BIG OIL'S LONG GOODBYE TO THE DOLLAR

In an article by Robert Fisk published in THE INDEPENDENT, the crisis of the American dollar in oil dealings is explained a little deeper than was known the last time we visited this topic. More former allies have agreed to leave the dollar, thus hastening its demise.

IN THE MOST PROFOUND financial shift in recent Middle East history, Gulf Arabs are planning—along with China, Russia, Japan and France—to end all dollar purchases 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, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place—although they have not discovered the details—are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil—yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power—along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system—which has prompted the latest discussions involving the Gulf states.

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But here is a more sober take from a poster whose handle is Solomon2, posting on Debbie Schussel's blog covering the same story within the context of a book review. This leveled advice smiles upon the survival of dollar, but cautions that all is not well. Read on...

It is possible for these parties to destroy the dollar, but by doing so they would sacrifice a great deal of their own wealth (in dollar-denominated assets) and future income (because of the worldwide depression caused by such a crash.)

After WWII the U.S. accounted for 50% of the world’s GNP. Thus there was really little alternative to using the dollar—that the British pound held its own for two more decades can be attributed to the economic influence of its fading Empire. Now the U.S. represents under 30% of world GNP and is no longer the world leader in providing capital, so it makes sense to revive the 1970s mechanism of the SDR for capital growth. Eventually the dollar will come down and manufacturing revive compared to the financial and services sector. It’s all quite natural—though we will have to get used to the fact that we cannot enjoy the benefits of great seignorage much longer.

RIPPLING GLOBAL ECONOMIC CRISIS

RUSSIANS ARE CUTTING BACK on personal spending and trading rubles for dollars as the collapse of world oil prices cripples an economy that just months ago soared on the strength of record prices for its petroleum exports.

Even vodka sales are down.

Economists are especially worried by the mounting flight of capital and increased dollarization of the economy—something that last happened a decade ago when the government defaulted on its foreign debts.

"Some of my friends have converted all their savings into dollars, leaving just 500 rubles to pay the phone bill in their account," said an administrative assistant at a bank, who asked that only her first name, Olga, be used because she was not authorized to speak to the press.

"I've been telling my friends for months to buy dollars while they were cheap, but some of them just wouldn't listen," she said.

A recent World Bank report documented the extent to which the decline of oil prices from a high near $150 a barrel to about $50 is wreaking havoc on the Russian government's budget and depleting its foreign-currency reserves.

This is a wicked turn of events just weeks after we have been on the edge of our minds fretting the absolute collapse of the dollar, and after a snarky Vladimir Putin tried to threaten the West with strong words and stronger acts of aggression against its own former satellites. So it seems that national confidence is always resides on a floating scale. At least the Russians still possess a fiscal reserve, despite the relative spoilage of their currency, which is something the United States can't boast as we continue to roll up debt.

Wonder what bad news Putin will have for Hugo Chavez in the near future, as the Russians rush to stop the bleeding while the Venezuelan regime suffers from the same impact of oil prices on its own ego-driven economy?

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