[Falconoffury]

I have heard a lot about proposed oil bourses using alternative currencies for oil transactions, but I have been wondering just how much they can affect the reign of the petrodollar.

Upon further thought, I have to wonder just how much power the petrodollar will hold after peak oil and a worldwide decline of oil. Can the petrodollar allow the USA to continue using as much oil as it needs post peak?

We know that, as oil declines worldwide, some countries will be hit harder than others because they won't be able to buy the oil. We are already seeing this with Zimbabwe. The countries with the most petrodollars are in the best shape to survive the early years after peak oil (theoretically). Since petrodollars come from the USA, would it stand to reason that the USA can just continue buying up whatever oil it needs, regardless of how much is left on the market?

Oil declines by 2 mbpd for one year? No problem for the USA. They can create as many petrodollars as they need to buy whatever is on the market. Some other countries are going to lose that oil.

So... am I a buffoon for posting all this, or am I on to something?

[EnergyUnlimited]

It is difficult to say, how markets will behave once PO is recognised.
The future of petrodollar would be much brighter, if US is not so much indebted.
If the global conclusion is that US is never going to pay its debt (short of printing out A LOT of money), than more and more countries will no longer accept dollars.
The same will hold true for most of oil exporters, who are usually hostile towards US.

OK, Saudi royal family can always be bribed (and petrodollars will be accepted), but any islamic uprising there would finish the party.
Iraque will give away their oil for free (no other choice there...) and Mexicans can be forced to accept dollars (but their oil reserves are dwindling).
Other oil exporters are likely to reject dollar payments few years into the future.

Taking into account corrupt Saudi royals and a fact that US has now very rich oil fields in Iraque, you may say that collapse of petrodollar may not be relevant to ability of US to secure necessary oil within next 10-15 years AT LEAST.
However relations with Israel may have to be timely revieved - after all you HAVE TO keep those corrupt Saudi royals in charge and this may be more and more difficult as time pass...

[rwwff]

$this->bbcode_second_pass_quote('EnergyUnlimited', 'T')aking into account corrupt Saudi royals and a fact that US has now very rich oil fields in Iraque, you may say that collapse of petrodollar may not be relevant to ability of US to secure necessary oil within next 10-15 years AT LEAST.
However relations with Israel may have to be timely revieved - after all you HAVE TO keep those corrupt Saudi royals in charge and this may be more and more difficult as time pass...

[SILENTTODD]

$this->bbcode_second_pass_quote('rwwff', '')$this->bbcode_second_pass_quote('EnergyUnlimited', '
')US forces are based in Saudi Arabia specifically to head off this problem. No coup staged by the natives that live in Arabia could ever survive against the American forces that are based in Arabia. A revolt could make a mess of oil production, but it'd have no chance of toppling the Saudis.

You don't think Zee King granted American basing priveledges because our jets look cute..

[mekrob]

$this->bbcode_second_pass_quote('', 'Y')ou don't think Zee King granted American basing priveledges because our jets look cute..

[Kingcoal]

Financial markets require order. Order doesn't happen naturally; it must be produced and maintained by the wise use of force. Without a big stick to enforce rules, all markets degenerate into anarchy. I think that post petrodollar markets will be like that, deals will be negotiated based on various methods of payment. In such a world, the price of everything will fluctuate wildly, depending on who you are, where you are and the cards you hold.

[rwwff]

$this->bbcode_second_pass_quote('mekrob', '')$this->bbcode_second_pass_quote('', 'Y')ou don't think Zee King granted American basing priveledges because our jets look cute..

[CARVER]

$this->bbcode_second_pass_quote('Falconoffury', '.').. would it stand to reason that the USA can just continue buying up whatever oil it needs, regardless of how much is left on the market?

Oil declines by 2 mbpd for one year? No problem for the USA. They can create as many petrodollars as they need to buy whatever is on the market. Some other countries are going to lose that oil.

[Euric]

$this->bbcode_second_pass_quote('Falconoffury', 'I') have heard a lot about proposed oil bourses using alternative currencies for oil transactions, but I have been wondering just how much they can affect the reign of the petrodollar.

Upon further thought, I have to wonder just how much power the petrodollar will hold after peak oil and a worldwide decline of oil. Can the petrodollar allow the USA to continue using as much oil as it needs post peak?

[MrBill]

The problem is to separate out the dollar's role as the currency of choice for international transactions, both oil and non-oil, from the relative size of the US economy, as the consumer of last resort, plus the size and depth of its capital markets, and then discount those advantages due to the US' large external imbalances. The US current deficit consumes 70% of the world's current account surplus, including the external savings of OPEC and non-OPEC oil producing countries.

$this->bbcode_second_pass_quote('', 'C')hinn and Frankel list the four conditions for maintaining a reserve currency as 1)patterns of output and trade 2) countries financial markets, 3) confidence in the value of the currency, 4) network externalities.

I will take it that at least points 2 and 3 are crucial to the maintenance of a comparative advantage as a store of value, whilst 1 and 4 are asymmetrically important.

http://www.ssc.wisc.edu/econ/archive/wp2006-01.pdf

The implications of this form of comparative advantage are profound however, in particular when the maintainance of the strength of the currency as an imperative runs contrary to the requirements of the economy.

That said, i don't believe that Bernanke and Co. will stop, or even pause in interest rate tightening. I may well be wrong here, but too much stands against it. Increased inflation as the cost of oil rises due to devaluation, and Walmart feels a squeeze on its profit margins.

further, i don't believe that a devaluation will help to boost exports, or even drastically reduce imports, as a lack of substitutability of chinese made goods, efficient japanese and german cars, etc, etc, short of an outright recession. Europe has lived with a 70% devaluation of the dollar since the 1970's and is still competitive in US markets. I think there is a higher tolerance for Euro appreciation than many people think. For one it provides a buffer against oil induced deflation, and increases credibility.

Krugman wrote about Germany in '99

"But the world has changed in a way that seems to favor flexibility over discipline. With technology and markets in flux, not everything worth doing is worth doing well; in an environment where deflation is more of a threat than inflation, an obsession with sound money can be a recipe for permanent recession."

But its an obsession with sound money that is required to maintain a store of value. The currently inflated oil prices, asset markets, etc, are the result of bad monetary practices and lead directly to risk aversion. Its circular. And when risk aversion grows discipline is definitely advantageous over flexibility.

Expect interest rates to continue rising or for the euro to quickly reach 1.30 and head rapidly for 1.35, and that's only the beginning!


Written by Guest on 2006-08-02 09:02:01

[pitzel]

But who says that oil is actually paid for in dollars?

Yes we price oil in dollars, but at the end of the day, Saudi Arabia, Iraq, and the other exporters accept all currencies, whether those currencies be dollars, euros, pounds, gold, silver, crates of prescription drugs, etc.

The US dollar is just a unit of price, not an actual unit of exchange, unless the exporters are actually accepting paper dollars. Its not necessary to hold even $1 in reserves for a country to purchase oil, just as long as they have currency or goods of value to exchange for oil.

This talk of the Sauds being given a bunch of US dollars in exchange for oil, and the conspiracy theories about the US military 'backing' Saudi Arabia are complete nonsense.

[Petrodollar]

Pitzel stated:
$this->bbcode_second_pass_quote('', 'Y')es we price oil in dollars, but at the end of the day, Saudi Arabia, Iraq, and the other exporters accept all currencies.

[MrBill]

Petrodollar wrote:
$this->bbcode_second_pass_quote('', '[')b]I should note that Washington is now quite angst at Putin. Why? Russia is introducing petrorubles via their RTS exchange, and Iran is scheduled to open an euo-based oil prcing bourse in late September on Kish Island. Back in 1978 Kuwait floated the idea within OPEC for a "basket of (3) currencies" for oil pricing and transactions (US dollar, Japanese yen and German mark), but the Sec. of the US Treasury personally flew out to Saudi Arabia in an effort to squash this proposal by Kuwait, and in the declassified memo of his "talking points," I'll simply note this sentence from an internal memo dated March 1978:

[marko]

On a somewhat different note, I am curious as to your opinion, Mr. Bill, on the likely effect of a Fed interest-rate pause next week, now considered likely, despite the signs that inflation is accelerating.

Do you think a pause would lead to a slide in the value of the dollar? Could this lead to more diversification away from dollars in central bank reserves, steepening the slide? Might this lead to a rise in market dollar rates, despite the Fed's (in)action?

I appreciate your experience and perspective and look forward to your insights.

[MrBill]

$this->bbcode_second_pass_quote('marko', 'O')n a somewhat different note, I am curious as to your opinion, Mr. Bill, on the likely effect of a Fed interest-rate pause next week, now considered likely, despite the signs that inflation is accelerating.

Do you think a pause would lead to a slide in the value of the dollar? Could this lead to more diversification away from dollars in central bank reserves, steepening the slide? Might this lead to a rise in market dollar rates, despite the Fed's (in)action?

I appreciate your experience and perspective and look forward to your insights.

[Petrodollar]

$this->bbcode_second_pass_quote('', 'Y')ou may note that the RTS oil contract is traded in USD, but is settled in rubles.

[MrBill]

Sorry, Petrodollar, already on my weekend, so no time to properly research this.

Let us just say, given from where the ruble came, I will take it more seriously when it goes back to 6 rubles to the dollar as opposed to 26 rubles as a store of value. Let us not forget the default in 1998! Although I work for them, they have no grounds to lecture when their currency weakens from 5-6 to 32 and is now at 26-27 or do you see it otherwise?

Also, may, could, would, maybe are all conditional, not absolutes. You always make the mistake of interpreting individual remarks as being public policy. For example in the case of Lukoil where you eroniously drew the conclusion that Lukoil 'could' sell oil in euros to Lukoil 'will' sell oil in euros.

In any case, you make the mistake of bringing everything back to, and solely to, petrodollar recycling, ignoring Asian central banks and other investors that fund the US current account deficit for trade reasons.

For you it is always black & white. For me it is someone will finance the current account deficit with their current account surplus, regardless of in which currency or how the surplus is generated, oil or manufacturing. And vice versa, if foreign creditors refuse to fund the deficit than domestic savers will be forced to leading to higher real interest rates and perhaps a weaker US dollar.

In any case, no time to read your links, but I will come back to them. Thanks. Have a nice weekend.

[Petrodollar]

$this->bbcode_second_pass_quote('', 'S')orry, Petrodollar, already on my weekend, so no time to properly research this.

[CARVER]

$this->bbcode_second_pass_quote('Petrodollar', '.').. Just to reinforce my point: In 1974, the price of oil went up by 400% (in dollar pricing), the total IMF debt of the developing world (i.e "Third World") went in one year from $8 billion (1973) to $32 billion (1974) - that is an increase of 400% - and it was due categorically to the 400% increase in the price of OPEC's oil. These poor countries had to borrow billions from the IMF for their oil imports - debts that had to be re-paid in dollars of course. That is the beauty of dollar hegemony (via both OPEC and IMF) for the perspective of the "Washington Consensus."

So, the historical facts are clear: demand for dollars/petrodollars in 1974 went up 400%, and that ingeniously allowed the US to fund its emerging trade deficit. ...

[MrBill]

Petrodollar wrote:
$this->bbcode_second_pass_quote('', 'F')or example, a poor sub-Saharan country in Africa that does not buy or trade much of anything with the US but does buy oil from OPEC may not want to finance the US trade account deficit - but it does anyway by virture of the petrodollar recycling system.