So Long, US Dollar
By Marin Katusa, Casey Research
The global landscape is undergoing a significant transformation, one largely overlooked by mainstream media, that could plunge the United States into an economic crisis and diminish its global influence: the decline of the US dollar’s status as the world’s reserve currency.
For many years, the US dollar has overwhelmingly dominated international transactions, particularly in the oil sector. This pivotal role has led to substantial demand for dollars, bolstering its value. The dollar’s global status not only enhanced its worth but also created an almost endless demand for US Treasuries. Nations worldwide sought to hold petrodollars, enabling the US government to borrow freely and spend liberally.
This dollar supremacy has granted the U.S. extraordinary global power and influence. However, a shift is underway. Emerging economies are slowly eroding America’s status as a superpower. Many nations that have historically opposed U.S. policies are exploring ways to diminish American influence, with moving away from the dollar being a significant step.
Countries like China and Russia have become active participants in this shift, forging agreements to conduct trade without the dollar. Several major oil-exporting nations have started accepting currencies other than the dollar for oil sales, prompting organizations like the United Nations and the International Monetary Fund (IMF) to propose measures for establishing a new global reserve currency that isn’t dollar-dependent.
The dollar’s dominance is not as steadfast as Americans often believe; the U.S. is no longer the unparalleled superpower it once was. These phenomena are interrelated, as seen in global reactions to U.S. sanctions against Iran.
U.S. allies across Europe and Asia quickly aligned with the decision to limit Iranian oil imports. Conversely, several nations that do not align with U.S. policy have chosen to continue trading with Iran, circumventing American sanctions either overtly or discreetly.
It’s a paradox: The U.S. introduced sanctions under the assumption that oil trades would remain dollar-denominated. This assumption, rooted in the belief that the dollar would always dominate international commerce, has provided countries unfriendly to the U.S. an opportunity to further distance themselves from the dollar—rendering U.S. sanctions ineffective. What was intended to demonstrate U.S. supremacy has instead motivated disillusioned nations to move away from the currency, gradually eroding its economic influence.
Signs the Dollar Is Going the Way of the Dodo
Currently, major oil-trading partners such as China and Saudi Arabia still engage in transactions involving the petrodollar. However, the critical question remains: how long will this last? In February, China imported 1.4 million barrels of oil daily from Saudi Arabia, marking a 39 percent increase year-over-year. With both countries collaborating on a large oil refinery in Saudi Arabia, the day may soon arrive when they deem it unnecessary to involve dollars in their dealings.
This potential shift would mark a significant turning point, given that the petrodollar system was established back in 1973 by an agreement between President Nixon and King Faisal of Saudi Arabia. Nixon requested that oil only be sold in U.S. dollars, with excess profits reinvested into U.S. Treasury bonds. In return, the U.S. committed to safeguarding Saudi oil reserves from external threats.
As oil revenues began flowing primarily through the U.S. Federal Reserve, demand for both U.S. dollars and U.S. debt surged. All oil-importing countries were compelled to convert surplus funds into dollars to purchase oil, laying the groundwork for a petrodollar system that eventually extended beyond oil, encompassing almost every aspect of international trade.
The dollar’s value is intrinsically linked to its function as a vehicle for global trade. Should this role diminish, a significant loss of value would follow. The resulting inflation, soaring interest rates, and increased costs for essentials could make past economic downturns look trivial in comparison. The U.S. government could find itself unable to meet its financial obligations. The fabric holding together the belief that the world would perpetually rely on the dollar could unravel entirely.
This scenario is alarming, but rejecting the reality poses even greater risks as countries worldwide are initiating steps to abandon the dollar.
Leading the charge are Russia and China. Over a year ago, the two nations initiated measures to reduce dollar dependency, conducting trade using rubles and renminbi. Recently, China and Japan, the world’s second and third largest economies respectively, established a framework to facilitate trade in their own currencies rather than relying on dollars as intermediaries. China is reportedly pursuing similar agreements with South Korea.
Additionally, a new understanding among BRICS nations (Brazil, Russia, India, China, and South Africa) promotes the use of national currencies in trade interactions, sidestepping the dollar altogether. China is currently working on bilateral trade agreements with Malaysia to use renminbi and ringgit, while Russia and Iran have agreed to rely on rubles in their dealings.
Looking at Africa, since overtaking the U.S. as the continent’s largest trading partner in 2009, China has been actively promoting the use of its currency for trade in Africa. Standard Bank, Africa’s largest financial institution, has predicted that by 2015, $100 billion in trade between China and Africa will be conducted using renminbi—exceeding total bilateral trade figures from 2010.
Even major international organizations are expressing support for the idea of moving beyond the dollar. The United Nations Conference on Trade and Development has criticized the current currency and capital rules governing the global economy, urging the need for a new global currency. Likewise, the IMF contends that the dollar should relinquish its role as the global reserve currency to pave the way for an international currency based on a basket of national currencies.
Furthermore, a growing number of nations are employing their own currencies for oil trades, directly challenging the dollar’s hegemony. China and the UAE have agreed to use their own currencies for oil transactions, a deal valued at approximately $5.5 billion annually. India is buying oil from Iran using gold and rupees, while China and Iran are collaborating on a barter system to facilitate trade between their countries.
Addressing the Iranian Sanctions
The U.S. and the European Union have centered their sanctions against Iran on the financial infrastructure supporting its oil trade. Historically, Iran relied on its central bank to conduct oil transactions, always in U.S. dollars, using the Belgium-based SWIFT system. The sanctions imposed control over transactions involving the Iranian central bank, effectively disrupting the official trading route. As a matter of fact, Iran was recently barred from SWIFT—an indication that this route may already be compromised.
However, a critical flaw in the sanctions lies in the assumption that Iran is limited to this dollar-based transaction model. In reality, Iran has proven to be quite resourceful, using the limitations imposed by sanctions as motivation to innovate new methods for selling its oil.
Official statistics show that Iran’s oil sales have experienced a decline since the sanctions announcement. The country proactively halted oil shipments to key European nations that accounted for 18 percent of its exports. Yet, covert sales may have staved off or even reversed this downturn. The specifics of these transactions remain elusive due to the clandestine nature of the dealings.
As mentioned earlier, Iran is reportedly selling oil to India in exchange for gold and rupees, while it has also been negotiating barter arrangements with China for Iranian oil in exchange for Chinese goods. Additionally, both China and South Korea are discreetly purchasing Iranian oil using their respective currencies.
The evidence of this stealth trading is visible in the sudden disappearance of millions of barrels of oil from Iranian tankers. Officially, the route taken remains a mystery—whether it was rerouted, production stopped, or stocks relocated is uncertain.
Once oil leaves its producing nation, it becomes nearly impossible to trace its origins, as oil remains fungible. Compounding the issue, tracking large vessels like supertankers can prove challenging.
To complicate matters further, Iran has instructed its oil tanker captains to disable their tracking transponders, rendering them invisible to monitoring systems. Presently, only a small fraction of Iran’s tanker fleet is actively transmitting their locations. While ships are legally required to have tracking devices, a captain can deactivate them for security reasons with government approval.
Moreover, Iran is set to enhance its capacity for disguising oil sales through the National Iranian Tanker Company (NITC), which is soon adding new supertankers to its fleet—boosting efficiency when international shipping options decrease.
Regardless of sanctions, Iran is succeeding in moving its oil. However, employing covert ships and alternate currencies incurs costs.
Freight charges for each voyage can reach nearly $5 million. Iran also faces rising insurance costs, as a significant portion of international shipments are insured through European companies that are now distancing themselves from dealings with Iranian vessels due to sanctions.
Furthermore, buyers demand favorable credit terms from the National Iranian Oil Company (NIOC), leading to agreements that allow buyers months of grace to pay, costing Iran significant revenue per shipment.
When factoring in freight costs, insurance, and lenient payment schedules, as much as 10 percent of each tanker’s value may be lost. Additionally, customers have begun negotiating for better prices. While China’s oil imports from Iran slowed earlier this year, this was not due to sanctions but rather a strategic move by Chinese refiners to negotiate lower prices.
Nevertheless, despite the constraints imposed by sanctions, Iran continues to receive a steady flow of revenue from its oil exports through various non-dollar transactions with nations like India, Turkey, and several others.
The mainstream media largely avoids discussing the decline of the US dollar as the premier reserve currency. Additionally, few comment on how sanctions predicated on the notion that Iran must trade in dollars have created sizeable loopholes for trading to circumvent restrictions.
Ignoring this overarching issue in discussions about Iranian oil trade results in narratives that resemble plots from espionage fiction. A more actionable takeaway is the notion that the reliance on the dollar is waning, and the longer the U.S. attempts to maintain that it remains the dominant force, the more its international strategies are likely to misfire.
Sincerely,
Marin Katusa
for Economic Prism
[Editor’s Note: Marin Katusa, a seasoned investment analyst, serves as the senior editor of Casey Energy Opportunities, Casey Energy Confidential, and Casey Energy Report. As Marin emphasized, the end of dollar dominance represents a grave concern for the U.S. economy, especially as the federal government appears to be overlooking this significant shift. It is a pivotal moment: remain oblivious at your own peril, or seek insights from over 30 financial experts to navigate the stormy economic landscape ahead.]