What golden egg did the dollar lay for OPEC?
The use of SDRs as "paper gold" seemed to offer a way to balance the system, turning the IMF, rather than the U.S., into the world's central banker. The US tightened controls over foreign investment and currency, including mandatory investment controls in 1968. In 1970, U.S. President Richard Nixon lifted import quotas on oil in an attempt to reduce energy costs; instead, however, this exacerbated dollar flight, and created pressure from petro-dollars now linked to gas-euros resulting the 1963 energy transition from coal to gas with the creation of the Dutch Gasunie. Still, the U.S. continued to draw down reserves. In 1971 it had a reserve deficit of $56 Billion dollars; as well, it had depleted most of its non-gold reserves and had only 22% gold coverage of foreign reserves. In short, the dollar was tremendously overvalued with respect to gold...
And then a miracle happened. US got its client states to quote oil in USD, creating the so called petrodolar. Thereby OPEC countries offset the US imbalance of trade due to USD's role as a reserve currency. Now most countries that have to rely on oil imports, are forced to maintain large stockpiles of dollars in order to continue imports. This causes demand for USDs to remain high, regardless of economic conditions in the United States. It also allows the US government to gain revenues through seignorage and by issuing bonds at lower interest rates than they otherwise would be able to. As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries.
It also means that the price of oil is more stable in the U.S. than anywhere else, since importers do not need to worry about exchange rate fluctuations.
And just what did OPEC get out of this? Well let's see: changes in the value of the dollar against other world currencies affect OPEC's decisions on how much oil to produce. For example, when the dollar falls relative to the other currencies, OPEC-member states receive smaller revenues in other currencies for their oil, causing substantial cuts in their purchasing power.
Sounds like they could not have made a worse decision, but wait, there is more!
The dumb asses in charge of OPEC, also pegged their currency to the dollar. And this means that their are chained to the dollar forever. They are damned if they do and are damned if they don't.
But since Russia, Iran, and few others are no longer selling oil in USD denominations, the house of cards is going to fall...and likely sooner rather than later.
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