THE INTERSECTION of ongoing structural shifts in international energy markets with strategic trends in global financial markets poses the most profound challenge to American hegemony since the end of the Cold War. In 2006, Pierre Noël and I wrote in these pages about an "axis of oil"-a loose and shifting coalition of energy-exporting and -importing states, anchored by Russia and China, that is emerging as a counterweight to the United States (so far, most notably in Central Asia and, increasingly, in Iran).¹ The ability of such a coalition to resist American hegemony is now compounded by the vulnerability of the United States to financial and monetary pressure by its major international creditors-most of which are at least putative members of the axis of oil.

In the past, the United States has exerted financial and monetary pressure on others to leverage their foreign-policy decision-making-on Britain and France during the 1956 Suez crisis, for instance.² But now-as the dollar declines to historic lows relative to other major currencies, against a backdrop of substantial expansion in the U.S. budget and current-account deficits in this millennium-the tables have turned. Half a century after Suez, there is growing potential for a coalition of major energy exporters-disproportionately concentrated in the Middle East and Russia-and major manufacturers like China to coordinate the application of financial and monetary pressure on the United States for strategic purposes.

The Axis of Oil and "Soft Balancing"

THE SUSTAINED rise in energy prices since 2002 is redistributing wealth-and, prospectively, economic power-across the world. The main beneficiaries of this process are major oil exporters and the major industrial exporters-e.g., China, Japan and Germany, the countries with the three largest current-account surpluses in the world-that serve them. The principal "loser" is the United States.

This redistribution of wealth and power has significant implications for the global economy. Today, major energy exporters in the Persian Gulf and Russia are, collectively, at least as important to financing global economic imbalances as China and Japan. China's current-account surplus-already the subject of much concern in the United States-is now dwarfed by the combined current-account surpluses of Russia and the six countries comprising the Gulf Cooperation Council (GCC).³

Moreover, as the redistribution of wealth and power proceeds, economic linkages connecting the principal "winners" in this process-Asian manufacturers and energy exporters in the Persian Gulf and Russia-are deepening and multiplying. If a "world without the West", as Steven Weber and his associates described recently in these pages,⁴ is indeed taking shape, these linkages are its foundation. These linkages are also adding new economic dimensions to the axis of oil.

Despite significant movement toward the creation of a single, integrated market for crude oil and refined products, there remains a profound degree of "regionalization" in oil-supply relationships. Two-thirds of current oil exports from the Persian Gulf-or "west Asia", as the Gulf is frequently described in more eastward Asian locales-are delivered to Asian customers. For Persian Gulf energy producers, the most important "growth" markets for future production lie to the east; Russia and Central Asian producers (Kazakhstan for oil and Turkmenistan for natural gas) also have ambitions to expand exports to Asian markets. For their part, China, Japan and other Asian economies perceive a compelling strategic interest in deepening their energy ties to major oil and gas producers in the Middle East and former Soviet Union.

Now, linkages between Asia and major energy exporters are also taking shape for trade and investment flows. Anchored by China, a rising economic power, and Japan, an established (and recovering) economic powerhouse, Asia has clearly consolidated its position as the "center of gravity" for global manufacturing. To be sure, the United States-which imports roughly 75 percent more than it exports-has been a key "engine" for Asia's economic growth. In recent years, however, new markets-including emerging economies and energy producers-have become increasingly important to Asian manufacturers. This trend has prompted the current emphasis on Asian regionalism in China's economic and foreign policies. It also reinforces China's interest in building strategic trade ties to energy-producing states in the Middle East (such as Saudi Arabia) and Russia; similarly, China wants stronger investment ties to Iran, Central Asian energy producers and Russia.

Looking in the other direction, major hydrocarbon exporters in the Middle East are turning to Asia as a venue for what will surely be increasing volumes of outbound investment. On a per capita basis or in relation to GDP, the current-account surpluses of major Middle Eastern energy producers are larger than those of Asia's manufacturing powerhouses. These surpluses far exceed what their holders can productively use to pay down official debt, stimulate their domestic economies through infrastructure construction, increase consumption and fund economic-diversification initiatives. And energy producers in the Persian Gulf and Russia now hold more dollars as reserve assets than they need for macroeconomic stabilization.

So, what to do with these excess funds? Increasingly, major energy exporters-and China as well-are looking to convert their dollars not only into other currencies but also into other types of international assets-equities, bonds, private-equity holdings and strategic stakes in investment projects across a range of economic sectors. This has led to an explosion of so-called "sovereign wealth funds" (SWFs) and similar types of state-owned investment channels in recent years. The most important ongoing trend in SWFs' investment flows is diversification away from the United States and toward Asia, which will bolster the consolidation of economic ties joining Asian manufacturers with energy exporters in the Persian Gulf and former Soviet Union.

These developments are playing out against mounting concern over what many states in Asia, the Middle East and the former Soviet Union see as the unilateral and ideological manner in which the United States has exercised strategic leadership in the post-Cold War period. To an impressive degree, these states are using the techniques of globalization-cultivating trade, telecommunications and investment links disproportionately with one another-to create a "world without the West." But, in various combinations, these states are also exploring what Robert Pape and other international relations scholars have called "soft balancing": The collaborative development of non-military means to restrain the United States from asserting influence in ways that other important regional and international players see as antithetical to their interests-the United States as dysfunctional hegemon.

The exercise of financial and monetary leverage over the United States by a coalition of creditor nations-including China and major energy exporters, the core of the axis of oil-would constitute a deep intensification of soft balancing. Since the end of World War II, the dollar's status as the world's premier currency has benefited America economically while also bolstering Washington's international leadership. However, the dollar's standing as the leading international transactional and reserve currency is increasingly fragile-creating a profound strategic vulnerability for the United States.

Dropping the Dollar

THE DOLLAR has enjoyed a long run as "the world's money." Following the collapse of the Bretton Woods system in the early 1970s-when the world moved to a monetary regime based on floating exchange rates for most major currencies-the dollar consolidated its position as the world's leading transactional currency, including for international oil trading. It also became the world's dominant reserve asset, effectively replacing gold as the ultimate international store of value and best instrument for settling deficits in countries' external accounts.

The dollar's unique standing has, among other things, enabled the United States to cover its current-account deficits and pay for growing and increasingly expensive oil imports by issuing debt instruments denominated in its own currency. Essentially, foreigners have underwritten America's credit card purchases with no credit limit, and the U.S. Treasury and Federal Reserve have been able to manipulate the interest rate on Washington's "account" to U.S. advantage.

But with the dramatic expansion of global economic imbalances, will countries with enormous current-account surpluses and burgeoning foreign-reserve assets continue financing America's "twin deficits" (current account and federal budget), providing critical support for the dollar's value and international standing? Or will there be, at some point, a slowdown in foreign financing of America's deficits, prompting flight from the dollar on a scale that would do long-term damage to its value and, effectively, displace the greenback as the world's top currency?

Dollar "optimists"⁵ argue that the comparative attractiveness of the United States as a venue for foreign investment and the relatively small percentage of global savings needed to finance America's current-account deficit mean that foreigners will continue to buy dollar-denominated debt instruments. Additionally, optimists argue that because manufacturing giants such as China and major energy exporters hold a high percentage of their reserve assets in dollars, they cannot move too far away from the dollar without seriously undermining the value of those assets. Dollar "pessimists"⁶, on the other hand, argue that the ratio of debt to GDP in the United States will, at some point, reach a level making continued financing of that debt economically unattractive to foreigners. At that point, declining demand for U.S. assets will prompt a fall in their prices-including the value of the dollar itself.