Plans to Move Away From Dollar Pricing of Oil

Many US commentators blithely asset that the US does not need to worry about the reserve currency status of the dollar, since there is allegedly no ready substitute. Yet those arguments ignore the fact that there has already been movement away from the greenback. The Globe and Mail in early 2008 noted:

A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. “The use of the U.S. dollar as an international reserve currency is in decline,” said UBS economist Paul Donovan.

“The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error – or considerable fiscal strain – is likely to cause the dollar to lose reserve currency status entirely.”

The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world’s central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.

“The private sector’s use of reserves is more important than official, central bank reserves – anything up to 20 times the significance, depending on interpretation,” Mr. Donovan said. “There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000.”

Another chip away at the dollar’s standing is a effort underway by the Gulf States plus China, Russia, Japan and France to denominate oil sales not in dollars but a basket of currencies. Note this is not completely novel; Iran’s oil sales to Japan are quoted in yen.

From the Independent (hat tip reader John D):

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings 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 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.”

Yves here. The explicit linking of security issues in the Middle East and the desire of a lot of countries to more away from the dollar as reserve currency is troubling, and the Independent also reads this as a thinly veiled threat:

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…. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold…

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.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East….

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

“These plans will change the face of international financial transactions,” one Chinese banker said. “America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate.”

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

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  1. Skippy

    I only have one point to make ie: China and Russia have land bridges to the Middle East as where the US and England do not.

    Skippy…um mm would some of the gulf states welcome new partners, after history and all.

  2. Andy T

    This kind of drumbeat for the disintegration of the USD is probably good evidence that the DX is very close to bottoming. All the “news” is really bad at the bottom.

  3. Mogden

    “only persistent policy error – or considerable fiscal strain – is likely to cause the dollar to lose reserve currency status entirely.”

    What a relief then.

  4. Charles

    For the millionth time, the currency in which the sale is denominated is meaningless, you could use turkish lire or even Zimbabwe dollars to do so. What is important is the currency in which the proceeds of the oil sale are invested. For such investment to happen, one needs a borrower, and right now the borrower is the US and its borrowing currency is the $.

    If the Chinese want to pay their oil in CNY, fine. If it is not a convertible currency (I.e. foreign countries holding these yuans cannot buy Chinese Goods using these yuans), nobody will be interested. If it is a convertible currency, it will be freely traded and will shoot up against the dollar, thus killing Chinese exports.
    The Chinese can’t have the cake and eat it.

  5. David Merkel

    Charles is correct, but even if weren’t, the Iranians are becoming marginal net exporters of oil due to their underpricing of gas at home, and depletion from abuse of their fields.

    Don’t get me wrong, the US Dollar will be dethroned, there just isn’t a reasonable replacement yet. The yen will suffer for years as Japan heads into demographic decline and large structural budget deficits. The Euro is still an experiment. Nothing else is large enough or stable enough, or mature enough to run the deficits necessary to have the debt markets, to be the global reserve currency.

  6. In Debt We Trust

    The Lisbon Treaty has just been ratified by the Irish. If the Czechs accept it too, then we could see an EU presidency…and with it, greater political and economic presence. Greater fund flows should follow too into the Euro.

  7. IF

    While Charles has a point, his view is the one from the oil seller plus world wide free market. Now, as seen from the oil purchaser, he can always get oil for dollars. This means the oil purchaser will be inclined to hoard dollars for rainy days. Of course, the purchaser could hoard yen or Euros. But the inconvenient truth is that neither Japan nor Germany have troops stationed in Saudi Arabia, Kuwait or Iraq (Iran maybe soon?) This means neither Japan nor Europe can guarantee oil delivery during a rainy day (or crisis). I don’t like to wear a tin hat, but this arrangement makes the greenback irresistible.

  8. Francois T

    If we decided to use oil strictly for critical uses (transportation not being a critical use, since there can be viable alternatives) we wouldn’t have any of these problems.

    It goes without saying that I’m not holding my breath waiting for that to happen. We can’t even have a basic energy policy in this country, let alone a radical but inevitable change toward sustainable energy.

    “the inconvenient truth is that neither Japan nor Germany have troops stationed in Saudi Arabia, Kuwait or Iraq (Iran maybe soon?) This means neither Japan nor Europe can guarantee oil delivery during a rainy day (or crisis).”

    Yeah…we have the military. Now, what they could do should a rainy day comes is an entirely different matter. Another inconvenient truth is that the Straight of Ormuz is easy to close…just ask the Iranians who have all sorts of plans with contingencies should we be stupid enough to try to invade them.

  9. Swedish Lex

    This post captures well how the dollars dominance will disappear very gradually and often invisibly through a myriad of small and hardly detectable decisions and transactions, most of which thus will be under the radar screen.
    Furthermore, Europe has its baby currency, which I prefer a lot to what the situation otherwise would have been, but the EU has failed to organize a coherent energy policy for which the continent is already paying a price. EU states are frequently crossing each others’ paths in the quest to secure future energy imports in ways that are not very impressive. A big lack of foresight. The Chinese rep. in your post stated that “We cannot lower vigilance against hostility in the Middle East over energy interests and security”, which again shows who closely linked matters of energy/influence and currency are.
    The EU will never have aircraft carrier groups crisscrossing the Persian Gulf and should not have that. Better to accelerate the work to make the Union energy independent. The Chinese are expanding their navy rapidly (,8599,1892954,00.html ) while the U.S. is financing its global naval presence increasingly through funding from Chinese and other foreign sources. So, the U.S. navy’s dominance obviously also depends on the USD to be in demand.

  10. Diego

    1. The currency in which oil pricing takes place is irrelevant. Charles is absolutely right.

    2. If there was a crisis (a real crisis, not some false evidence of WMD in Iraq), present-day Europe would be as militarily and politically ready to secure oil routes as anyone.

    Swedish Lex says: “The EU will never have aircraft carrier groups crisscrossing the Persian Gulf and should not have that.” Well, the fact is the US has 11 aircraft carriers in service spread around the world; EU nations have 6, all relatively close to the area; and China has exactly 0 aircraft carriers, and has had exactly 0 through history.

    That should put a grain of realism on who’s who militarly in the world.

  11. bob


    The military angle should be looked at a lot more closely. School yard rules, its only yours if you can keep it.

    The size of the Chinese navy is not that impressive, I looked at in some depth last year. The subs in the time article are way over-sold. The are essentially uboats, most useful playing close defense. China had/has one “advanced” sub, but last I checked it was still docked after just one very short maiden voyage.

    The India-Pakistan naval situation is also interesting, but more entertaining as a story of what happens when you buy a used navy.

    1. Swedish Lex

      Correct on the size of the Chinese navy.

      However, the question is where it will be 10-15 years to now and where other navies will be then. Yves has reported on Chinese shipyards building cargo ships in quantities that nobody is buying (or did I read that somewhere else?). One has to assume that the Chinise, to the extent it is technically possible, will try to redirect that overcapacity to accelerate the military programs. Keynesian armada-building.

      1. Diego

        I am afraid you are wrong on this. Military spending is not like food and buildings; military spending goes mainly into high-tech, hence is not susceptible to PPP corrections.

        And if you look into nominal military budgets, you get this:

        US – $663bn
        EU nations – $312bn
        China – $70bn

        Even France spends more every year on its military than “superpower” China. Moreover, China can’t buy (nor develop) state-of-the-art technology; they can’t even build a single, old-tech aircraft carrier!

        Now, unless you buy into the theory that China’s economy will somehow grow threefold over the next 15 years… I can’t see how its military power can be significantly different from irrelevant.

        Remember that the Anglo-Saxon press (hence, the world press) has a passion for magnifying Third-World countries’ military capabilities (WMD in Iraq? Intercontinental missiles in NK? One of today’s linked articles shows even Iran’s frightening military budget is lower than… “superpower” Greece’s), and China is still Third World, no matter how big and populated it is.

        1. Swedish Lex

          While I am sure that the number on EU spending is correct, it really has to be broken down into what the 27 States are spending individually and on what. It is the opposite of economies of scale going on here. I would not be surprised if the “EU’s” total bang per buck is max half of that of the U.S.

          I do not have an educated opinion on what the Chinese will be able of or not in the future. If they can assemble Airbuses today I can not see why they should not be able to assemble aircraft carriers tomorrow.

          1. Diego

            All they do in China is assembly. The only real Chinese manufacturing related to Airbus is… emergency doors.

            It’s pretty obvious to me that there’s a China perception bubble going on, when all they do is assembling and packaging. If you take a couple of metropolitan areas like Beijing and Shanghai out of the equation, Chinese GDP per capita is no higher than many African countries’.

            So you are right with the comparison: they can’t build airplanes (only assemble them with no domestically-produced technology) as they can’t build aircraft carriers (but they could assemble them if just told how and given the components!).

            Now, on the military-expenditure front, you may have a point, but common military procurement is in the agenda. Where EU countries pool their efforts, they get the same bang for the back as the US. I mean, if EU nations collectively buy 500 Eurofighters, it doesn’t matter whether they are different countries or just a single buying country.

          1. Diego

            China has no technological capabilities to build simple aircraft carriers as those made in the West over half a century ago.

            That is a 50-year development gap in military technology.

            So yes, they bought an incomplete Soviet carrier, towed it to China, and were left wondering for years how to complete it. That’s the end of story.

      2. bob

        There was a story about a year ago about how China should be Keynesian armada-building. There was little evidence that they were at the time. I have not been looking, but I don’t think they have started. Huge lead times, and a technological gap.

        They know they won’t win in a head to head confrontation with the west at sea, they are learning, they can project force a lot better with cash, dollars at the moment.

        Just as a crazy side note- China has numbers and in my reading of history they always lead with that. Economic warfare through mass migration. They wouldn’t need a hardened navy for that. The threat of North Korea to China is exactly this, in my mind.

        Strangelove out

  12. IF

    Counting aircraft carriers to prove military might seems short sighted.
    a) Your numbers suggest that they are about equal in strength, which they are not: The EU has 6 carriers distributed over 4 countries (Spain, Italy, France, UK) displacing a _total_ of 140 kilotons. Each of the 11 US carriers displaces 100 kilotons. Germany and Japan have 0. (Wonder why?)
    b) The EU has no unified military agenda. They have been shown to be unable to coordinate even under substantial pressure. Now for the listed countries, I am very doubtful about Spain’s and Italy’s military capabilities. But UK and France are certainly able to control an African country or two if needed to secure fuel. (The western hemisphere is off limits due to US policies.) Any African action might collide with Chinese interests though.

    1. Swedish Lex

      Exactly. Hence my point that Europe’s resources are better spent building nuclear reactors and developing renewables to create energy independence rather than a military to compete with the usual suspects for dwindling pools of fossil fuel.

    2. Diego


      you are right that US supercarriers are much heavier. My points were:

      1) China hasn’t been able to build a single operational old-tech aircraft carrier, as of today.

      2) EU nations have significant military capabilities. Not oversized, not 11 nuclear-powered supercarriers, but more than enough to fight Third-World countries.

      And regarding your doubts on Spain and Italy, one thing are perceptions, and a different thing is reality. I take it that you think the UK or France has a bigger economy than Spain and Italy combined.

      Moreover, EU military capabilities are growing fast: other 147 kilotons will be commissioned (delivered) over the next 7 years.

      1. bob

        On tonnage- Armor is very high tech steel. Can’t find any numbers but china’s forte has always been cheap commodity steel, not nearly the same thing.

        I would love to see the production capacity of armored steel from china, probably something to watch for. That’s where the weight comes from, it took the US more than 50 years to get where it is now. Building container ships is completely different than military ship building, tonnage be damned.

        You are of course right about energy policy, but the existing income stream is protected better than one of those super carriers, or maybe by it.

  13. Skippy

    Ahem, China does not need a Navy or does it wish one, save coastal defense. Even in their hay day they only went down the East African coast in any numbers, and then pulled a rug over their head.

    What China does have is a very good Ground to Air capability and in big numbers, add to that Surface/Air to Ship capability. So for a fraction of the cost they can flood defenses and sort out capital ships, yes we know this and hence would have to remain at a safe stand off distance, there by reducing our air/mission/exposure time.

    What about Russia eh, bit of old school ties. What if for any reason they collaborate, they have the only tech in missile and air craft that would really give the US a bother at par. Plus we have to go to them, supply lines, coms, Intel where their lines are shorter and established, shorter time lines to react ie: troop movements and resupply.

    Just look at the damage the Afghans can do with old Russian Chinese gear against our high tech in a face to face scrap.

    Skippy…On the seas the west wins…on the ground in their backyard I’ll give it to the East including the middle part. We play speed chess they play slow go.

    1. DownSouth


      You say “Just look at the damage the Afghans can do with old Russian Chinese gear against our high tech in a face to face scrap.”

      I agree completely.

      All these arm-chair generals talking about sophisticated weaponry really miss the point, or perhaps they’re just mouthpieces for the armaments industry. They always trot out the same old hackneyed theory about how a people can be bombed into submission. This of course doesn’t work. It has never worked. The examples are too numerous: Germany against London in WWII, US against Vietnam, US against Iraq.

      Perhaps no one said it better than Andrew Bacevich. “Whereas the architects of full spectrum dominance had expected the unprecedented lethality, range, accuracy, and responsiveness of high-tech striking power to perpetuate military dominion, the veterans of Iraq and Afghanistan know better,” he wrote in The Limits of Power. “The IED–which can be built for about the cost of a pizza–brought the American victory express to a crashing halt.”

      If there is one overriding trait that stands out above all others regarding American hawks, it is their complete and total inability to learn from experience, as this quote, written well before the Vietnam war, illustrates:

      If a man’s trust is in a robot that will go around the earth of its own volition and utterly destroy even the largest cities on impact, he is still pitiably vulnerable to the enemy who appears on his doorstep, equipped and willing to cut his throat with a penknife, or beat him to death with a cobblestone. It is well to remember two things: no weapon is absolute, and the second of even greater import–no weapon, whose potential is once recognized as of any degree of value, ever becomes obsolete.
      –J.M. Cameron, The Anatomy of Military Merit, 1960

    2. DownSouth


      I might add that this remoteness from reality, this Alice-in-Wonderland atmosphere in which they exist, is where we find the nexus between neocons and neoliberals.

      Whether we look at McNamara and his cast of high priests or Cheney and his—Irving Kristol, Norman Podhoretz, William Kristol, Charles Krauthammer, Robert Kagan, Joshua Muravchik, Michael Ledeen, Frederick W. Kagan, Max Boot, Lawrence Kaplan, David Frum, Richard Perle, David Brooks, etc.—they all share the same conviction that every aspect of human life can be reduced to measurable and quantifiable parameters that can then be plugged into mathematical models to predict the outcome of extremely complex phenomena.

      The end result is that mathematical models end up trumping reality, at least in their minds. These are exactly the same pseudo-scientific delusions suffered by the neoliberals—Greenspan, Geithner, Summers, Bernanke, etc.

  14. MarcoPolo

    I feel like this article and these comments miss the more important points.
    There is already more than 1 reserve currency, the €, a baby currency using SL’s description, with several structural limitations, make up 25% of reserves going on 30. For the Chinese and Gulf States (nearly 3rd world economies) or the IMF, to try and coordinate yet another experiment is hardly promising.
    If the $, 65% of reserves going on 60, were to decline further over a significant period of time there would be many benefits to the US economy. There was lots of discussion of this about a year ago as the Chinese brought up the possibility of using IMF SDR’s.
    Currencies cannot be defended with carrier groups. That discussion is pointless. It would seem perhaps the Chinese understand this.
    The bad scenario is one in which the $ loses its value too quickly – or instantly, as in the case of a monetary crisis – and world trade is left without that stability. If that were to happen you wouldn’t be able to buy oil in any currency. Or in Au either. No infrastructure.

  15. But What do I Know?

    The analysis concerning the aircraft carriers is well-taken, but beware the thinking that these inventions of WWII are all-powerful. The history of the last hundred years has shown that the most successful weapons of the last conflict are rarely the best in the next.

    The other concern is that the inability of the Chinese to project their military power actually works in their favor with many regimes around the world (Africa or South America). You can take their money and not worry about them showing up to collect.

    There are ways to fight with things other than weapons.

  16. chad

    It’s interesting that we’re talking military strategy on an economics board. Has it really come to that?

    At any rate, in order for projection of power to work you have to have the street cred that you may, in fact, use that power. For example, the US nuclear sub fleet is a tremendous projection of power but no one believes the US will actually launch ICBM’s. However, when the US parks a carrier off your coast, given the US actions over the past 10 years, there’s a very real chance that Tomahawks and JDAM’s could be landing on your doorstep.

    I’m unaware of any other country with the military strike credibility to match the US. It’s depressing but a fact is a fact.

  17. BasBen

    As hard as it may be to grasp for Americans used to the outsized peacetime military spending of their post-WWII governments, real power projection can not be gauged by current military spending.

    For example, the US only spent about 1.5% of GDP during the 1930s – while Germany’s exceeded 10%, and France’s hovered around 7%.

    Military industrial capacity in Europe could easily quadruple in times of clear and present danger, and the same does not hold for the already overstretched US armed forces. Given technology parity, that means a European war economy could produce a military on a par with America within half a decade.

    Of course, the US military is geared towards immediate power projection, with dollar hegemony as a sine qua non. Exit the dollar as the reserve currency, and America will quite soon experience the real burden of a standing army this size.

  18. kevinearick

    Most of the teachers and managers will need to
    find something else to do; many of the doctors
    will need to retire; and the retiring generation
    needs to give up drugs and start walking.

  19. Hugh

    Moving oil to a basket of currencies is an intelligent move by oil producers to diversify their risk. What this should tell you is that they see risk in the status quo and are reacting to it, something our own political and financial elites are not.

    I have been sceptical of calls to move to a new reserve currency because I don’t think they take into account the political realities. But as Swedish Lex said above this could be a more gradual move toward a new de facto reserve currency. This is a more likely scenario.

  20. Phillip Huggan

    Looking at 2020 timelines? Canada and Russia can buid Natural Gas pipelines. EU makes wind turbines but China and USA probably catching up at rate equal to EU growth. China and USA vying for utility-scale future chemical battery supremacy, can’t imagine Japanese and S.Koreans sitting on their thumbs here.

    Last I checked few years ago 34% of reserves were USD 7% were Euros with Euros gaining. Don’t see why they wouldn’t meet at around 15-20% each by 2020, but don’t see how oil will be as relevant here. Maybe same revenues as now but lower percentage of bigger 2020 econopie.

  21. Phillip Huggan

    …don’t know much about who makes solar thermal. And not sure if roll to roll polymer solar can be made durable enough for utility power generation. If CCS happens and happens earlier than present timelines I stand corrected.

    If oil production still the fixitation later this century it will all be about who’s farms are AGW resistant. Given peak oil prices could be anywhere.

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