Reports of the U.S. dollar’s demise may have been greatly exaggerated, but a report by the Independent’s Robert Fisk on “secret meetings” to discuss conducting oil trades — traditionally priced in dollars — using a basket of currencies has moved the dollar’s exchange rate, and contributed to rising oil prices and record-high dollar prices for gold.
Officials in major oil-exporting countries were quick to deny the allegation that they have been considering the possibility of pricing and trading their oil in other currencies, especially the Saudis, who reaffirmed their commitment to support the dollar as the world’s primary currency (and America’s primary export). However, it must be noted that this is hardly the first episode of “dollar crises” prompting OPEC countries to debate trading their oil for a basket of currencies (remember 1980?).
In fact, as the Baker Institute’s Amy Myers Jaffe and I argue in our forthcoming book Oil, Dollars, Debt, and Crises: The Global Curse of Black Gold, the most recent episode of rising U.S. indebtedness, depreciating dollars, oil price spikes and debt crises, bears a very close family resemblance to its older sibling of three decades ago, with significant and important differences: The rise of globalization since the 1970s, in part enabled through advances in information and financial technologies, but also enabled by the dollar’s dominance as global numeraire, have resulted in globalization of the Middle East’s resource curse, as we point out in a recent Foreign Policy article.
The bottom line is this: The dollar’s situation is very precarious, but not hopeless. We were incredibly fortunate that the ongoing banking crisis was not accompanied by the worst of all currency crises. Developing countries that have suffered simultaneous banking and currency crises have traditionally suffered much worse than countries that only suffered a banking crisis. It is in this regard that the world was spared total meltdown of the international financial system because the financial crisis in fact led to a flight to the dollar. Now that the panic that prompted this flight to familiar safety has passed, G7 finance ministers and central bankers have had to affirm that “disorderly movements in exchange rates” (thinly veiled code for flight from the dollar) must be avoided.
However, as Amy Jaffe and I show in our forthcoming book, currency markets cannot be managed in isolation from energy markets and Middle East geopolitics. Reports of the not-so-secret and widely shared desires to reduce dependence on the dollar remind us of those interlinkages, but they should also remind us that we do not have a viable alternative. Some see this as a source of comfort, and others see it as the most unsettling fact.
— Read “Who is in the Oil Futures Market and How Has It Changed?” by the Baker Institute’s Kenneth B. Medlock III and Amy Myers Jaffe.
Mahmoud El-Gamal is Rice University’s chair of Islamic Economics, Finance and Management and a professor of Economics and Statistics. He is also a Baker Institute Rice Scholar, a member of the Rice faculty who has made significant contributions to the work of the James A. Baker III Institute for Public Policy.