Those Pesky Petrodollars Again

How much longer can the dollar reign supreme?
By Linda S. Heard
Online Journal Contributing Writer
May 25, 2006

Saddam Hussein stopped trading his oil for dollars before Iraq was invaded. Iran gets set to open a new oil bourse and futures market that will trade in euros, while Venezuela is said to be mulling over whether to follow suit.

Now Russia has joined the bandwagon. On May 10, President Vladimir Putin announced the creation of a Russian oil and gas bourse along with his intention to convert the ruble into a convertible currency that would be used for the trade.

Russia has recently swapped some of its dollar reserves for euros.

Together Iran, Venezuela and Russia corner some 25 percent of the export market in oil. If the three countries do away with the petrodollar, this could seriously buffet the US currency, forcing up interest rates, increasing the cost of imports in the US and contributing to an inflationary economy or a recession.

William Clark writing in the Energy Bulletin says, “What we are witnessing is a battle for oil currency supremacy. If Iran’s oil bourse becomes a successful alternative for international oil trades, it would challenge the hegemony currently enjoyed by the financial centers in both London (IPE) and New York (NYMEX) . . ."

At the same time, nations in this region have been exchanging percentages of their dollar reserves for other currencies.

In March, following the Dubai Ports World debacle, the UAE Central Bank said it was considering converting 10 percent of its dollar reserves to euros. Kuwait and Qatar have hinted that they might do the same.

The Commercial Bank of Syria has exchanged all its dollar devise for euros, following a call from Washington urging US banks to cease acting as correspondents for Syrian financial institutions, ostensibly because of money-laundering concerns.

Last month, Sweden cut the dollar share of its $21 billion foreign reserves from 37 percent down to 20 percent, causing the dollar to tumble almost 2 percent in one week.

Sweden’s central bank said the switch to euros was an effort to stabilize its foreign currency reserves and reduce volatile currencies.

Iran, Venezuela and Russia are hardly on warm terms with the US government and their proposed flight from dollars is thought to be partially if not wholly politically motivated. However, if the dollar value plunges as a result, then central banks around the world will be left with devalued reserves, and may have to start switching as well. Continue reading...