In its latest agreement, OPEC decided not to increase the production ceiling. I believe one of the reasons behind this decision is the lack of clarity on oil demand this year due to drastic changes in consumer behaviors, including the decline in travel for professional purposes thanks to digitalization and the development of the virtual world, as well as the rise of remote education, which affects transportation. In fact, aviation and transportation accounted for an average of 4 percent and 54 percent of oil demand in the last three years. These structural changes will be followed by greater and more important changes in the near future as China, Europe, and the United States are currently moving towards spending on renewable energy and achieving the goals of the Paris Agreement.
The United States decided in the 1970s to not rely on the Middle East for oil, which was a strategic decision that was reinforced by the emergence of concerning political regimes, such as the Islamic Republic of Iran, Saddam's Iraq, and Gaddafi's Libya, as these three countries collectively accounted for 7.5 percent of the world’s oil supply at the time. The main difference between the current global trend and the US’s previous decision is that the objectives of the United States at that time stemmed from national security concerns that were entrenched in the minds of US politicians while today, they stem from the modern society's conviction of the dangers of climate change. This is especially true for Generation Z, which now accounts for 51 percent of the electorate according to Pew Research Center. However, it must be mentioned that not only will the end of oil and fossil fuels in general be painful for the Middle East; it may also be the beginning of the end for the US global influence.
One of the key pillars of the US economy is the strength of its currency thanks to the huge volume of global trade in US dollars. According to BIS, the United States’ share of global trade is 15 percent, which accounts for one third of all dollar-based trade, amounting to 45 percent of global trade. This huge volume of global trade in US dollars is due, in part, to the pricing of raw commodities and natural resources in dollars. Oil represents a large part of these resources, and estimates suggest that it covered nearly $1 trillion in global trade in 2019. The volume of dollar-based trade, however, was $8.5 trillion as the entire value of global trade was $18.8 trillion in 2019 according to WTO data. This can explain the positive correlation (0.5) between the US banking sector and energy companies in financial markets over the last 40 years. Additionally, demand on many minerals will see a decline with the rise of digitalization and the increase of accusations blaming minerals for carbon emissions and environmental pollution despite the role some minerals play in the renewable energy sector.
In contrast, China registered double the research and innovation growth rates compared to the United States (10.6 percent and 5 percent respectively). PwC estimates that artificial intelligence will account for a quarter of China's GDP by 2040, not to mention its pioneering role in 5G technology and its successful transformation of its neighboring countries to hubs of traditional industries so it can devote itself to smart industries. In fact, China has three times more robots than the US. Moreover, the wealth of developing nations in Asia, such as Hong Kong, the Philippines, and others, mainly comes from Chinese businessmen at present.
This potential decline in international dollar-based trade, coupled with the increase of US debt that recently surpassed its GDP and pushed the credit rating agency Fitch to revise its US outlook to negative, 10 years after S&P did the same, could undermine the confidence in the United States and its ability to print its currency. This is quite alarming as the US’s capacity to print its dollars has saved it during many economic crises, such as the rise of the Federal Reserve's assets after the 2008 financial crisis from $750 billion to $4 trillion, and then to $7.8 trillion during the latest crisis. This important agility and characteristic of the US economy will be affected.
The current trend against oil, fossil fuels, and raw materials means a smaller power for the dollar, which could affect the United States' role as the global leader. The post-oil era may not be an American era as modern empires are not defeated militarily, but rather, economically and scientifically as we saw what happened with the Soviet Union.
This article was originally published in, and translated from, Saudi Arabian outlet al-Riyadh.