[mefistofeles]

$this->bbcode_second_pass_quote('', 'P')rice discovery is via a futures & options exchange like the ICE/NYMEX/CBOT/CME/LSE etc., but physical contracts are denominated in whatever currency two counterparts wish. Very few transactions on the exchange actually result in physical delivery. Most physical delivery is done point to point without ever being priced on any exchange.

[Doly]

$this->bbcode_second_pass_quote('MrBill', '
')It is very convenient for everyone involved if the transaction currency is in dollars as then either counterpart can hege themselves via futures or options and not run any foreign exchange risk.

[MrBill]

$this->bbcode_second_pass_quote('Doly', '')$this->bbcode_second_pass_quote('MrBill', '
')It is very convenient for everyone involved if the transaction currency is in dollars as then either counterpart can hege themselves via futures or options and not run any foreign exchange risk.

[mefistofeles]

What on earth do you do for a living Mr. Bill you seem to know ALOT about oil trading? Lol you probably had quite a jump on peak oil versus most of us here.

Me I'm just a guy who sells insurance and some mutual funds on the side.

Although I'm quite impressed with your explanation I think it will probably blow most of the people on this board of out the water so here's a simpler version.

Buyers and sellers use futures contracts to buy or sell something tommorrow at today's prices.

A good example of this would be Southwest Airlines. Southwest has good cash flow so they can buy jet fuel at a set price in future. Let's use the figure $64.00 for delivery in January 2009. So if he price is higher on January 2009 (Let's say $120) then Southwest has bought its fuel at a steep discount buy using the futures market to pay for it today but take delivery tommorow.

Conversely as an energy producer if you've just read the latest CERA report talking about lower oil prices and are panicking at the thought of lower energy prices in 2009($40.00) maybe selling to Southwest at $64.00 for January 2009 looks like a pretty good deal instead of selling for $40 tommorrow.

Both parties are able to contend with potential risk.


Since the futures markets deal with times frames ranging from months to years the number of dollars in play would be enormous.

Of course since every major energy producer and buyer will be probably be quite active in this market that means that the players in the futures markets must be willing to accept as well as accumulate large dollar reserves.

However as the author of Petrodollar Warfare rightly pointed out if the price of oil increases (i.e. tripple 2001 values) but the volume remains the same or even expands you need ALOT more dollars to play the same game. This makes the dollar valuable and gives all the major energy players an incentive to hold and acquire dollars.

However if it was possible to trade oil futures directly in Euros (something that Europeans have a strong incentive to do) then the demand for dollars would decrease. Resulting in losses to whoever is holding dollars. If this adjustment takes places slowly then it would simply be a gradual but unpleasant process for the US.

However if this adjustment takes place quickly then all hell would break loose as major players holding dollars try to cut their losses and dump their dollars as quickly as possible.

As an economist I don't know if either scenario would play out with opening of the Iranian oil bourse but I do know this: OPEC and Russia trade more with Europe than they do with the United States. Some of the largest players in the energy market really do have an incentive to use the Euro for trading oil versus the dollar.

From an intuitive commercial standpoint its better for those buyers and sellers to move to use Euros to hedge oil futures. Of course that's bad for the United States.

I sincerely believe that's why we stand closer to the precipace of war than anyone would care to admit.

[grabby]

I heard they are having trouble selling bonds now for the first time, no one wants the dollars as much as expected


Inflation is how republicans tax you without taxing you, you have less money and you don't know it.

Taxes is how theDemocrats tax you at least they are simple minded about it. "Gimme your dough"
Democrats do this, they are strict economists, and they just take the money right out of your bank and you right the check or go to prison. (They can do this cause they ahve the lawyers on their side.

The best scenario for the poor middle class is when we go from a democratic government to republican switch cause they CUT taxes and inflation hasnt caught up with you yet.

the worst is when we go from republican to democratic cause the inflation is catching up and making everything more expensive, now your going to get direct taxes raised right and left. Both to GET back the taxes the REpubs cut and to get MORE tax money cause INFLATION makes it necessary.
double whammy.

This republican to democratic switch is perfectly bad timing for 90 dollar a barrel oil.

I believe it is going to become very hard for a lot of people in 06 and 07 in many ways to just survive.

NOW the REPUBS KNEW THIS WAS COMING, the republican cycle is almost over, and the democratic cycle is starting, the repubs will hunkjer down, let the people get ticked as the economy fails and the Dems will have to do what they hate, TAKE LOANS or go bankrupt, usually 1 4 year term sometimes two if they are good weasels, and the Repubs are back for another cycle, whereupon the promptl;y cut taxes and print money setting up the next cycle.


the easy bankruptcy is removed.

Now with bankruptcies you have to pay back the debts incurred.
They are expecting a lot of them. And you will be stuck paying for a long time. as more and more housing loans fail and the banks collect their homes they will get rich in land about the only thing of value any more.

If you were suckered into mortgaging your home to consolidate debt, you are probably not going to be able to pay your loan as jobs get scarce, I would sell the house now and get one that is payed off,

do it quick even if it turns out toe be a mobile as long as it is yours.

[MrBill]

$this->bbcode_second_pass_quote('', 'W')hat on earth do you do for a living Mr. Bill you seem to know ALOT about oil trading? Lol you probably had quite a jump on peak oil versus most of us here.

[TommyJefferson]

$this->bbcode_second_pass_quote('mefistofeles', '.')..if the price of oil increases... but the volume remains the same or even expands you need ALOT more dollars to play the same game. This makes the dollar valuable and gives all the major energy players an incentive to hold and acquire dollars.

[Doly]

$this->bbcode_second_pass_quote('MrBill', 'H')owever, at least they do not run translation FX risks as if DEA/Aral hedge future purchases and Saudi Aramco hedge future sales by using futures & options traded on an exchange then both the cash (the crude oil) and the hedge (futures & options) are both denominated in dollars.

[Petrodollar]

During the oil shocks of 1973-1974 and again in 1979-1980, as the price of oil went up dramatically, the demand/liquidity of US debt obligations also went up dramatically. (Developing nations aggregated debt to the IMF went from approx $9 billion in 1973 to about $35 billion in 1974. In otherwords, as oil prices went up 400%, debt to the IMF went up 400% - not too surprising b/c dollars are the currency used for oil transactions. These debts of course had to be paid in dollars, and that helped finanace the US trade deficit, which first appeared in 1971, and became permanent in 1974 or 1976)

This dollar-oil price correlation still exists. The more than doubling increase in the price of from 2002 to 2006 dramatically increased the volume of dollars/petrodollars held outside the US. This phenomenon existed even when the Fed Reserves interest rates were at rock bottom lows 2from 002 until June 2004, when it began to gradually increase the rate. However, an extra $1.5 trillion of liqudity has been injected into the system to buy today's higher priced oil. Here's an example:

http://www.atimes.com/atimes/Global_Eco ... 6Dj01.html

$this->bbcode_second_pass_quote('', 'E')CONOMIC FORECAST, 2006
Upswings and downfalls
By Jephraim P Gundzik

As of mid-2005, foreign investors, including foreign central banks, held an estimated $6.6 trillion worth of US bonds and equities, up from less than $4 trillion in mid-2002. About 60% of this money is parked in long-term US Treasury, agency and corporate bonds. The rapid and sustained increase of international oil prices is the main factor behind the growth in foreign holdings of US securities and the external supply of dollars used to purchase these securities.

The risk is high that foreign investors will increasingly question the credibility of the US Federal Reserve as monetary policy becomes more accommodative in the face of rising inflation. The strong advance in gold prices in recent months indicates that the Fed’s credibility is already under scrutiny. By the second quarter of 2006, foreign sales of long-term US bonds and the sliding value of the dollar could push market interest rates sharply higher.

[Daryl]

$this->bbcode_second_pass_quote('Doly', '')$this->bbcode_second_pass_quote('MrBill', 'H')owever, at least they do not run translation FX risks as if DEA/Aral hedge future purchases and Saudi Aramco hedge future sales by using futures & options traded on an exchange then both the cash (the crude oil) and the hedge (futures & options) are both denominated in dollars.

[mefistofeles]

$this->bbcode_second_pass_quote('', 'I') did not understand that simply the -volume- of trading done in a particular currency can affect its value and desirability.

I hope I am understanding this correctly.

[Daryl]

Inflation is a very important issue also. A currency must have an independent central bank dedicated to controlling the growth of the money supply. Government regulations of captial flows is another concern. Small countries are very unattractive for these reasons. Government stability is another issue, even if you are investing in illiquid assets, like real estate or plant and equipment. The list of stable countries with "hard" currencies is a short one. This is the primary reason the USD is dominant. Only since the introduction of the Euro 5 years ago has it even become conceivable to speak of another currency as an viable alternative. Still, the Euro has a way to go. Some of the reasons for this I pointed out in this thread that I started

http://www.peakoil.com/fortopic16341.html

[Daryl]

Inflation is a very important issue also. A currency must have an independent central bank dedicated to controlling the growth of the money supply. Government regulations of captial flows is another concern. Small countries are very unattractive for these reasons. Government stability is another issue, even if you are investing in illiquid assets, like real estate or plant and equipment. The list of stable countries with "hard" currencies is a short one. This is the primary reason the USD is dominant. It has very little to do with what currency oil is priced in. Only since the introduction of the Euro 5 years ago has it even become conceivable to speak of another currency as an viable alternative. Still, the Euro has a way to go. Some of the reasons for this I pointed out in this thread that I started

http://www.peakoil.com/fortopic16341.html

[mefistofeles]

$this->bbcode_second_pass_quote('', '.') Still, the Euro has a way to go. Some of the reasons for this I pointed out in this thread that I started

[Daryl]

$this->bbcode_second_pass_quote('mefistofeles', '')$this->bbcode_second_pass_quote('', '.') Still, the Euro has a way to go. Some of the reasons for this I pointed out in this thread that I started

[Euric]

$this->bbcode_second_pass_quote('ChicknLittle', 'T')his doesn't make sense to me... As a US citizen when I go to Mexico I can use my us credit card to buy tacos in Mexico. I receive a debit in dollars for an amount that corresponds to the same amount of Pesos I spend in Mexico (conversion made based on the exchange rate). Money was sent from my account to a Mexican bank, with the conversion from dollars to pesos happening seamlessly. I didn't have to "hold pesos" to be able to buy tacos, and I didn't have to buy pesos in anticipation of buying tacos in the future. Even if I decided to buy Tacos from Japan, and their tacos were priced in "pesos" I imagine the interaction would be the same... dollars paid by me converted to Yen of equivalent value to the "pesos" that the tacos cost. The price is set in Pesos, but the conversion among currencies is automatic, silent and never converted to actual pesos. Pesos aren't held in Japan to facilitate the trade, they are "imaginary," a marker of value. Am I missing something?

Yes the government can print money, but the consumer/corporations buys the oil, not the government. Real consumer dollars are used in the purchase. The government can affect the money supply/dollar availability by "printing dollars," but all governments do this, and the value of their currency (and therefore the price of oil) is adjusted accordingly... This is a problem (inflationary), but it is not really relevant to which currency oil is priced in. Anytime any nation buys something from the other side of the world there is the possible benefit of those monies not returning in exchange for actual goods and services from that country... The downside is a trade imbalance and devaluation of currency, but it shouldn't matter what the product was priced in. The US has benefited (increased stock prices and domestic investment) from return of money it prints as investment in stocks... It risks losing this if the US market is seen as irresponsible and unstable due to debt, but again I don't see how the currency oil is priced affects investment decisions of foreigners (who can just as easily convert their oil dollars to yen or gold if they choose).

A switch away from dollar pricing of oil may send a "message" about the center role the dollar plays currently, resulting in discussion of domestic debt and an emotional or rational reduction in the value of the dollar, but I don't see how selling dollars in another currency would directly affect US dollar holdings overseas...

What am I missing? Thanks for any help...

[Kingcoal]

My question is, why is the EU pursuing policies that hurt both their own economies and the dollar? Most EU economies have very slow growth which can be kicked up with Euro inflation. The dollar inflation provides a golden opportunity to inflate the Euro in tandem. Instead, the EU seems to be purposely trying to strengthen the Euro at the expense of economic growth.

I get this feeling from a lot of our EU posters that the world would be better off with a weak, isolationist US. However, without US intervention, nations like Iran, Iraq and others would be charging the equivalent of +$200 per barrel. What's that? "Oh they wouldn't do that." Don't bet on it. Oil producers around the world don't need to give Europe cheap oil unless Europe is going to protect their regimes and enforce order in world trade (like the US does now.)

As you can see, the Euro is still dependent on the dollar (and the US military) for stability. Without stability, the Euro is, well, unstable. That is not good for a world wide reserve currency.

[FoxV]

$this->bbcode_second_pass_quote('Euric', 'U')nder the petrodollar system, the government's over printing of dollars does not result in inflation. Because there is a demand for dollars on the international market that prevents a situation where there are too many dollars chasing too few goods. Whether losing money due to currency conversion is a factor or not in demanding dollars is not an issue. Either way the dollars will be needed.

[eric_b]

$this->bbcode_second_pass_quote('Euric', '
')
(...)

The US would have to purchase goods it needs on the international market either in euros, which it would have difficulty obtaining or still in dollars but at an unaffordable rate.

Those Mexican Tacos would rise significantly in price as would a trip to Mexico. You wouldn't be able to afford it. The same situation that affected Argentina 20 years ago would affect the US.

The petrodollar has that effect on the world's economy simply because oil is only commodity of real value that has replaced gold. The currency linked to black gold is the currency that will rule the world.

[Scion]

>My question is, why is the EU pursuing policies that hurt both their own >economies and the dollar?

Good question. To me as European real price stability
and sustainable growth must come with low inflation to keep
purchase power. Profits must made from the goods
we make and sell abroad. Not from hot air stocks by money printed.

Of course it takes longer to get to the top by choosing this approach
but the society and infrastructure will be established to a strong ground.

On the other hand Europe spends less money to wage war
and uses that money saved for efficient production
and meeting Kioto protocol.

Trade balance here in Finland is kept positive after 90´s recession
and we must collect pensions for years to come because nobody else will.
Independent country has such limitations you see.


>Most EU economies have very slow growth which can be kicked up with >Euro inflation.

True. Italy infrastructure and corruption is example of negative growth.
Then there is Finland with 1.1% inflation with 3% mortgages
meaning real interest is 1.9% but house prices have
increase by 9% per year due to stock boom.

>Instead, the EU seems to be purposely trying to strengthen the Euro at >the expense of economic growth.

Reagan did it. Our politicians have that aim too.
I prefer keeping modest growth for a decade instead of having a boom
for 2 years and then quick recession resulting to lower achievement
at the end of the decade.

Diversion of income sources and investments is advised.
In Finland when USSR collapsed during late 80´s we lost
overnight 20% of GDP and we had to make hard structural changes
and to find new products and sales territories where we could thrive.

$120 oil price would enforce USA to make similar adjustments
but somehow I foresee large scale New Orleans scenario again
instead of calm re-assesment and not going to another war.

>I get this feeling from a lot of our EU posters that the world would be >better off with a weak, isolationist US.

I am sorry about that. Remembering how great USA once was
it might be rude awakening to American people that other parts
of the World are rising and passing USA by the time. E.g. China etc.

USA not participating to Kioto agreement, Iraq etc. alienated old friends
in Europe from USA democrazy held hostage by corporate & elite.

Multilateratism is a result of Globalization. Unilateratism is out.
Democratia has many voices and nations remember.

All empires have fallen sooner or later due to overexpansion,
overtaxation and unstoppable urge for liberty without opressors
(not forced liberty but your own type freedom)

Take Soviet Union as example. So will Europe drop too.


>However, without US intervention, nations like Iran, Iraq and others >would be charging the equivalent of +$200 per barrel. What's that?

I disagree here. Overprinting USD and its inflation rises barrel price
but basically peakoil is the very reason for price hikes.

Why should USA enjoy from petrodollar commissions as it used to ?
Europe pay 5% premium and USA gets oil 5% cheaper
even USA is considered to be far away from the source ?

Because of USA feels superior to even in fact is loosing ground
by deficits ? World has paid tax to USA by inflatory USD in oil price.

>Oil producers around the world don't need to give Europe cheap oil >unless Europe is going to protect their regimes and enforce order in >world trade (like the US does now.)

Here came the enforce word from you too. Ten points for you.
USA did not suffer that much from Nazis and Commies
walking on their very own soil or did it ?

In fact USA greatly gained from WW2 even was late participant
while Europe was in pieces to late 50´s.


>As you can see, the Euro is still dependent on the dollar (and the US >military) for stability. Without stability, the Euro is, well, unstable. That is >not good for a world wide reserve currency.

I somehow agree on this. I do not want to support the rest of world
by having too strong Euro choking our exports.

Nothing is stable by nature.Lets take weather against time as example.

Gold backed currencies with digital money like goldmoney.com
could be one way out of USD collapse.

Gold backed USD was in use until USA defaulted in 70´s
when USA ran out of gold and then changed the rules.

Truly free market economy is real risk for banks and nations.

Free of supervising, tariffs and taxation many countries
with reasonable share of outsourcing and solid infrastructure
plus R&D investments could challenge superpowers even further.

Fat rich countries do not want hard working
nations with talents to get too much stronghold.
China will grow larger. USA deficits will be liquidated by assets it has
or by hyperinflation. Four to the floor is answer we will see.

In USA without big militarycomplex there would not be
current level R&D paid by the taxpayers, would it ?

Or can you as American please then explain to me
why has the infrastucture repairs (preservation of capital)
and efficiency improvements neglected for decades ?

Above sounds bad but consider me one of USA friends anyway.
Sometimes you have to talk hard to friends to see some manners.