The headline appears more scary than it actually is, but it is still a significant step down the road.
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 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.
Given the statements that Russia and China have been making all year long, this isn't much of a surprise. The only real concrete change is that the OPEC nations and Japan have gone past theoretical talk and engaged in high level meetings.
Russia and China are heavyweights, but they absolutely have to have the OPEC nations on board for this to be effective. Iran and Venezuela have been moving towards this for years, but getting the UAE on board suddenly makes this serious.
We also see that the Japanese election outcomes are having immediate effects.
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.
The chances of there being an actual economic war between America and China are small. While China would suffer, America would lose far more. That's how it always is when a debtor and creditor do battle.
It's very interesting that gold would be considered a transitional currency. If this is true you can bet that the IMF's recent plan to sell 403 tonnes of gold will get quickly snatched up by Asian central banks. It'll never even hit the market. Also, two of the largest gold producers in the world today are Russia and China. You can bet that their gold exports will quickly dry up.
So what exactly would it mean for the world's reserve currency to be priced in oil rather than dollars? ZeroHedge uncovered 30 year old documents that addressed that very question. These documents were recently declassified from the Carter Administration.
1. An announcement that dollars were no longer being used as the unit of account in paying for oil would trigger selling of dollars on the foreign exchange markets. So we would suffer.
2. I don't see any offsetting gain, since OPEC would probably raise prices in SDR terms, as necessary to recover revenue losses if the SDR appreciated relative to the dollar.
We might be able to persuade the OPEC countries to make the shift if the dollar weakened but that's precisely when the move would be most damaging to us.
The choice of the unit of account for oil pricing is basically under the producing countries' control. There is no particular economic reason why a shift from the dollar would be contrary to U.S. interest -- unless the dollar were to depreciate significant in relation to the currencies in the pricing basket. But there could be major psychological effects. Given the unsettled conditions in the foreign exchange market [TD: so true today, 30 years later], such a step at this time could be interpreted as a lack of confidence in the dollar and as presaging a shift in OPEC investment policy away from the dollar. It could precipitate a serious market reaction.