What if the US government or military were to do something precipitous - say for example it provokes a disturbance that closes down the Strait of Hormuz - which makes oil go to over a hundred dollars a barrel, and thereby increases the (longterm?) demand for the petrodollar.
Or, say, what if the US were to do something else that disrupts China's or Europe's oil supplies more so than it does America's?
What if the world as a whole regarded these actions as intentionally disruptive and wished to disassociate themselves from the American dollar and the American-owned and USD-denominated (NYMEX and IPE) oil exchanges at all costs?
I'm not necessarily talking about the Iranian Oil Bourse, either. Couldn't the other industrialized nations begin to purchase their supplies from the oil producers simply by using the telephone and e-mail, and then by wiring proceeds between bank accounts?
PeakOil is You
Question for oil traders
First unread post • 5 posts
• Page 1 of 1
Question for oil traders
by Zentric » Sun 05 Feb 2006, 18:21:51
-
Zentric - Tar Sands
- Posts: 709
- Joined: Mon 14 Mar 2005, 04:00:00
Re: Question for oil traders
by kochevnik » Mon 06 Feb 2006, 02:56:26
I trade oil. Most people seem to have the mistaken idea that oil traders actually buy and sell oil. This is not true. What we do is buy contracts for future deliveries of oil. I don't know any trader who has actually taken delivery of said oil. It's just a big monopoly game to provide an ability to provide price insurance for those companies like airlines whose profit margins are very dependent on oil.
Is it possible that some combination of events will cause the NYMEX to close ? I think it's inevitable. But I also don't think it is going to happen anytime soon. I would guess prices would have to triple before it ever even became a consideration - and considering the huge pyramid of derivatives outstanding around the world, if the oil markets were closed, the prices would be settled on that last day and winners and losers would just take their money and go home, little the worse for wear.
Remember that during the 70's we had wage and price freezes too. This tactic will undoubtedly be attempted once again in the future and it will precede the possible closing of the exchanges.
- kochevnik
- Lignite
- Posts: 328
- Joined: Fri 20 Aug 2004, 03:00:00
Re: Question for oil traders
by MrBill » Mon 06 Feb 2006, 06:15:37
$this->bbcode_second_pass_quote('Zentric', 'W')hat if the US government or military were to do something precipitous - say for example it provokes a disturbance that closes down the Strait of Hormuz - which makes oil go to over a hundred dollars a barrel, and thereby increases the (longterm?) demand for the petrodollar.
Or, say, what if the US were to do something else that disrupts China's or Europe's oil supplies more so than it does America's?
What if the world as a whole regarded these actions as intentionally disruptive and wished to disassociate themselves from the American dollar and the American-owned and USD-denominated (NYMEX and IPE) oil exchanges at all costs?
I'm not necessarily talking about the Iranian Oil Bourse, either. Couldn't the other industrialized nations begin to purchase their supplies from the oil producers simply by using the telephone and e-mail, and then by wiring proceeds between bank accounts?
Or, say, what if the US were to do something else that disrupts China's or Europe's oil supplies more so than it does America's?
What if the world as a whole regarded these actions as intentionally disruptive and wished to disassociate themselves from the American dollar and the American-owned and USD-denominated (NYMEX and IPE) oil exchanges at all costs?
I'm not necessarily talking about the Iranian Oil Bourse, either. Couldn't the other industrialized nations begin to purchase their supplies from the oil producers simply by using the telephone and e-mail, and then by wiring proceeds between bank accounts?
I agree about kochevnik's point that oil bourses are used for price discovery and not for physical transactions. A point that I have tried to explain many times in many posts, but which people just don't seem to want to understand. It must be me. Sorry.
However, in your post there are a lot of what ifs?
Oil prices dropped on the London bombing. Why? The market was long and looking for an excuse to take profit and traders rightly or wrongly assumed another terrorist attack may slow the world economy as did 9/11 and therefore lead to lower oil demand.
Ditto for Katerina/Rita. After the initial spike post-Katerina, oil prices fell even though Rita looked like it was ready to destroy what was left of any Gulf of Mexico oil refining capacity because again traders felt rightly or wrongly that this would lead to severe disruptions and lower demand through a distruption in economic activity.
You can second guess them all you want, but traders do not focus on the current event, but on the next big event just over the horizon. That is why it is hard to speculate what the current price is telling you when it is at odds with obvious fundamentals.
So what ifs? Oil prices may spike because the US leaves the Gulf, leaves Japan, leaves S. Korea and all its other overseas bases because they may correctly or incorrectly assume that this might cause regional powers, N. Korea, China, Iran, etc. to become more aggressive, and when the US is not defending open access to Gulf oil then who is? The EU is not up to the job.
What ifs? What if China invades Taiwan? Oil prices may spike because the world would expect a response from the USA even though there is no likely response. A nuclear war or protracted land war over Taiwan? It does not make sense. However, markets do not like risk.
What ifs? What happens if terrorists do get their hands on a dirty bomb and explode it in NYC or LA or Washington or Houston? Oil price up on uncertainty or oil price down on a global downturn from the fallout?
What ifs? What if bird flow disrupts commerce and trade while killing off a hundred million people or so? Likely oil price down on lower economic growth, but if you are an importer and cannot take delivery of oil then regionally most likely to result in shortages and therefore higher prices, rationing and hoarding.
So net/net, I would hazard a guess that $65.70/54.75 euros/7802 yen takes all those what ifs, plus all others, world growth, interest rates, inflation, supply and demand, etc. and aggregates them into one spot price for oil. Again, you can second guess them all you want.
What happens the US does nothing to upset its trade partners and therefore they have no reason to switch away from a system which is efficient and already in place? I guess that possibility is also in the price of $65.70? ; - )
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
-
MrBill - Expert
- Posts: 5630
- Joined: Thu 15 Sep 2005, 03:00:00
- Location: Eurasia
Re: Question for oil traders
by Petrodollar » Mon 06 Feb 2006, 12:36:49
Zentric asked
$this->bbcode_second_pass_quote('', 'W')hat if the US government or military were to do something precipitous - say for example it provokes a disturbance that closes down the Strait of Hormuz - which makes oil go to over a hundred dollars a barrel, and thereby increases the (longterm?) demand for the petrodollar.
Or, say, what if the US were to do something else that disrupts China's or Europe's oil supplies more so than it does America's?
What if the world as a whole regarded these actions as intentionally disruptive and wished to disassociate themselves from the American dollar and the American-owned and USD-denominated (NYMEX and IPE) oil exchanges at all costs?
$this->bbcode_second_pass_quote('', 'W')hat if the US government or military were to do something precipitous - say for example it provokes a disturbance that closes down the Strait of Hormuz - which makes oil go to over a hundred dollars a barrel, and thereby increases the (longterm?) demand for the petrodollar.
Or, say, what if the US were to do something else that disrupts China's or Europe's oil supplies more so than it does America's?
What if the world as a whole regarded these actions as intentionally disruptive and wished to disassociate themselves from the American dollar and the American-owned and USD-denominated (NYMEX and IPE) oil exchanges at all costs?
That is an interesting question. Unfortunately, the geopolitical risk with regard to the current situation in Iran is the one scenario that I think could produce the outcome that you speculated about. Indeed, the possability for miscalculation by either the US leadership or Iranian leadership remains high.
So, given the cliche: "Those who do not learn from history are doomed to repeat it." Has a nation or a group of nations made a strategic mistake that almost produced a similar effect that you mentioned (i.e. economic warfare)? Yes, and it was about 50 years ago...
As a former student of military history (my undergraduate minor), I think the 1956 Suez Crisis serves as perhaps the most important history lesson with regard to the scenario that you describe. What happens in 2006-2007 with regard to Iran may determine whether or not we see what I refer to in my book as the "rogue nation hypothesis."
America’s Achilles Heel: Lessons from the Suez Crisis of 1956
$this->bbcode_second_pass_quote('', 'A') multilateral approach to these core problems is the only way to proceed. The US is strong enough to dominate the world militarily. Economically it is in decline, less and less competitive, and increasingly in debt. The Bush people’s intention appears to be to override economic realities with military ones, as if there were no risk of economic retribution. They should be mindful of Britain’s humiliating retreat from Suez in 1956, a retreat forced on it by the United States as a condition for propping up the failing British pound.
— Peter Dale Scott, author and professor, University of California at Berkley, May 2003(1)
The petrodollar-recycling system is now under pressure from a competing currency, a problem that has been exacerbated for the US by political tensions arising from the Iraq War and from US neoconservative ideology. The Bush administration probably believed that the occupation of Iraq and the installation of large and permanent US military bases there would keep the remaining OPEC producers from even considering switching the denomination of their oil sales from dollars to euros. It appears that any attempt by OPEC members in the Middle East or Latin America to do so will be met with either overt or covert expressions of US power.
However, the blowback against US foreign policies, including nuanced statements by foreign leaders, reveals the limitations of the unilateral hard power that lacks international support. The lesson is clear: the US cannot unilaterally overthrow sovereign nations at will under the pretext of an expanding “war on terror” without considering the world’s potential to retaliate economically by abandoning the dollar.
If Washington continues to follow neoconservative doctrine, it is far from inconceivable that operations could be pursued in an attempt to overthrow the Iranian government and thwart the emergence of the Iranian bourse. These actions could result in disaster for the US at many levels. It is hard not to see why the “war on terror” has shaken the willingness of foreigners (including OPEC) to invest in American debt.(2) This blowback extends not only to the elite foreign money handlers who have publicly stated that the US dollar is not secure, but also to the masses widespread anger about the ongoing war in Iraq. The Pentagon itself has officially noted that anti-American sentiments in the Arab world has reached unprecedented levels.(3)
There is an important historical parallel in which currency warfare proved decisive in thwarting military operations by outsiders in the Middle East. In July 1956 Egyptian president Nasser nationalized the Suez Canal, in which the British held a 44 percent interest.(4)
Despite public opposition to the use of force, the British, French, and Israelis developed a secret plan in Sèvres, France, in which the Israeli army was to invade Egypt and occupy the canal; British and French troops would then retake the canal under the guise of intervention to protect Egypt. On November 5, 1956, the Israelis attacked, and a joint Anglo–French force landed at Port Said. British and French paratroopers attacked Canal Zone 5, killing approximately 1000 Egyptians, mostly civilians.
President Eisenhower was furious when he learned that this invasion had been arranged by the British and French governments without his knowledge. Subsequently, Eisenhower suspended aid to Israel, refused to loan money to the UK, blocked its application for a loan from the IMF, and threatened to sell US holdings of the British pound.(5) Due to US pressures, a fiscal crisis erupted in the UK as the value of the pound sterling plummeted. Diplomatically isolated, the foreign troops were withdrawn from the Suez Canal. Shortly thereafter, British prime minister Eden resigned in disgrace. Devastating currency devaluation ended the Suez Crisis and marked the final episode of unilateral British imperialism during the 20th century.
Perhaps US leaders who espouse the neoconservative philosophy of global domination should heed the history lesson provided by the 1956 Suez Crisis. The events of the 2003 Iraq War suggest that the global community will not tolerate a US empire that ignores international law. As the tragic quagmire in Iraq demonstrates, America cannot afford to engage in unilateral military operations against nations that do not pose an imminent security threat. The US empire has a sword of Damocles dangling over it. Several oil-producing states (i.e. Russia) could collectively drop that sword by moving to a monopoly petroeuro system.
Even if the US behaves, the emergence of a basket of currencies with both the dollar and euro is probably inevitable, which will require multilateral negotiations if such a system is be implemented in a coordinated manner.(6) Additionally, China received 14-15% of its oil from Iran, and in October 2004 signed a 25-year agreement with Iran for oil and gas trades. (note: this was the largest deal in Iranian history, between $70-$100 billion dollars). China's surplus holdings of hundreds of billions in US gov't debt/dollar holdings is yet another Sword of Damocles, and Bejing could be forced into action if the neocons make a mistake regarding Iran's nuclear program.
While neither the industrialized nations nor OPEC wish to drop the sword of Damocles on the dollar, considering the resulting economic dislocations, such actions would take place as a desperate effort to thwart additional belligerent US military conflicts in the Persian Gulf region. Attempting to hinder US imperialism here is conceivable considering that the euro has become a viable alternative as a world reserve currency — and petrocurrency. Furthermore, as the global community quietly awakes to the realities of Peak Oil, the industrialized nations will attempt to prevent any further unilateral US actions to “restructure” the Middle East via destructive force. The risks of disrupting the global oil supply or physically damaging the associated oil pumping and shipping infrastructure are simply too ominous.
Any such decision by the Bush administration to intervene unilaterally in Iran could result in the realization of the “rogue nation hypothesis” — a collective abandonment of the dollar to thwart US imperialism. Although unlikely, if this fateful event were to occur, it would create the historical irony of a new Suez Crisis scenario similar to President Eisenhower’s actions that ended British imperialism 50 years ago.
Certainly from the perspective of OPEC and the industrialized nations, preserving the critical oil production infrastructure in Iran, Saudi Arabia, and elsewhere would likely outweigh the allegiance to the dollar’s supremacy and the desire for stability within the current international economic order. Additionally, from China’s viewpoint, its huge oil and gas deals established in October 2004 effectively drew “a line in the sand” around Iran. Hence it is doubtful that America can conduct military operations against Iran without fear of China divesting itself of US debt instruments.
Given America’s structural debt levels, overstretched military, and international isolation, could the US economy withstand a massive divestiture of dollar-denominated assets? The answer should be obvious. Consequently, if US policy makers continue pursuing unilateral, unprovoked wars in an effort to gain military control over the world’s energy supplies while toppling sovereign governments, the US should not expect the global community to continue purchasing its debt and thereby funding these military campaigns.
This broad movement away from the dollar circa 2002-2006 does not appear to be based purely on the structural imbalances of the US economy, since it has carried a trade account deficit every year since 1976. Massive deficit spending was tolerated in the early years of the Reagan administration — but of course, the US was still the world’s largest creditor nation then. It is now the world’s largest debtor.
Tragically, the arrogance of the current Bush administration with its strange avocation for unilateral warfare, its dismissal of various international accords, and its apparent disregard for international law have created tremendous international blowback. This rapid deterioration of America’s international stature is apparent in global surveys of both “friendly” and “hostile” nations.(7) The consequences of this blowback is likely manifested with the systemic drawback from the dollar. During the run-up to the 2003 invasion of Iraq, governments in Asia, Russia, and Canada all significantly reduced their US dollar holdings.(8-10) Despite the lack of media coverage about this trend, the movement away from the dollar on the eve of the Iraq War was widespread. Joseph Quinlan, a global economist with Johns Hopkins University, summarized these risks just before the outbreak of the war:
$this->bbcode_second_pass_quote('', 'T')oday if you have the US acting [in Iraq] against world opinion, there could be an even faster pullback out of dollar-denominated assets …. How we go to war influences the rate of decline of the dollar.(11)
Unlike 1991’s Desert Storm, the early tactical success in Iraq has not lead to any increases in the dollar’s value. In fact, the war accelerated its downward trend — especially among the OPEC members and Russia. History has shown that opposing geopolitical alliances will form when an empire begins excessive military adventurism, and the openly stated neoconservative goal of US global domination will naturally be resisted by other nations.
The following statement summarizes the risks inherent in neoconservative doctrine:
$this->bbcode_second_pass_quote('', 'O')ne of the dirty little secrets of today’s international order is that the rest of the globe could topple the United States from its hegemonic status whenever they so choose with a concerted abandonment of the dollar standard. This is America’s preeminent, inescapable Achilles Heel for now and the foreseeable future.
That such a course hasn’t been pursued to date bears more relation to the fact that other Westernized, highly developed nations haven’t any interest to undergo the great disruptions which would follow — but it could assuredly take place in the event that the consensus view coalesces of the United States as any sort of ‘rogue’ nation. In other words, if the dangers of American global hegemony are ever perceived as a greater liability than the dangers of toppling the international order. The Bush administration and the neoconservative movement has set out on a multiple-front course to ensure that this cannot take place, in brief by a graduated assertion of military hegemony atop the existent economic hegemony.
— Anonymous former US government employee
Only will time will tell, but let us hope that neither side makes a mistake similar to what British PM Eden did 50 years ago...
Footnotes:
1. Peter Dale Scott, “Bush’s Deep Reasons for War on Iraq: Oil, Petrodollars, and the OPEC Euro Question,” updated May 27, 2003, http://ist-socrates.berkeley.edu/~pdscott/iraq.html
2. Steve Johnson and Javier Blas, “OPEC Sharply Reduces Dollar Exposure,” Financial Times, December 6, 2004.
3. Neil Mackey, “US Admits the War for ‘Hearts and Minds’ in Iraq Is Now Lost,’ Sunday Herald, December 5, 2004, http://www.sundayherald.com/46389.
4. Derek Brown, “Millennium in Review, Day 479, 1956–1957,”Guardian Unlimited (UK), http://www.guardian.co.uk/Millennium/0, ... 99,00.html.
5. Ibid.
6. “Should Oil Be Priced in Euros?”Alexander’s Oil and Gas Journal, 9(4), February 25, 2004; Source: Khaleej Times,
http://www.gasandoil.com/goc/features/fex40825.htm
7. Martin Sieff, “Zogby: Iraq War a Mistake on Many Levels,” Arab American Institute, March 18, 2003, http://www.aaiusa.org/news/aainews031803.htm.
8. John Garnaut, “US Dollar Losing Its Position As Asia’s Reserve Currency,” www.rense.com, July 17, 2002, http://www.rense.com/general27/rec.htm.
9. "US Dollar on Shaky Ground,” Associated Press, 24 January 2003,
10. “Canada Sells Gold, Keeps Shift into Euro Reserves,” Forbes, January 6, 2003,
11. Grainne McCarthy, “Dollar’s Decline Starting to Accelerate, Rattling Nerves,” Dow Jones Newswire, January 25, 2003, http://www.ratical.org/ratville/CAH/lin ... arDec.html.
Last edited by Petrodollar on Mon 06 Feb 2006, 15:23:10, edited 1 time in total.
-
Petrodollar - Coal
- Posts: 406
- Joined: Tue 19 Jul 2005, 03:00:00
- Location: Maryland