SPEAKING FREELY Gulf takes wrong currency path
By Chris Cook
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their say.
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The end-of-year meeting of the Gulf Cooperation Council (GCC) in Muscat
apparently saw another step along the road to the creation of a GCC currency
designed along the lines of the euro.
It is surprising, to say the least, that the GCC is not taking a cool step back
and reviewing the project from first principles in the light of the continuing
global credit crash, which is about to enter its
next phase of a wave of defaults in the world of commercial property and
private equity.
The answer can only be that the GCC - composed of Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia and the United Arab Emirates - perceives that there is no
alternative.
A lucky reader of the Financial Times recently won 10,000 pounds (US$14,500)
for identifying what a panel of judges agreed would be the "Next Big Thing" in
financial products. This, the judges realized perhaps five years after the IT
world recognized the model, is "peer-to-peer" financing - such as www.zopa.com
- which directly connects borrowers with lenders, and investors with
investments.
In this model, the financial service provider ceases to be a middleman, or
credit intermediary, and becomes a pure service provider. The fact is that in
the Internet age there is no need for credit intermediaries, whether private
banks or central banks.
Indeed, Hong Kong managed
quite well without a central bank (or lender of
last resort) at all, with bank credit creation
under the stern control of a monetary authority.
The 21st century alternative to the central banking model first implemented by
John Law in France in 1719 will be a peer-to-peer "Gulf Clearing Union".
To reach this destination, we must take a swift detour via Switzerland.
Swiss efficiency
Few have ever heard of it, but most Swiss businesses are members of the
Wirtschaftsring-Genossenschaft or WIR. Since 1934, small and medium-sized
businesses in Switzerland have routinely extended each other credit - for many
years interest-free - and settled this credit in goods and services, rather
than in Swiss francs. So transactions are not settled conventionally in Swiss
francs created as interest-bearing credit by Swiss banks, or as non
interest-bearing Swiss francs minted by the Swiss central bank. In fact, no
Swiss francs change hands at all: transactions take place by reference to the
Swiss franc as a value unit.
The pragmatic Swiss are not prepared to rely purely on trust in the ability or
willingness of their members to settle debit balances. WIR members are obliged
to give security over their property by way of collateral. In other words, the
WIR is a monetary system that is "property-backed". It is but a short step from
the WIR to a Gulf Clearing Union.
The GCC members produce between them some 16 million barrels of crude oil per
day, and possess some 45% of known oil reserves. In addition, members,
particularly Qatar, also have immense reserves of natural gas.
The key innovation that will enable a Gulf Clearing Union is the simple
expedient of creating - within a suitable legal framework - a "petro" unit
redeemable in a constant amount of energy value, let's say the energy released
by burning 100ml (measured at 20 Centigrade) of n-octane.
Such a definition of an energy value unit provides a straightforward benchmark
for both domestic and international buyers of oil, gas, petroleum products, and
even electricity, to use petros - as well as, or instead of, US dollars - in
settlement for purchases of GCC production.
Gulf business-to-business transactions would take place on credit terms within
a GCC state-sponsored mutual guarantee framework. No interest as such would be
paid, but a provision would be made by both sellers and buyers into a "pool".
Service providers formerly known as banks would no longer put capital at risk
by creating credit based on it, but would act as service providers in return
for a fee, managing the system, setting guarantee limits, and handling
defaults.
Settlement of credit would take place in petros, in goods or services by
reference to the petro, or in dollars or other currency acceptable to the
seller.
Domestic benefits
GCC use of carbon-based energy is staggeringly profligate and increasing
rapidly. Introduction of the petro offers a way in which energy prices may be
raised to global levels, and suitable distributions made in the form of a
"petro dividend" to consumers and businesses, who would then be incentivized to
cut back on carbon-based energy use since this would literally save them money.
Moreover, part of the energy pool could be invested in renewable energy and
energy-saving technology: thereby monetizing value which will cost nothing to
redeem in the future.
In this way, a new economic route for GCC countries to transition to a
post-carbon economy becomes possible.
The GCC members are essentially able to make the rest of the world an offer it
cannot refuse and can lead the way to a new global settlement, by a transition
to an international clearing union configured around the petro as a global
reserve currency and value unit.
The US could then be invited to repay its energy debt to the rest of the world
and to do so by turning swords to ploughshares. That is to say, the huge US
capacity in human and other resources currently wasted in staggeringly
profligate military expenditure could be turned to the peaceful, but
profitable, purpose of creating new generations of energy-saving technology and
renewable energy production.
The GCC members should remember what they have either forgotten or never
understood: that oil is not priced in dollars; dollars are priced in oil. And
they should act accordingly to create a Gulf clearing union.
Chris Cook is a former director of the International Petroleum Exhange
and is now a strategic market consultant, entrepreneur and commentator.
(Copyright 2009 Chris Cook.)
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say.
Please click hereif you are interested in contributing.
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