Sam's Exchange: Tear down that wall

The wall is collapsing. Just like the Berlin wall came down in 1989, today we are seeing the collapse of the petrodollar wall across the oil producing nations of the Arab world.

The wall is collapsing.  Just like the Berlin wall came down in 1989, today we are seeing the collapse of the petrodollar wall across the oil producing nations of the Arab world.  The petrodollar wall, unlike the Berlin wall, is not physical but a system of exchange. It is a system which exchanges oil for dollars, and dollars for security.  It is a function of a uni-polar world, and given we are in a paradigm shift to a multi-polar world, the petrodollar wall no longer serves its purpose.  The purpose of the so-called petrodollar wall was to ensure the dollar as the world’s reserve currency, and the accepted global system of exchange. With the drum beat for change in the global financial system beating ever louder, and the move to a new system of account away from the petrodollar wall, the pace at which regimes across the Arab world fall or change will increase.  What will this mean for the price of oil?

Many if not most in the Arab world are angry with their leaderships, especially if they are seen to serve the masters of the dollar, the United States.  The threat or use of force, as with Bahrain and Libya, will fail.  They will fail because regimes must provide actual leadership and openness, not what is seen as more empty promises.  The likelihood that the Libyan regime of Muammar Gaddafi will fall is 100%.  This is not simply because he is an autocratic ruler, whose son and supposed successor went on a 40-minute rant threatening its people with bloodshed from the country’s army, but because Libya has 30% unemployment and its population is demanding hope, and after 42 years of the same leader wants change.  Bahrain was the fastest growing economy in the Middle East in 2008.  However, Bahrain, or the Kingdom of Bahrain, is an absolute monarchy, with a prime minister and a parliament. The prime minister and 80% of the parliament are all from the same ruling family.

The petrodollar wall has kept autocratic rulers in the Arab world in power, and democracy and change out.  A result of the petrodollar system there is high unemployment in the region today.  Yemen has 35% unemployment; Libya has 30%, Sudan nearly 20%, Jordan 14%, Egypt has 10% and Saudi Arabia also has 10%.  It’s not clear if there will be a regime change in Saudi Arabia, but it is likely there will be change of some sort, for no other reason than the ruling princes’ average age is 83 years old, while 47% of the population is under 18 years of age.  With a high level of Internet usage, and the fact that social networks have been the medium of choice across the Arab world for discontent, that Saudi Arabia will experience pressure from within for change is almost certain.

So what will the fall of the petrodollar wall mean for the price of oil?  Will it go up or down?  Well it might go round and round, from currency to currency.  A multi-polar world will mean a multi-currency model, a system which may have multiple reserve currencies.  What is absolutely true is that the petrodollar system will need to be replaced with another system.  The need for a system of transparency, which opens economies in the Arab region to competition and political and economic interdependence, will mean the need for new markets in the region.   These new markets are likely to be exchange traded, rather than using the current bank to bank dollar system, with things like leverage and the use of derivatives being highly regulated, unlike derivatives markets which are the cause of the current global financial crisis.

Saudi Arabia has the chance to avert an uprising in their country by getting in front of the ball and leading the change in the way oil in the region is priced.  If Saudi Arabia placed a large quantity of oil via an exchange in the region, like Dubai, it would become the benchmark for oil pricing in the region, giving them control of their oil pricing and transparency for the region.  More than this, if a grouping like the Gulf Cooperation council, plus Iran and Iraq, created an energy bank and traded their hydrocarbons via this energy bank in a physically deliverable exchange traded environment, removing intermediaries and counterparty risk, some of the profits from oil and gas trading would stay within each participating country, boosting investment, profit and economic stability.  In turn, this may reduce some of the chronic unemployment in the region.

Like with the fall of the Berlin wall, the fall of the petrodollar wall will happen much more quickly than people expect. It is already catching regime after regime flat-footed, and seeing nervous autocrats making rambling threats to their people.  A new era of leadership will emerge along with a market without walls, and an oil price which is predictable and transparent.

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Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.

Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.

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