Monday, March 26, 2012

BESSMA MOMANI - Gulf Cooperation Council Oil Exporters and the Future of the Dollar

"Since the mid-1970s, the value of the United States’ dollar has been upheld by a number of domestic and international factors. An often underestimated factor is that oil is sold and traded in US dollars. Arguably, having the dollar used as the ‘main invoice currency’ for oil makes the trade of this vital resource the new post-Bretton Woods’ Fort Knox guarantee of the dollar.1 The world’s continued confidence in dollar-denominated and US government debt is further supported by the use of petrodollars in oil trade and petrodollar recycling in the global financial system. It is argued that states have partial faith in the value of the dollar because the world’s lifeline of fuel and production is purchased and sold using petrodollars. After all, whether measured by value or volume, oil is the most traded good around the world..."


"Dollar-based invoicing of oil trade
The historic decision by the Organization of Petroleum Exporting Countries (OPEC) to invoice the trade of oil in dollars can be traced back to a set of bilateral deals between the United States and Saudi Arabia (the world’s largest oil exporter and producer). The first step towards this historic OPEC decision was taken in June 1974 with the establishment of the United States–Saudi Arabian Joint Commission on Economic Cooperation. Devised in part by US Secretary of State Henry Kissinger, the Joint Commission would facilitate annual meetings between Saudi Finance and US Treasury officials. This Joint Commission also included a special technical group that was staffed by American civil servants who helped US companies to increase their exports to Saudi Arabia. Financed by the Saudi government, the technical group’s objectives were to improve bilateral political and commercial relations, promote the export of US goods and services to Saudi Arabia and, most importantly, help recycle Saudi petrodollars
through the purchase of US goods..."

"In summary, OPEC, Saudi Arabia and the GCC no longer determine what currency to invoice their oil trade, because oil pricing is determined by oil markets.47 The latter are highly institutionalised capital markets that prefer to deal in US dollars. Similarly, oil producers would not be willing to incur currency risk to invoice oil trade in a currency not used in the oil markets.48 While the GCC may not be capable of undermining the dollar by changing the dollar-based invoicing of oil trade, this article examines two further possibilities: will the GCC uphold the dollar by continuing to recycle petrodollars in dollar investments, and will the GCC diversify its dollar reserve holdings?"
"Promoted by a young, entrepreneurial and Western-educated class of individuals, Gulf citizens are demanding that their governments invest more into their people.66 Moreover, Gulf citizens do not want a repetition of the 1970s when oil wealth was recycled into Western banks; this time, Gulf citizens are expecting their governments to invest in their future."


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