NICHOLAS SHUBITZ: New Brics members have good reasons for joining
Global push for decarbonisation could hasten de-dollarisation
As the world seeks to decarbonise the global economy, major oil producers may feel the only way to protect themselves is via de-dollarisation.
The expansion of Brics to include Saudi Arabia, the UAE and Iran suggests that major oil producers in the Middle East are keen to get on board with the bloc’s plans to conduct trade in their own currencies. This may be the best way for these countries to maintain economic stability in a world transitioning away from oil.
Saudi Arabia achieved a budget surplus of $28bn in 2022. It was no coincidence that the oil-rich kingdom’s first surplus in a decade coincided with oil prices going above $100 a barrel for the first time in almost a decade. With oil revenues accounting for about 75% of the Saudi budget, the world’s largest oil exporter remains heavily dependent on oil revenues despite efforts to diversify the kingdom’s economy.
Three things can cause an increase in oil prices: increased demand, lower supply and a weaker US dollar. Last year oil prices went up over concerns that Russia may struggle to export oil in the wake of unprecedented sanctions in response to the war in Ukraine. This saw oil prices spike temporarily. But as rising interest rates put downward pressure on the global economy and much of Russia’s oil still found its way to market, the major producers in crude oil cartel Opec+ were forced to agree to voluntary cuts to stabilise the oil price.
Countries like Saudi Arabia cannot rely on wars and geopolitical disruption to maintain a balanced budget, and cutting volumes to boost the price can amount to running on the spot. Selling less oil for a higher price is not the same as selling more oil for a higher price, and that is where the Brics plan to increase trade in local currencies comes into play. If emerging markets switch to oil purchases in their own currencies this could reduce demand for the dollar.
If the dollar weakens as a result of this development oil prices will rise. Normally, higher prices can lead to demand destruction, but with emerging markets purchasing oil in their own currencies a weaker dollar will not automatically translate into higher prices for these markets.
This could explain Saudi Arabia’s enthusiasm to join Brics. India and China are two of the three largest oil importers in the world, and if these countries can import more oil at a higher dollar price by purchasing oil in their own currencies this could benefit Saudi Arabia enormously.
The addition of some of the other new Brics states can also be attributed to energy market dynamics. Both Iran and the UAE would be equally enthusiastic about working with major emerging markets to export more of their oil at higher prices. Recent estimates place both the UAE and Iran among the top 10 largest oil exporters in the world. Oil importers in Brics could also benefit, as countries such as Egypt and Argentina struggle with balance of payments crises.
As US interest rates have risen in response to fiscal and monetary policy induced inflation coinciding with supply chain disruptions from lockdowns and the war in Ukraine, countries such as Egypt and Argentina have found themselves facing a crisis. With a shortage of dollars to pay for imports and service their debts, these newly minted Brics members could benefit hugely from being able to pay for a share of their oil imports with their own currencies.
While these plans have yet to materialise and several commentators have dismissed Brics expansion as an insignificant event, we could be witnessing the greatest geopolitical shift in forex markets since the 1945 agreement between Saudi Arabia and the US, which established the petrodollar. This agreement, ensuring demand for US dollars to purchase oil, allowed then US president Richard Nixon to abandon the gold standard in the 1970s and saw the dollar remain the world’s dominant global reserve currency though it was no longer backed by gold.
If more countries join Brics and gradually decrease the use of the dollar in the global oil trade, this could have profound implications for global markets and political relations between states. The status of the US could become diminished, though the country might also find itself achieving a healthier balance of trade as a result of a weaker dollar. The US Federal Reserve has acknowledged that in the long run the dollar may have to weaken for the US to generate enough export revenue to service its debts. Brics expansion could usher in a new financial era.
The US may have precipitated these events itself. It alienated Saudi Arabia politically by accusing it of human rights abuses, and economically by becoming a net oil exporter. US imports of Saudi Arabian oil peaked 20 years ago in 2003, and dropped to a record low by 2018. The push by the Biden administration to decarbonise the US and global economy threatens to undermine the traditional alliance between the US and Saudi Arabia even further.
While global oil prices plunged after the US embraced fracking in the 2010s, the threat to major oil producers presented by decarbonisation is existential. According to the International Energy Agency the use of oil for transport fuels is set to decline after 2026 due to the expanded use of electric vehicles. Growth in biofuels and improvements in fuel efficiency are also expected to reduce consumption. Total oil demand is predicted to decline before the end of the decade, so it makes sense that major oil producing states are making plans to protect their national interests.
Trade in local currencies could lift oil prices and increase exports at the same time. These increased oil revenues could then be reinvested in India, Africa and other emerging markets, which would help boost oil demand from these countries even further. This is a strong economic motivation for joining Brics, as the new oil-producing Brics states look to maximise their oil revenues in the coming years as they race to diversify their economies.
• Shubitz is an independent Brics analyst.
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