2024 Energy Highlights: Petro Dollar

2024 Energy Highlights- Petro Dollar

Our Energy Economist, Dominic Whittome, shares his Energy Highlights Report on oil, natural gas, and electricity prices in 2024. Delving into the dynamics of Crude Oil, petrodollar, Natural Gas, and Electricity, this is the second of a four-part blog series.

The Future of the Petro-Dollar and BRICS Currency

Abandoning the Petro-Dollar: A Strategic Shift

This is a separate but important topic. The future of the petro-dollar is directly relevant to the pricing of petroleum products and all inter-related commodities.

Any new sustained increase in oil prices is likely to come about not because of some unexpected change in supply or demand (both very closely monitored anyway) but of a concerted move by oil producers to abandon the petro-dollar, forthwith pricing exports in their own currencies and in preparation for trading them in a common BRICS currency. This future trade currency is being set up to replace the petro-dollar as the trade currency for petroleum commerce. This is a status that the US dollar has enjoyed since Richard Nixon left the Gold Standard in 1971 and later signed a security accord with Saudi Arabia in 1974, establishing the petro-dollar as the principal form of exchange for oil and every petroleum product.

Saudi Arabia's Integration into BRICS and Its Implications

Saudi Arabia is now a member of the BRICS community. If the bloc succeeds in launching a trade currency of its own, it is expected to be backed or indirectly indexed to gold and indexed by weight, not by the dollar-spot value. This could lead to a sharp upward revaluation of exported oil. Especially if we see a subsequent decline in the dollar’s value which will only lead to further rise in the gold prices, potentially driving oil prices higher still under some scenarios being looked at.  

The Expansion of BRICS

Somewhat under the media’s radar, this trade bloc, initially comprising Brazil, Russia, India, China, and South Africa, has expanded. There are now 26 BRICS countries, with Singapore and Japan possibly set to boost this number again as early as November this year.

Once crude oil, petroleum products, LNG and wider energy commodities are traded in BRICS-units then they will naturally become more expensive to purchase on the world stage, certainly for energy importing countries with an ‘exposed’ currency, i.e. a currency whose value may fall relative to BRICS, either in tandem with the US dollar or even faster in relative terms. Because the petro-dollar will still have a degree of natural protection: first on account of the USA’s ‘own’ gold reserves and second since so much of the world’s contracted commerce will still be in dollars whatever happens. The USA will retain, initially at least its reserve currency status because most given exporting states will still need somewhere to park their export earnings. The only practical ‘port of call’ is US Treasury Bonds, which are only denominated in dollars, and this need to hold dollar assets has long been cited, by some economists anyway, as a means for other countries to help fund the US debt.  

However, countries with ‘exposed’ currencies, notably those running deficits, could see their own currencies decline relative to BRICS faster than the petro-dollar. The dollar will, in any case, initially retain its ‘safe haven’ status, which other countries, notably those running large trade deficits, will not have.

Challenges and Opportunities for OPEC Producers

This road to independence for OPEC producers has been rocky. For over 30 years now, various producing states have tried, always unsuccessfully, to market their crude outside the sphere of the greenback. But with Saudi Arabia, Qatar and other OPEC countries now prominent BRICS members themselves and with the central banks of China, Russia, and India, as well as others expanding their bullion reserves in the background, the status quo could be about to change, possibly within the current decade.

Weeks before what would have been its 40th anniversary, Crown Prince Mohammed bin Salman of Saudi Arabia declined an invitation to renew a key security agreement conceived by Richard Nixon. The agreement went on to expire on June 9th this year, leaving OPEC’s largest producer free to export oil in any currency it wants, initially in Riyals but in other currencies it may wish to choose in the future.

Once described as a ‘pipe dream’ or of ‘nuisance value’ (the term used to describe OPEC once by the Seven Sisters oil producers in the Sixties and early Seventies), the possibility of a BRICS currency in future or before the 2030 Grid Zero decarbonisation target should not be dismissed in such a way.  

Any transition may be gradual, with limited volumes exported in the new currency initially. In fact, the BRICS process has been credited by observers as being very methodical. It will also take time for existing petroleum and LNG contracts to expire. Still, it could still apply to new trades and contracts. So consumers could expect a revaluation of prices whenever that happens.

As explained earlier, no one should doubt how keen certain BRICS members may already be to see the dollar’s trade currency status fade, fanning inflation initially and potentially threatening the dollar’s reserve currency status later.

There are no prizes for guessing than the identity of one BRICS leader who addressed OPEC’s last meeting, courtesy of the TASS news agency, declaring, “If oil producers in the Middle East stop using the US dollar, it will be the end of the dollar”. However, other BRICS members may well see ‘dollar hegemony’ as a drag on their countries’ economic development. First by the petrodollar serving as an ‘unrequested dollar hedge’ in respect of their export earnings and second as a brace which ties their fortunes to the economic cycle or monetary policy set in (and designed for) the US economy not their own; a feat which the USA can’t reasonably be expected to do anyway.

Record gold prices and a sharply deteriorating US fiscal deficit may now be working to the advantage of BRICS, in spite of its growing number of members. The club is expected to exceed 30 next year but to pause there, making it technically larger than the EU but with vastly greater oil and gas reserves. As far as oil producers are concerned, the US dollar’s 85-year reign as the trade currency probably can’t come soon enough.

Another concern for BRICS economies generally and an incentive to act sooner relates to the risk of being left holding dollar securities (e.g. T Bills) just as the dollar declines. Something widely forecast to happen anyway due to the sheer size of the federal debt. Some economists now argue that it has reached a size where it cannot ever be repaid through growing the economy and efficiency measures alone or not without a real terms’ devaluation or other re-set of an unspoken kind.   

As things stand, more than $1 trillion is being added to the deficit (not the debt, which is much higher) every 100 days, in some part also due to payments on the higher debt interest building up.  

Most observers now expect the deficit will breach $ 45 Trillion next year but that anyway pales into insignificance relative to the debt itself. Latest figures offered by the Congressional Budget Office suggest that the debt will excess £125 trillion next year however some economists put the figure very much higher than this. Once decommissioning liabilities, off-balance sheet finance initiatives, uncovered pensions, medical, student loan and miscellaneous programmes are included, then the ‘true deficit’ climbs to $300 Trillion, with some placing the ‘true debt figure’ higher still.

Whatever the actual figure, the debt has clearly reached the stage where it cannot ever be repaid by growth alone or without accompanying dollar devaluation, inflation (‘soft default’ on government assets/bonds, in other words), or some equivalent ‘set set’.

Naturally, no oil exporter will wish to be part of the petrodollar system if/when this happens. This may then explain the wider commercial incentives of all the BRICS nations, not only Russia or other politically motivated oil and gas exporting countries. All of them are BRICS members already, the solitary exceptions being Norway and America itself. 

Impact on Global Markets and Future Outlook

Bringing the discussion closer to home, all UK consumers stand to be affected. Most crude oil, petrochemical, LNG, and their related supply chain imports would be re-priced under a BRICS currency if/when this replaces the petrodollar.

The UK’s balance of trade and fiscal deficits, as well as its own external debt, which is materially larger than that of the USA relative to GDP and hard assets’ cover, probably would render Sterling an ‘exposed currency’, at least for our purposes here. IF the changes happen soon, or within the timeframe that some key BRICS countries would like, it will coincide with the UK’s accelerated transition to a de-carbonised electricity grid (‘Grid Zero’) by the year 2030. Potentially this will create a pincer movement; driving balancing, peak and base-load electricity prices higher in unison with internationally-traded LNG and contracted natural gas indexed to petroleum products’ prices.

Whether a BRICS currency emerges in 5 or 10 years time, with a lot of smart money on the 5, either one will fall inside the contract Horizon of long-term oil, LNG, gas sales agreements and power purchased agreements signed from this point on. So, the spectre of BRICS could already be on us anyway; either way, progress from this point should be on the radar of forward traders and contract negotiators alike.

Dominic Whittome

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues.

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