GRM 2010 GRM 2011

Abstract Details

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Title of Paper:
Persian Gulf Oil, China\'s Rise, and the Erosion of Dollar Hegemony
Paper Proposal Text :
Since World War II, the dollar’s standing as the world’s leading reserve and transactional currency has been a central pillar of America’s primacy in global affairs. And since the end of dollar convertibility into gold in 1971 and the final implosion of the Bretton Woods fixed exchange rate regime in 1973, Persian Gulf hydrocarbon producers have been critical to the recasting and extension of the dollar’s hegemonic role in international finance and monetary relations, in at least two important ways.

First, the willingness of Persian Gulf producers to keep pricing oil in dollars puts considerable commercial and even (in some cases) political pressure on other producers to continue doing so as well. In turn, the nearly universal pricing of oil in dollars reinforces commercial and transactional path dependencies for international oil sales to be not just denominated in dollars but settled in dollars as well. This dynamic provides significant and ongoing support for worldwide dollar demand.

Second, since the mid-1970s, the willingness of (first) Saudi Arabia and (then) other Persian Gulf oil producers to recycle significant parts of their petrodollar surpluses into the U.S. economy has been key to maintaining the dollar as the world’s premier reserve currency. While Iraq was moving away from pricing its oil exports in dollars prior to the 2003 U.S. invasion and occupation and Iran no longer accepts dollars in payment for its oil exports, the commitment of most major Gulf producers to continue petrodollar recycling—especially by buying substantial numbers of U.S. Treasury securities and, less directly, large amounts of U.S. military hardware—remains critical to perpetuating dollar hegemony.

Most GCC producers complement their contributions to covering America’s fiscal and current account deficits by pegging their national currencies to the dollar. (In 2007 Kuwait shifted from a pure dollar peg to pegging the dinar against a basket of currencies—but the dollar continues to hold by far the biggest allotment within that basket.) In this context, senior Saudi officials say on background that the Kingdom’s commitment to the dollar is fundamentally a “strategic decision,” not primarily an economic one.

The importance of Persian Gulf oil producers to the dollar’s future standing is another compelling reason—beyond those already identified by the co-convenors of this workshop—why the United States is unlikely to “withdraw” or fundamentally disengage from the Middle East. It also means that “currency politics” will become an increasingly important reference point for other powers that want to increase their influence in the region. China’s rise, both as a global economic power and as by far the leading incremental market for Persian Gulf oil producers, makes it an especially significant player in this regard.

As part of its long-term strategy for moving the international order from a condition of unipolarity to a more genuinely multipolar distribution of power, China plans on renminbi becoming a major international reserve and transactional currency in its own right. China’s ambition is not for renminbi to replace dollars, but to have renminbi assume a position alongside the dollar as an important reserve and transactional currency. In the Persian Gulf, more specifically, Beijing is working to encourage major hydrocarbons producers to begin incorporating renminbi in their central bank reserve portfolios, and to begin accepting renminbi as a transactional currency—including for settlement of hydrocarbon purchases. (A good example of this is the recent agreement between the People’s Bank of China and the UAE Central Bank whereby China will be able to pay for $5.5 billion in oil purchases from Abu Dhabi with renminbi.)

Against this backdrop, my paper will explore four major topics:

• U.S. strategies for keeping Persian Gulf oil producers committed to the dollar as their preferred reserve and transactional currency;

• Chinese strategies for promoting the use of renminbi by Persian Gulf producers—including as a currency for settling hydrocarbon purchases;

• the currency strategies of major Gulf producers (e.g., Iran, Iraq, Saudi Arabia, and the United Arab Emirates); and

• how the interaction of these strategies will help to shape the evolving balance of influence in the Gulf between the United States and China.