This author put out an article on dollar supremacy, Jesters, Economics and American Dollar Supremacy, which showed some weak correlations between oil prices and said dollar supremacy. The article you are now reading sets out to elucidate how that change in dollar supremacy means a problem not only for the US, but all countries included based upon simple ideas about trade. With a world in constant motion it should not come as a surprise to anyone who is not overtly nationalist that the US could not maintain uni-polar power. Countries in the global south are on the rise, and with that rise means more energy consumption, which invariably means more oil consumption. The ensuing loss of dollar supremacy is linked also to the decline of the Western oil multi-nationals in comparison to the State oil companies of non-Western nations (excluding Statoil of Norway, as it is an oddity of a Western State oil company). So, what is happening is not what has been called post-modernity, but rather transitional modernity to a multi-polar world.
Let us begin with a quick example. The US economy is worth around 14.3-14.7 trillion dollars GDP, that puts it three times ahead of second place in GDP China and third place, Japan. It has an incredible amount of clout due to this high level GDP and also the dollar peg for oil. In order for a country to buy oil, which is produced in around 20 countries, they need to possess dollars or to change out their currency for dollars. So, say I have 1,000,000 Mexican pesos and the exchange rate is 11.70 pesos per American dollar, so I take that and do the exchange and now have $85,000 USD. Now, in pesos the Mexican economy has 17.117 trillion pesos or 1.436 trillion USD, and can not exchange all of that in order to have only dollars, it is a sovereign state. On every exchange that is made in order to purchase dollars, the US economy receives a bump, it is a financial transaction bump. This is because a country with less capital has to use the money of a country with more capital, therefore draining its own capital a bit in order to utilize that currency to purchase oil.
Ok, so then if I have to do this currency exchange, which adds a cost to my purchasing of oil, I will necessarily have to purchase less oil and also would want to maintain a dollar reserve. That reserve is in the instance that I have problems exchanging my currency for dollars etc. Now, what happens when the dollar depreciates is that it is cheaper to buy dollars and so then oil prices go up, more people are included in the market, it becomes a burden on supply. This depends on the global economic climate. In the beginning of the financial crisis the dollar took a hit, but oil did not rise. That’s because every other country took a hit at the same time. Also, there were not social upheavals happening in countries with oil reserves or that are near to shipping lines. So, the dollar was able to depreciate without raising the price of oil, because demand was not going to rise for oil. Yet, when QE2 was implemented the global economic climate was quite different, with other countries showing good growth. Countries with solid growth then holding dollar reserves saw the value of their money depreciating, with the point of the dollar in some cases being to purchase the oil pegged to it. Therefore, oil prices rose with demand as people bought oil to dump the dollar, because there was less reason to maintain a depreciating dollar. Especially with different plans in motion to move to a basket of currencies.
Also, it should be taken into consideration that along with the changing currency roles has been a changing role in who is/are the powerful petroleum/gas corporations in the global market. As pointed out by Alfredo Jalife-Rahme, in the past it was the Western trans-nationals such as Shell, Exxon, BP (he includes 7) which had the larger share of the market. Now they only produce around 10% of the oil and have 3% of world reserves, in comparison to the State oil companies such as ARAMCO, Gazprom, PDVSA (once again there are 7), who have about a 1/3 of the production and 1/3 of the reserves. The only strength the West carries at the moment is the US and its military, and all that accounts to is Thucydides Maxim of might makes right. It is not carrying the production capacity or the reserves in order to maintain a legitimate domestic economic reason for the dollar peg. If anything, other countries would have to accept the dollar peg as a way to keep down demand and that would mean a currency appreciation policy on the side of the US to make it a deal worth having. And that would be an international reason, yet the debate typically does not cover the concerns of other countries in relation to oil. This is a highly hegemonic act, the act of disregard the economies of other countries, as if the US as the largest economy does not affect them adversely or beneficially.
But that is the inherit problem of what is titled post-modernity, that it excludes these other factors, namely other countries and then only the West (I.e. the US) exists. That form of ignorance has led us to constant wars for oil, hegemony, and economic dominance, instead of trade. Rule #1 of trade, everyone receives a benefit. Being that we want to act like a T-Pain song, “All I do is Win Win Win, I can’t never get enough,” we completely skipped over that rule. Now, it is affecting the true American geopolitical power, dollar supremacy, along with geopolitical clout. With other countries on the rise, their oil companies becoming highly competitive and internal issues with the American economy, I think it is time that America take an interest in readjusting its role to save dollar supremacy and oil hegemony just for the sake of oil prices. Welcome to transmodernity.
By. Andrew Smolski
Andrew Smolski is a contributor at Oilprice.com and specializes in Political/Economic Sociology. His work has been syndicated in many leading online publications and he can be reached at firstname.lastname@example.org