Petrodollars Overlooked - an interview with Mahmoud El-Gamal

The following interview was conducted for 'The Pursuit of Injustice' (click here) on KVRX UT student radio.

Doctor Mahmoud El-Gamal is a Professor of Islamic Economics, Finance, and Management, and Professor of Economics and Statistics at Rice University. His insight into energy economics was recently featured (click here) in the September/October edition of Foreign Policy Magazine. His forthcoming book, in collaboration with Amy Jaffe, will be released this December and is entitled Oil, Dollars,Debt, and Crises: The Global Curse of Black Gold.

CS: In your article in the October issue of Foreign Policy you stated:

“Without a change, the next phase of the cycle could be catastrophic. The next banking crisis, for example, might be accompanied by a currency crisis for the U.S. dollar, which has been the linchpin of the international financial system since World War II.”

Given the current trends in the oil industry, the lack of capital flows, the price volatility, and the lack of cooperation amongst oil exporters and importers alike, all of which are hindering investment for future production, do you believe that your foreboding will be materialized? Will we face another larger financial crisis in the near future?

MG: I do not think that the current financial crisis is over. We could have an amplification of this crisis that would be the equivalent of a new crisis of a larger magnitude. There is a serious problem of capacity production not catching up to potential demand and when the global economy recovers, demand in the U.S. and the OECD countries in general might not grow very fast, but demand in Asia will grow fast, and therefore we are likely to have another spike in oil prices that could then be the first phase of the next crisis.

CS: And that would be a financial, speculative spike?

MG: There would be a spike because of the real demand growing and outpacing the growth in supply, the problem is that that gets amplified because of the speculative opportunities that are still available to this day, despite all the talk about the tightening up of regulations that would make another speculative spike not possible.

CS: What is your take on Robert Fisk's reporting on the conspiratorial talks amongst the Gulf States, China, Russia and Japan in dumping the dollar? Is Fisk being sensational, or should we all be taking these warnings seriously?

MG: I thought Fisk was talking about discussions of oil producing countries to price their oil in another currency, and that discussion goes back to the 1970's. It is natural, those countries always suffer whenever the dollar price of oil skyrockets and they're selling the same number of barrels. The oil receipts that they are receiving, because the Dollar depreciates vis-a-vis the Euro and other currencies result in domestic inflation, because they import a lot from other countries.

So they have always been going back and forth about whether they should hold their reserves and receive their receipts in dollars, but as the central bankers of Saudi Arabia and Kuwait were just saying the other day, there are three separate issues: what you price your oil in, what you receive for the oil you sold, and what you hold. And just because you price in dollars does not mean you have to receive the price in dollars, and just because you receive in dollars does not mean you have to hold in dollars. You can always convert it into another currency.

So those three issues need to be disentangled, but it is always going to be an issue whenever it comes up that the dollar is on a depreciating spiral.

CS: How would regulating derivative markets affect oil trading?

MG: Oil has become commoditized more than before, so as some of my colleagues at the Baker Institute, Amy Jaffe and Kenneth Medlock have shown the correlation between oil prices and dollars in terms of other currencies used to be much weaker. Now it is getting very close to negative one, which means that oil is being treated as yet another commodity. Just like speculators are trading currencies and gold, and other precious metals, they are treating oil as just another commodity.

If you put enough regulatory constraints so people cannot buy just because they think that the price is going to go up, and once the price goes up that is a self fulfilling prophecy so they have to buy even more. I think that that cycle can be easily short-circuited.

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