model due to the COVID-19 pandemic.

      Ontario Cannabis Store

      The Ontario Cannabis Store says you can order online for delivery.

      The Ontario Cannabis Store is waiving delivery charges to make its service accessible.

      Preston Hardware

      Preston Hardware says you can place your order online or by email for curbside pick-up or delivery.

      Canadian Tire

      All Canadian Tire stores in Ontario must close for in-store shopping.

      Canadian Tire says customers can still shop online with free curbside pick-up at stores or delivery

      Home Depot

      Hope Depot stores in Ontario remain open for curbside pick-up and delivery.

      Lowe’s Canada

      All Lowe’s stores in Ontario remain open, but only for curbside pick-up following an online order.

      Lowe’s also offers delivery options for purchases made online

      Home Hardware

      Home Hardware says some of its locations are offering delivery-only.

      Shoppers are advised to check with their local store about online, phone or email orders.

      Let’s block ads! (Why?)



      Source link

      Continue Reading

      Business

      Oil prices set to open lower due to Saudi-Russia row – The Globe and Mail

      Published

      on


      Russian President Vladimir Putin attends a meeting on global energy markets via a video link at his residence outside Moscow, Russia, April 3, 2020.

      SPUTNIK/Reuters

      Global benchmark oil prices are expected to open lower on Monday as a dispute between top crude exporters Russia and Saudi Arabia raises concerns of another collapse in talks to curb production at a meeting this week.

      Russian President Vladimir Putin put the blame for the crash in prices on Saudi Arabia on Friday – prompting a firm response from Riyadh the following day, disputing Putin’s claims.

      Crude futures surged for a second day on Friday, with both U.S. and Brent contracts posting their largest weekly percentage gains on record due to hopes that a global deal to cut crude supply worldwide would be struck at talks, which are now set for April 9. [O/R]

      Story continues below advertisement

      The sharp rebound from weeks of losses came after U.S. President Donald Trump said Moscow and Riyadh would negotiate to end a price war that slashed prices by more than half last month.

      “Given the slimmer chances of a deal, prices are likely to give up the gains made last week that were a shortcovering rally induced by Trump’s comments,” said Amrita Sen, co-founder of the Energy Aspects consultancy.

      OPEC and its allies are working on a global agreement for an unprecedented oil production cut equivalent to around 10% of worldwide supply in what they expect to be a global effort including countries that do not exert state control over output, such as the United States.

      Trump has, however, made no commitment to take the extraordinary step of persuading U.S. companies to cut output.

      Per Magnus Nysveen, head of analysis at Rystad Energy, said the decline in global demand due to the coronavirus pandemic and the global lockdowns was larger than the proposed cuts by the OPEC+ alliance.

      “It is not strange for the market to hike prices by enthusiasm such as Friday’s, but for the levels to stay stable for more than a day or two, it takes concrete developments and deals on the ground,” he said.

      On Friday, Brent crude futures rose 13.9%, or $4.17 a barrel, to settle at $34.11. U.S. West Texas Intermediate (WTI) crude CLc1 rose $3.02, or 11.93% to settle at $28.34.

      Story continues below advertisement

      OPEC and its allies postponed an emergency meeting, led by Saudi Arabia, where the oil cuts could be agreed upon. A senior Saudi source told Reuters on Sunday, that the kingdom would host the meeting via video conference on April 9 and the delay was to allow more time to bring other producers on board.

      Saudi Aramco will delay the release of its crude official selling prices (OSP) for May until April 10 to wait for the outcome of a meeting between OPEC and its allies regarding possible output cuts, the Saudi source said.

      “As Aramco seems to have postponed the release of their official selling prices for May, it seems the kingdom still believes an oil production cut deal is possible,” said UBS commodities analyst Giovanni Staunovo.

      “The biggest challenge remains how to split up those cuts among producers, particularly if U.S. oil producers will not join with voluntary cuts.”

      Let’s block ads! (Why?)



      Source link

      Continue Reading

      Trending