[Petrodollar]

Mr. Kerver,
Thanks for distributing a copy of my book last weekend. I hope it will be informative, even if somewhat disconcerting.

That hypothetical essay by Pat Murphy is quite interesting. BTW, next weekend I am attending the 2nd annual Peak Oil conference (in Ohio), which is sponsored by Mr. Murphy's orgnaization, Community Solutions, Inc. It should be an interesting conference, and I'll likely post my analysis once I return. FWIW, I'm also attending the Peak Oil conference by Rep Bartlett next Monday, here in MD.
-W. Clark

[Revi]

Looks like the country will be divided once again by this war, and our insatiable desires. We have done a lot to cut our energy useage and switch to renewable sources, but will continue to do more. There is every reason to do it, including it saves money, you aren't feeding the war machine, to cushion against future energy shocks and the feel good reasons like the fact that any energy you aren't using could be used by future generations, and doesn't contribute to global warming.

We'll be at the CommonGround Fair in Unity, Maine this weekend, and any peak oil people who want to meet for lunch, meet by John Howe's Solar tractor, in the solar area after his talk at around 12:30 on Saturday the 24th. See you there, at the fair!

[rkerver]

William, you're welcome, but a small thing compared to you're writing the book. See ya in Yellow Springs this weekend. You'll have to autograph my copy. I'd love to be around when you and Richard Heinberg get into rap on the next 365 days. Regards. Richard.

[rkerver]

I have to confess that my motives are mixed, in looking for information about the Iranian Declaration of the Petroeuro. In part, I'd like to yank as many of my investment dollars away before the subsequent devaluation of the dollar that will ensue. So I periodically http://news.google.com/news?hl=en&ned=us&q=%22oil+bourse%22+iran&btnG=Search+News Some notable articles appear, such as the following:

Slipping and sliding, by Vikram Sood September 28, HindustanTimes.com
$this->bbcode_second_pass_quote('', 'I')t is the Iranian plan for a Euro-denominated oil bourse to be commissioned by March 2006 that has sent shock waves in Washington. If this happens, then London’s International Petroleum Exchange and New York’s Mercantile Exchange, both owned by American companies, could feel threatened. This would make Iran the regional hub, attract European buyers paying in euros as well as oil-starved Chinese and Indians. Both India and China could offer lucrative trade in exchange to an Iran whose industry has been hurt by sanctions. The global demand for billions of dollars for buying the oil would go down along with the requirement that the US may have to buy a part of its needs in euros. Further, if other commodities move away from the dollar, this would be the end of dollar supremacy. Some European analysts like Toni Straka describe the effect of this changeover as worse than a nuclear attack on the US. This is the urgency for the US and Iran must pay for it.

[knightrd]

I thought the Iranians already stated that they would still be selling crude on the European and US markets. From what I understood, they were going to start by selling distillates on their new bourse. Plus, don't they keep pushing back the date for the creation of this bourse?

I'm not saying it won't happen or that they won't eventually be selling crude on the bourse. The article you posted just seemed a little "off" to me.

[Euric]

$this->bbcode_second_pass_quote('knightrd', 'I') thought the Iranians already stated that they would still be selling crude on the European and US markets. From what I understood, they were going to start by selling distillates on their new bourse. Plus, don't they keep pushing back the date for the creation of this bourse?

[deconstructionist]

Euric: very insightful... my question--what will the US response be? we are not typically good losers...

[rkerver]

This is a cross post to boost interest in Massachusetts Initiatives, meeting Friday Oct 7th.

[Euric]

$this->bbcode_second_pass_quote('deconstructionist', 'E')uric: very insightful... my question--what will the US response be? we are not typically good losers...

[rkerver]

I have started a new topic at Geopolitices
Boston Globe "Foreign policy realism" with Condolezza Rice
$this->bbcode_second_pass_quote('', '[')color=darkblue]
GLOBE EDITORIAL
Foreign policy realism

October 9, 2005

QUIETLY, THE Bush administration is abandoning many premises and practices that defined its first-term conduct of foreign policy. On one issue after another, President Bush has permitted Secretary of State Condoleezza Rice to navigate the slow-turning ship of state away from the unilateralist course set by doctrinal neoconservatives during the first term and back toward a multilateral pragmatism like that of Rice's first mentor, former national security adviser Brent Scowcroft, and his mentor, Henry Kissinger...
[size=24][/color]

[MrBill]

$this->bbcode_second_pass_quote('', 'B')ecause Iran has been branded an "axis of evil" nation by the US, the Commerce Department forbids any bank in the world from shipping US dollars to any enemy state. Iran is an enemy state. No bank anywhere in the world can ship US dollars to Iran. However there is no restriction on euros. To get its money out of the US, Iran has to convert it back to euros, at an expense and have the euros shipped out and placed in a European bank or sent directly to the Central Bank in Tehran.

[FoxV]

I understand that companies buy oil in US dollars to avoid a 5% exchange premium.

However when a company earns money by selling oil products, that money is in the currency of the host country. So when this money is used to buy US dollars (or transfer the money to a US bank account) the company will still have to pay the 5% exchange, and defeat the purpose of using US$

I suspect I'm missing something. Can someone explain (or provide a link)

[Daryl]

Extensive discussion of related issues here

http://www.peakoil.com/fortopic16542.html

and here

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

If you stick with these links, you will find reference to alot of good resources if you want to educate yourself in these matters.

[bobbyald]

http://www.energybulletin.net/12125.html

This explains a lot.

[Petrodollar]

IMO, the most authoritative source on petrodollar recycling is David Spiro's book, The Hidden Hand of American Hegemony: Petrdollar Recycling and International Markets, Cornell University Press, 1999.

http://www.amazon.com/gp/product/080142 ... oding=UTF8

Dr. Spiro used primary source verification (FOIAs, including some de-classified documents, etc.) and interviews with some of the actual participants at the US Treasury to describe how it was set-up and how it works, although the system is now breaking down due the dollar's declines from 2001 to present day, and the critical issue may revolve around the success or failure of a euro-denominated Persian Gulf crude oil marker (via the IOB). Here's the basic description of petrodollar recycling as provided by Dr. Spiro (pp 121-122):

$this->bbcode_second_pass_quote('', 'S')o long as OPEC oil was priced in US dollars, and so long as OPEC invested the dollars in US government instruments, the US government enjoyed a double loan. The first part of the loan was for oil. The government could print dollars to pay for oil, and the American economy did not have to produce goods and services in exchange for the oil until OPEC used the dollars for goods and services. Obviously, the strategy could not work if dollars were not a means of exchange for oil.

The second part of the loan was from all other economies that had to pay dollars for oil but could not print currency. Those economies had to trade their goods and services for dollars in order to pay OPEC. Again, so long as OPEC held the dollars rather than spending them, the US received a loan. It was therefore important to keep OPEC oil priced in dollars at the same time that the government officials continued to recruit Arab funds.

[FoxV]

ok, let me get this straight.

Am I to understand that when they talk about US dollars in buying oil, there has not actually been any exchange from a foreign currency to a US dollar.

That the dollars they talk about in foreign banks are just those that have been deposited by companies that have recieved payment for goods from the US, and that foreign currency was never involved.

I always thought that the US$ reserves that countries held were from them Physically buying the US dollars with their own money (and not just the proceeds of an exchange of goods for paper)

[ChicknLittle]

This 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 recieve a debit in dollars for an ammount 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 seemlessly. I didn't have to "hold pesos" to be able to buy tacos, and I didnt 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 relavent 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 exhange for actual goods and services from that country... The downside is a trade imbalance and devaluation of currency, but it shouldnt matter what the product was priced in. The US has benefitted (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 dont 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 dont see how selling dollars in another currency would directly affect US dollar holdings overseas...

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

[mefistofeles]

Here are two articles that shed light on the subject:

Euros Oil, Europe and Russia

Euros and Iran

From reading these two articles I get the impression that oil transactions must be settled in dollars.

Using the Taco analogy if the a Mexican company wanted to sell a US company Tacos the contract would have to be settled in dollars if it was done through a trading exchange.

Now perhaps if you are in Mexico you could buy a peso denominated taco at a retail Taco stand but from both articles it appears that trade through large commercial exchanges is denominated in dollars. So ironically if you want to use an exchange you have to buy and sell your tacos in dollars!

Also there are some very practical reasons for keeping oil in one currency. If oil was priced in multiple currencies chaos could insue as oil traders attempt to make money by exploiting differences in oil pricing via currency fluctuations. It would make th market much more volatile and possibly the multiple currencies themselves more volatile as traders attempt to use money in order to exploit prices differences , it would get messy fast. I think the markets would work but major pricing volatility would insue.


In fact even non dollar denominated contracts are effectively dollar priced and settled:

Australian Dollar Oil Contract

Note that there is a very interesting stipulation to this contract even though it is supposedly priced in Australian Dollars:

$this->bbcode_second_pass_quote('', 'O')ver the life of the warrant, the price will rise and fall based on two specific underlyings.

The price fluctuations of a specific oil futures contract in US dollars.
The change in value between the Australian dollar and the US dollar.

[MrBill]

$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 recieve a debit in dollars for an ammount 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 seemlessly. I didn't have to "hold pesos" to be able to buy tacos, and I didnt 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 relavent 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 exhange for actual goods and services from that country... The downside is a trade imbalance and devaluation of currency, but it shouldnt matter what the product was priced in. The US has benefitted (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 dont 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 dont see how selling dollars in another currency would directly affect US dollar holdings overseas...

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

[MrBill]

$this->bbcode_second_pass_quote('', 'N')ow perhaps if you are in Mexico you could buy a peso denominated taco at a retail Taco stand but from both articles it appears that trade through large commercial exchanges is denominated in dollars. So ironically if you want to use an exchange you have to buy and sell your tacos in dollars!

Also there are some very practical reasons for keeping oil in one currency. If oil was priced in multiple currencies chaos could insue as oil traders attempt to make money by exploiting differences in oil pricing via currency fluctuations. It would make th market much more volatile and possibly the multiple currencies themselves more volatile as traders attempt to use money in order to exploit prices differences , it would get messy fast. I think the markets would work but major pricing volatility would insue.