[Cojock]

Hi

For what it's worth, I used to be a Director of the UK's International Petroleum Exchange, and I'm currently involved in a Middle Eastern initiative to set up an alternative to the existing global market platforms.

Energy use is only part of the problem: we need a solution that also addresses the cause of the drive for economic growth which in turn drives demand. To do this we need to "reverse the polarity" of the monetary system.

The following article addresses this.

Best Regards

Chris Cook

>>
[Reversing the Polarity – Bretton Woods revisited?

A very strong case has been made by William Engdahl ("A Century of War - Anglo-American Politics and the New World Order": Pluto Press) that the three principal goals of US foreign policy in the last 100 years have been Energy Security; Energy Security and Energy Security. But it is becoming clear that the Iraq war - while aimed at reducing US reliance upon Saudi oil - may have unintended consequences in terms of changing the dynamics of the oil market generally and OPEC in particular.

When it is considered that the US, with 5% of the global population, consumes 25% of global energy supplies, then we see the sheer impossibility for China or India to begin to approach US levels of consumption within the existing global political and financial market settlement which has maintained since Bretton Woods in 1944.

But what is the alternative?

Is oil priced in dollars or are dollars priced in oil?

There has been a growing realisation on the part of major oil producers such as Iran and Saudi Arabia that oil is not priced in dollars but rather that dollars are priced in oil. The reality underpinning this epiphany is the fact that oil has “Value” ie “money’s worth” - in exchange for commodities, goods and services – whereas the financial object we are accustomed to think of as the “dollar” is merely a “claim over value” or IOU issued by the US Federal Reserve Bank.

If we look at the current structure of the global energy market, we are accustomed to think that the “big bad wolf” is a “cartel” of OPEC members. However, the fact of the matter is that while there has been a cartel extracting extraordinary profits from energy markets in recent years this has consisted of intermediary investment banks and energy traders who control the global market platform on which oil is traded and benchmark prices set. In other words, the derivative tail has been wagging the oil market dog.

This is set to get worse, to the extent that a major trading disaster is only a matter of time – possibly as soon as this winter if the prognosis of Goldman Sachs of “super-spikes” to $100/ barrel oil is realised. The reason for this is the fact that the investment banks and oil companies have themselves now lost control of the price-setting process to a wall of hedge fund money under the control of star traders attracted by rewards beyond the dreams of avarice – as opposed to the pittance they were receiving with their former employers.

Hedge funds – as the Long Term Capital Management meltdown showed us in 1998 - are almost entirely unregulated since there is no regulatory body either with access to data in relation to their transactions (particularly “off-exchange”) or with the capability to take enforcement action over off-shore entities typically used by hedge funds.

Due to the lack of transparency in "off-exchange" trading, oil producers and consumers do not even know that they are losing - a phenomenon which J K Galbraith memorably described as the “bezzle”. However, while oil producers and consumers have now woken up to the bezzle, the problem they have is what they can do about it.

It has long been clear that a Middle Eastern benchmark oil price is a key part of the solution and the creation and domination of such a benchmark has been a Holy Grail for the International Petroleum Exchange and New York Mercantile Exchange for some 15 years.

Whatever the benchmark and market mechanism there are two functions which are generic to all markets: money, capital, commodities, energy, whatever. Firstly there is a requirement for a legally binding contract – “transaction registration”; secondly there is the function of transfer of title against payment and together these are thought of as “clearing and settlement”.

These two functions constitute a natural monopoly and should therefore only take place in the context of an “enterprise model” (ie legal and financial structure) which is neutral both in terms of participation and of the absence of outside investors.

The requirement is therefore for an Energy “Clearing Union” comprising all market participant constituencies whether producers, consumers or intermediaries, constituted as an “International Energy Trade Association” (“IETA”) and served by a consortium of providers of services such as communications, technology, risk management and so on.

Such an IETA would not only have both access to trading data both on and off-exchange but would also be in a position to impose standards of probity and market behaviour with the threat of sanction such as suspension – temporary or permanent - of the right to register transactions.

Bilateral transactions between IETA members would be subject to mutual guarantee, backed by suitable deposit or margin arrangements and/or a default fund. A risk management partner - rather than a central counterparty “Clearing House”- would manage the system and the risk.

The outcome is a “Clearing Union” or “Guarantee Society” as recently adopted by the Scottish Liberal Democrats as part of their policy in relation to stimulating small and medium size enterprises. Such a Clearing Union would be operated by a neutral consortium of service providers within a true partnership arrangement with funding provided by the stakeholders themselves without recourse to outside investors.

The Clearing Union concept is not a new idea within the oil market – at least one OPEC member has been advocating for almost 20 years an OPEC Clearing Bank and associated investment institution.

A Rational Energy Policy?

It was instructive to hear the response at an industry event last June of both a Panel of senior energy traders and their audience when asked for an assessment of the likely success of emissions trading.

"Slim to Zero" was the consensus of both the Panel and the audience, and even more telling was the analogy from the floor:

"If you want to keep a Donkey healthy you don’t take care of what comes out of it, you take care of what goes in".

We do not have to look beyond the structure of the limited liability company to realise what the problem is with emissions trading. It is not necessary to make any ethical or moral judgment in respect of “the Corporation”: we merely observe that the managers of GasCo Inc or Oilco plc are likely to be held to account by their shareholders if they fail to minimise costs and maximise shareholder value.

A levy on non- renewable energy would affect the costs of the global intermediaries in a way which they would find more difficult to pass on and is therefore not in the interests of investors. This "externalisation" of costs is the reason why the more canny oil companies and conglomerates have been assiduously promoting and lobbying for the emissions trading concept. The embarrassing fact of the matter is that if emissions trading could actually work energy intermediaries would not support it.

An Energy Clearing Union, on the other hand, while not necessarily in the interests of investors is certainly in the interests of the Planet. In particular it could form the cornerstone of a rational global energy policy as an alternative to fundamentally unworkable emissions trading schemes.

Since all energy transactions would be registered it is a simple matter to apply a suitable levy which could then form the basis of an “Energy Investment Fund” which would fund investment in:
· existing and future non-renewable infrastructure, to ensure the most efficient possible utilisation of these finite resources;
· renewable energy;
· energy efficient and eco-friendly housing and infrastructure.

IETA would increase the oil price with a levy of (say) $20/barrel above the market clearing level and with the excess acquire and develop the capital assets of all existing oil intermediaries while utilising their expertise as development partners with incentives made up of a share in any gains in energy efficiency for which they are responsible.

A Money based upon Value?

While an Energy Clearing Union provides the means for a rational energy policy it does not remove the driver for economic growth at all costs at the heart of our malaise: in other words, it would treat the symptom rather than the disease.

In order to do that we need to re-examine the monetary unit itself. It is possible to conceive of a global “petro-dollar” - based upon a set amount of energy - which would be capable of fulfilling a role as a genuine alternative to the dollar as a global means of exchange.

J M Keynes put forward at Bretton Woods 60 years ago an "International Clearing Union" coupled to a new monetary unit he called the "Bancor". Unfortunately, what we got is a "Central Bank - centric" monetary system configured around the World Bank/IMF and the Bank of International Settlements where the monetary units we use are essentially debts created by Central Banks and issued into circulation by banks as loans.

We take for granted that we need Banks to create credit but perhaps do not realise that this bank-created credit constitutes the bulk of our money supply. The effect of a monetary unit created as a debt is that - to take the UK as an example – more than 97% of all money in circulation has come into existence through the creation of loans (two-thirds of them in respect of mortgage loans secured against property) by "credit institutions" such as banks and building societies.

However, when credit institutions create money through a loan they do not create the money necessary to repay the interest on that loan. So the simple and inexorable mathematics of compound interest on the loans backing our money drives the unsustainable imperative for economic growth at the heart of our malaise.

We also take for granted that banks are entitled to charge interest on the credit they create.

The new site www.zopa.com which links would be borrowers together with would-be lenders essentially on a peer-to peer basis does for Banks what Napster did for the music industry – ie it dis-intermediates them.

But the Guarantee Society or Clearing Union goes further than this: credit is granted bilaterally and interest-free, and the only costs to the system user are the administration/ accounting costs and a share of any defaults. Furthermore, there is no reason why transactions in a “Clearing Union” need be settled in Central Bank issued money, since users may quite simply agree that they will accept “money’s worth” in (say) energy or commodities instead by reference to a Value Unit.

While Banks, Credit Unions or ratings agencies may be the managers of the system and of credit creation in this model, Banks would no longer are able to charge us for their use of our credit.

Some commentators, notably Susan George and George Monbiot, are advocates of an International Clearing Union as a solution. However, while an International Clearing Union is undoubtedly capable of being part of the solution it is also necessary to address the nature of the monetary unit itself so that we may achieve a global monetary unit based upon “Value” - such as an absolute amount of energy - rather than its antithesis – the Fed issued Dollar.

An International Energy Clearing Union could provide a platform both for a new and rational energy policy and -in conjunction with new energy investment institutions -for a global monetary system based upon Value rather than its antithesis - the US dollar.

This would literally "reverse the polarity" of Money to base it upon Value, rather than upon a claim over Value created by a Bank out of thin air.

How then might this come to pass? The fact of the matter is that the existing system is approaching a crisis point, and that a new alternative is emerging. A revolution is approaching – albeit a silent one – and when it is over we will wonder how it could ever have been otherwise.
>>

[hotsacks]

Very interesting hypothesis but I can't see it being instituted. The 'real value' problem with the current monetary system is most readily fixed by returning to the gold standard. If it was only an issue of real value,that would have been done. But Big Money saw how much more they could profit by Bretton Woods Voodoo and by God that's what they've done.Keep monetary policy fuzzy,Byzantine and monolithic - a shell game. Rational,fairminded,environmentally responsible fiscal policy is something we pray for but,like God,something we're not likely to see.
But that's someone speaking who passed Economics 101 by turning the professor on to Led Zeppelin.

[OilsNotWell]

Fascinating post, Kojock.

I have made a few posts on the inherent problem of fiat debt-based money, particularly that global wealth-stealing monstrosity that is the Federal Reserve Note.

Hotsacks is correct, in my opinion. Quite simply, we humans have not found a way to create, as you say, a unit of measurement that is simple, value-based, inherently trade-able, expandable (but based upon natural limits), and such that everyone is able to understand it readily, that is better than gold or silver. (As you may know, the U.S. Consitution was quite explicit on what money was to be.)

If, however, you can create a define a new "unit" of money that fulfills all of these points, by all means.

Perhaps our new unit of money, then, is the LITER of gasoline (metric, there's another problem for US/UK and rest of the world) of 87 octane, at a certain specific gravity, etc? Define this to be the "unit" of XXX ergs of "work". Hence, "power", the ability to do "work", is the new currency? So, everyone is to be paid in say, "energy" chips? Which are then a claim on real value asset such as coil, oil, gas, stored electricity, etc?

Can you see the inherent short-sidedness of this solution? How can you define a trade "energy" unit (say a barrel of oil), and have everything relate to it, when that unit itself is becoming more and more scarce? We are facing not only peak oil, but really peak energy a bit later on given all the current sources, and our ability to utilize these sources at a sustainable rate for a population that may see its resource limits breached? Overshoot is upon us unless we find a dramatically new source of energy. Did you know energy use per capita has been declining since 1977? Did you know food use per capita has been declining since 1980? The system is set for ultimate deflation and annihilation....UNLESS a new source of energy is created....

I agree with you and Catherine Fitts that a new currency, or medium of exchange is needed, but it won't be developed by means of a petroleum based market exchange, or even a carbon trading exchange, or even an energy-unit based exchange. They are declining in a rising population.

By your underlying reasoning, we could just as soon have a food-based monetary exchange. As food becomes scarcer, its value will be recognized even further. There's even a fairly good measure of food value, called the calorie, that applies whether it's chocolate or corn, too.

These may seem like off the wall ideas or comments, but there they are.

I keep coming back to gold and silver. The problem we have with our oil priced in dollars, and dollars being worth less over time, is that it's an unbacked currency along with fractional reserve banking. Eliminate interest (as you do...your BEST idea!), and we "drive the money-changers from the temple"....so to speak.

[OilsNotWell]

Not only that, but having a new monetary system based upon a fixed amount of energy, given that currently the most readily accessible and available and utilitarian source of energy is the Middle East. It would mean the wealth of the entire world shifted overnight...and THAT, my friend, won't happen as long as the West has the such overwhelming military superiority. You are correct in that a revolution is coming. But keep in mind that vested interests are there to fight any would-be revolutionaries....

If such an attempt to monetize oil were announced and made by OPEC powers, for example, every non-resource rich country in the world might just attack, don't you think?

I highly doubt any of what we are talking about is going to happen unless the West collapses....and then it would probably happen by necessity, not by intelligent design...ala "The Road Warrior"...

[Leanan]

Fascinating article. Are you the author?

I wonder what would have happened if we never went off the gold standard? The "problem" - there being not enough gold to sustain continued growth - might have actually been a solution.

[bobcousins]

That's invasion talk!

[PCoyle]

Dear Mr Cook,

I wonder if I could ask you a couple of questions about your proposed 'Energy Clearing Union'?

You have compared it to Maynard Keynes' proposals for a Clearing Union which he made at Bretton Woods. In Keynes' proposal, there was to be a new currency, the Bancor, which would have been a non-debt-based fiat currency. He also proposed that both positive and negative balances be charged interest, to ensure that no country ran a persistent trade surplus or deficit. I have always found Keynes' proposal very interesting ever since I read about it in Michael Rowbotham's book 'Goodbye America!' (although I agree with you that it would be better if the currency used were backed by something), so I was very interested to read about your proposal for a similar, although not identical, Clearing Union.

You have called your Clearing Union, an 'Energy Clearing Union', which makes me wonder what would be traded in this Clearing Union. Keynes proposed Clearing Union would have been for all international trade. As a result, under Keyne's proposal energy-importing countries would not necessarily have been running a deficit. But in your Energy Clearing Union, would it be possible to trade anything or only oil and other fossil fuels? If it would be possible to sell anything, why do you call it an 'Energy Clearing Union' - is this only because the currency used would be backed by oil? On the other hand, if only oil and other fossil fuels were traded in the Energy Clearing Union, then what would the oil exporters do with the money they earned?

I would be very grateful for any clarification you could provide as it is something I am very interested in.

[CARVER]

PCoyle,

I don't know if Mr. Cook will see your post, you might want to try to send him a pm or go to his website: Open Capital and contact him.

You might also be interested in the following white paper:
The Terra TRC White Paper (pdf) (by Bernard Lietaer).

[JoeCoal]

Great thread! Thank you, Cojock.

$this->bbcode_second_pass_quote('Leanan', 'I') wonder what would have happened if we never went off the gold standard? The "problem" - there being not enough gold to sustain continued growth - might have actually been a solution.

[PCoyle]

$this->bbcode_second_pass_quote('CARVER', 'P')Coyle,

I don't know if Mr. Cook will see your post, you might want to try to send him a pm or go to his website: Open Capital and contact him.

You might also be interested in the following white paper:
The Terra TRC White Paper (pdf) (by Bernard Lietaer).

[MrBill]

$this->bbcode_second_pass_quote('', 'H')i

For what it's worth, I used to be a Director of the UK's International Petroleum Exchange, and I'm currently involved in a Middle Eastern initiative to set up an alternative to the existing global market platforms.

Energy use is only part of the problem: we need a solution that also addresses the cause of the drive for economic growth which in turn drives demand. To do this we need to "reverse the polarity" of the monetary system.

The following article addresses this.

Best Regards

Chris Cook