Sunday, January 17, 2016

The Demise Of Dollar Hegemony: Russia Breaks Wall Streets's Oil-Price Monopoly

by Phil T Looker

Moscow, Red Square (Image source)

Significant moves in the geopolitical chess game have just rendered the huffing and puffing of warmonger Obama meaningless and will break the hold Wall Street exercises in controlling oil prices, at least in markets that supply a huge part of the world demand for oil. The move is part of Vladimir Putin's long-term strategy of decoupling Russia’s economy and especially its very significant export of oil, from the US dollar, in effect responding to Obama's attempts to provoke Russia into starting a shooting war by attacking American interests in the Caucasus and middle east by waging a currency war designed to depose the US dollar as the global reserve currency.

Late in November 2015 the Russian Energy Ministry announced that it will begin test-trading of a new Russian oil benchmark. So what you might well say. Well this move has huge significance in terms of global economics. If successful, and there is no reason why it won’t be, the Russian crude oil benchmark futures contract traded on Russian exchanges, will price oil in rubles and no longer in US dollars (the petrodollar). It is part of a de-dollarization move that Russia, China, Iran, India and a growing number of other countries have quietly begun (extensively reported below).

This of course makes nonsense of Barack Obama's claim that the US economy is sound and the most powerful in the world. That Russia and China can so audaciously challenge US economic dominance shows their has been an enormous shift in the balance of global power.

Setting an oil benchmark price is the basis of the Wall Street bank's method of controlling world oil prices. The
London financial community uses similar techniques to control currency trading. Oil is the world’s most traded commodity. In dollar terms it props up the US economy and gives US companies an immense advantage over non - American competitors.

At present the price of Russian crude oil is tied to the Brent price. The problem is that the Brent field, along with the UK's other major North Sea oil fields is in major decline while the US West Texas benchmark is based on fields enjoying a temporary resurgence due to the fracking of shale deposits. Thus Wall Street can use a vanishing benchmark to leverage control over vastly larger oil volumes. A quick look at historic price trends will show that Brent Crude is always a higher price than West Texas Intermediate (WTI). This is not solely because Brent tends to be better quality.

The sale of oil denominated in dollars is essential for the support of the US dollar (sic). In turn, maintaining demand for dollars by world central banks for their currency reserves to back the foreign trade of countries like China, Japan or Germany, is essential if the United States dollar is to remain the leading world reserve currency. That status as world’s leading reserve currency is one of two pillars of American hegemony since the end of World War II.

Because all nations have to buy dollars to pay for imports of oil and other commodities, countries such as Russia or China find the USA can influence the health of their economies by manipulating the price of dollar in currency markets. 

That reserve role of the US dollar, since August 1971 when the USA abandoned the gold standard, has essentially allowed the US Government to run seemingly endless budget deficits without having to worry about interest rates, like having a permanent, unlimited overdraft at your bank. Nations need dollars to pay for their imports, he USA simply forces the dollar exchange rate higher.

That has allowed Washington to run up an $18.6 trillion federal debt without major concern. Today the ratio of US government debt to GDP is 111%. In 2001 when George W. Bush took office and before trillions were spent on the Afghan and Iraq “War on Terror,” US debt to GDP was just half, or 55%. The glib expression in Washington is that “debt doesn’t matter,” assumes that the world, Russia, China, Japan, India, Germany–will always buy US debt with their trade surplus dollars. The ability of Washington to hold the lead reserve currency role, a strategic priority for Washington and Wall Street, is vitally tied to how world oil prices are determined.

In the period up until the end of the 1980’s world oil prices were determined largely by real daily supply and demand. It was the province of oil buyers and oil sellers. Then Goldman Sachs decided to buy the small Wall Street commodity brokerage, J. Aron in the 1980’s. They had their eye set on transforming how oil is traded in world markets. Russia has just changed it for them.

It was the creation of “paper oil”, "paper gold", "paper metals" and so on, commodities traded in futures, contracts independent of the production and supply of physical goods, that really sowed the seeds of the economic chaos we find ourselves in. This 'derivatives' market, which has extended to include almost everything from electricity to bundles of collateralised debt obligations' (mortgages), have made it much  easier for the investment banks to manipulate markets based on rumors and derivative market jiggery - pokery.  Oil is of course the biggest by volume and most valuable commodity traded on markets.

A handful of Wall Street banks have dominated oil futures trades for years and were able to do so because their analysts knew just who held what positions, a convenient insider role that is rarely mentioned in polite company. Moving the market from physical oil to paper oil had the effect of transforming oil trading into a  Las Vegas style casino where the odds were stacked in favour of the banks such as Goldman Sachs, Morgan Stanley, JP MorganChase which own the casinos and run the run the tables.

Until the Russians made their move, Wall Street was the oil market just as London was the currency market. Oil trades in the spot markets of London, Paris, Singapore, and the financial centres of Frankfurt, Lagos, Hong Kong etc. were peripharal, made by traders acting as agents of the New York banks.  Now it will be possible to buy and sell both paper and physical oil in Moscow. And while that may or may not be good news for the rest of the world, it could turn out to be catastrophic for the USA.

READ MORE ON: Banks >> Currency >> dollar >> finance >> oil >> USA

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