The Price of Oil

[Mailman]

If the petrodollar became the petroeuro or the petromonkeynuts it does not change the cost of that petrounit. If you want to do business with america you are still going to have to do that business in dollars and considering america is still a very attractive investment opportunity I doubt this e-myth will actually have much effect on reality.

Give me your address and Ill send something to you

Mailman

[ALM]

Look, if you are going to want to do business in America you have to buy USD so you are going to have to convert all those euros to USD anyway. Given the economic forecast for 2006 and through to 2007 are looking very good for america where do you think people are going to want to invest their hard earned euros? Yes thats right me lad, America!

Forgive for being so blunt but ... THE EXACT OPPOSITE IS TRUE YOU IDIOT. The US trade deficit stood at $200Billion for 2005 alone! In other words, countries are not queuing up to convert their euros to dollars at all. Quite the opposite in fact. The US consumes more goods from abroad than it sells. So it is the one which sees an outflow of currency from the economy and it is the one which has to convert it's dollars to other currencies. A change in the currency used to trade oil will see a significant fall in the value the dollar for two reasons. Firstly because US Dollars will simply not be required to buy oil. The hundreds of billions of US Dollars now used to buy oil would never be purchased in the first place. Simple as that. Secondly, and more importantly, the dollars standing as the premier currency of world would be lost to the Euro and this will greatly diminish investment which involves buying dollars. The investors you speak of will, in anticipation of these falls, sell any dollars they may already hold and invest future funds in economies where the currency is expected to hold it’s value in the long term.

[Mailman]

And you call yourself an arm chair economist!

Fact is, those who do this for a living, have the complete opposite from you and the e-myth you hold so dear

Oh well, I guess thats what you get when you believe everything you read on the net ALM

Mailman

[ALM]

Fact is, those who do this for a living, have the complete opposite from you and the e-myth you hold so dear Mailman

Of course there are! Well why don't you do as Alf requested supply us with the details of these economists which predict that a Euro OilBourse will lead to a resurgence of the US dollar. We're waiting mailman ....

[AlfredJPruffock]

Excellent points ALM.

I have only a laymans knowledge of economics but your observations made perfect sense to me.



I have since found some more interesting reflections on the Global financial implications of the Iranian Bourse ...


In 1971, as it became clear that the U.S. Government would not be able to buy back its dollars for gold, it prepared an alternative arrangement to hold the world hostage to its fiat dollar: during 1972-1973 it struck an iron-clad arrangement with Saudi Arabia—to support the rule of the House of Saud in exchange for accepting only dollars as a payment for Saudi oil. By imposing the dollar on the OPEC’s leader, the dollar was effectively imposed on all OPEC members.

Because the world had to buy oil from the Arab oil countries, it had the reason to hold dollars as payment for oil.

Because the world needed ever increasing quantities of oil at an ever increasing oil prices, the world’s demand for dollars could only increase.

Even though dollars were no longer exchangeable for gold, they were now exchangeable for oil.

The economic essence of this arrangement was that the dollar was now backed by oil.

As long as that was the case, the world had to accumulate increasing amounts of dollars, because those dollars were needed to buy oil.


As long as the dollar was the only payment for oil, its dominance in the world was assured, and the American Empire could continue to tax the rest of the world. If, for any reason, the dollar lost its oil backing, the American Empire would cease to exist, because it would no longer be able to tax the world by making them accumulate ever more dollars.


Thus, Imperial survival dictated that oil be sold only for dollars. It also implied that oil reserves were spread around various sovereign states that none was strong enough, economically or militarily, to demand payment for oil in something other than dollars.

If someone demanded a different payment, he had to be convinced, either by political or by military means, to change his mind.


The Iranian government has recently proposed to open in March 2006 an Iranian Oil Bourse that will be based on an euro-based oil-trading mechanism that naturally implies payment for oil in Euro.

In economic terms, this represents a much greater threat to the hegemony of the dollar than Saddam’s, because it will allow anyone willing either to buy or to sell oil for Euro to transact on the exchange, thus circumventing the U.S. dollar altogether.

If so, then it is likely that much of the world will eagerly adopt this euro-denominated oil system:

The Europeans will not have to buy and hold dollars in order to secure their payment for oil, but would instead use with their own currency.

The Chinese and the Japanese will be especially eager to adopt the new exchange. It will allow them to drastically lower their enormous dollar reserves and diversify them with Euros.

One portion of their dollars they will still want to hold onto; another portion of their dollar holdings they may decide to dump outright; a third portion of their hoards they will decide to use up for future payments without replenishing their dollar holdings, but building up instead their euro reserves.

The Russians have economic interest in adopting the Euro – the bulk of their trade is with European countries, with oil-exporting countries, with China, and with Japan.

Adoption of the Euro will immediately take care of the first two blocs, and will over time facilitate trade with China and Japan. Also, Russians seemingly detest holding depreciating dollars, for they have recently found a new religion with gold: their central bank is diversifying out of dollars and accumulating gold. Russians have also revived their nationalism; if embracing the Euro will stab the Americans, they will gladly do it and smugly watch the Americans bleed.


The Arab oil-exporting countries will eagerly adopt the Euro as a means of diversification against rising mountains of depreciating dollars. Just like the Russians, their trade is mostly with European countries, and therefore will prefer the European currency both for its stability and for avoiding currency risk.

[bobsmithldn]

Alfred, please can you enlighten me on why a strong dollar - rather than a weak one - is key to the strength of the US economy. Not too clear on this ... as imports will increase and exports will decrease (other things being equal) - surely leading to the trade deficit increasing even more?

I have read that the Fed intends to stop reporting M3 which includes foreign holdings of $ - could this be related to the Iranian bourse situation, etc.?

http://www.federalreserve.gov/releases/h6/discm3.htm

[AlfredJPruffock]

Alfred, please can you enlighten me on why a strong dollar - rather than a weak one - is key to the strength of the US economy. Not too clear on this ... as imports will increase and exports will decrease (other things being equal) - surely leading to the trade deficit increasing even more?

I have read that the Fed intends to stop reporting M3 which includes foreign holdings of $ - could this be related to the Iranian bourse situation, etc.?

http://www.federalreserve.gov/releases/h6/discm3.htm

Given that because the US dollar converted from the Gold Standard to the Petrodollar as from 1971 after the agreement with the House of Saud ,to price Oil transactions in US Dollars, it became necessary for countrys to hold Dollar Reserves to purchase the Oil, thereby promiting the strength of the Dollar due to the fact that Oil purchases are unavoidable, perhaps akin to a global Oil currency tax.

If you are effectively printing the US Dollar as the Global Currency then it matters little if you are importing beyond your means, as the US does, nor if you have a whopping deficet as a result, as nations have to buy your Dollars to make the Oil Transactions thereby strenghtening the currency irrespective of your domestic economic perfrormance.

Again I am not an expert in this field and I imagine ALM and others could give a better explanation, but I hope this gives an idea of why the Dollar needs to be strong, as long as the PetroDollar is the de facto trading currency then imports are not a problem , but were the petrodollar to be replaced, my oh my ....

[bobsmithldn]

Given that because the US dollar converted from the Gold Standard to the Petrodollar as from 1971 after the agreement with the House of Saud ,to price Oil transactions in US Dollars, it became necessary for countrys to hold Dollar Reserves to purchase the Oil, thereby promiting the strength of the Dollar due to the fact that Oil purchases are unavoidable, perhaps akin to a global Oil currency tax.

If you are effectively printing the US Dollar as the Global Currency then it matters little if you are importing beyond your means, as the US does, nor if you have a whopping deficet as a result, as nations have to buy your Dollars to make the Oil Transactions thereby strenghtening the currency irrespective of your economic perfrormance.

Again I am not an expert in this field and I imagine ALM and others could give a better explanation, but I hope this gives an idea of why the Dollar needs to be strong, as long as the PetroDollar is the de facto trading currency then imports are not a problem , but were the petrodollar to be replaced, my oh my ....

Why does the press say that treasury bond purchases by foreigners are propping up the US economy? What does that really mean?

[AlfredJPruffock]

Why does the press say that treasury bond purchases by foreigners are propping up the US economy? What does that really mean?

Perhaps BS this is what it means ?


U.S. Treasury Secretary John Snow issued a warning recently that the U.S. Government is on the verge of collapse - as the statutory debt limit imposed by Congress of $8.184 trillion dollars would be reached in mid-February - the government would then be unable to continue its normal operations.

Considering the current total U.S. debt stands at $8.162 trillion dollars, once the official debt ceiling ($8.184 trillion) is reached, the U.S. government’s credit abroad (its borrowing power) is gone.

Those countries (mainly China) who presently keep America afloat by holding U.S. Treasury Notes, will most likely no longer continue doing so.

[AlfredJPruffock]

Finally Bob another observation on this,not mine I hasten to add !

Again it would be interesting to learn the views of those with a sound background in economics such as ALM etc


If you want to read some serious economic discussion of this, try reading Bonner and Wiggin’s best-selling book "Empire of Debt: The Rise of an Epic Financial Crsis". (That is, if you can find a copy....last I heard Amazon was sold out.)


It is a serious discussion by real economists, and is recommended reading by some of the leading economic journals. If found it so riveting, that I couldn’t put it down, until I had read it straight through.

The assumption of many people like you, is that Asian countries like Japan and China will be forced to continue buying US debt, because if they don’t, the US economy will collapse, and so they would lose their export market, and that would hurt them too much. So, in self-defense, they will continue to buy worthless US bonds.

That is, indeed, the only thing that is keeping us from collapse at this time.

But, throughout history, the fundamental value of a currency, is based on the economic output of a country. As China becomes the major manufacturer in the world, and the US output shrinks to almost nothing, the fundamental fact is that our currency has no real value, and we are just buying time by assuming that the Asian countries will continue to bail us out, by buying our debt.

The trouble is, by selling debt, we are in essence, printing more money. By issuing no-interest loans, and continuing to fuel the economy by consumer indebtedness, inflation is inevitable. (In fact, inflation is starting to take off.) As long as there is inflation, the price of gold will go up (gold has more than doubled, since Bush took office, as a result of his incredibly high deficit spending).

The longer we fool ourselves into thinking the Asians will bail us out, the worse inflation will get, and the higher the price of gold. At some point the Asians will increase their gold holdings (countries like Russia have just announced they are doing just that.)

For China to increase their gold holdings by just 5%, I think I heard, would mean something like 67% of the world’s gold supply....thus resulting in another phenominal increase in the value of gold.

The point is, these factors are completely out of our control.

The longer our debt economy lasts, the worse off the economic fundamentals will be. And there has never been a time in history, when the economic fundamentals didn’t rule in the end.

My worst concern, is that if, and when, we finally collapse, how will we be able to recover?

In previous economic collapses, we were still one of the only industrial countries in the world.

So, it was just a matter of finally getting it together, and getting the capital together, to fund our recover.

But now, with places like China and India taking the economic lead, with people working for 16 cents/hour....how could we ever recover to the point of competing in the world, without lowering our standard of living to that of a third world country?