Harvey,
I truely wish it was that simple (see below).
David A. Douthit
Manager
LoCan LLC
----------------------------------
Harvey Miller wrote:
>I found the following on www.prudentbear.com. It is an expression of how higher oil prices
>have an economic policy role in finding needed new holders for dollar reserves and
>devaluing our deficits. Other results of higher oil prices: 1. Elasticity of demand will
>lead to lower consumption of oil products - nothing like higher prices to force more
>efficient energy usage, 2. the politics favoring Alaskan drilling will become
>insurmountable.
>
>
>
>Harvey Miller
>
>Fabfile Online
>
++++++++++++++++++++++++++++++++++++
THE PETRO-DOLLAR & PROTECTION RACKET
by Jim Willie CB
April 6, 2005
Jim Willie CB is the editor of the HAT TRICK LETTER
For specific detailed analysis of the Gold, USDollar, Treasury bonds,
and inter-market dynamics with the US Economy and Fed monetary policy,
see instructions for subscription to my newsletter research reports,
which include stock recommendations positioned to rise in the commodity
bull market.
The term Petro-Dollar has been bandied about for years. In my travels,
much has been mentioned in indirect terms about it, with assumptions of
its nature and structural significance. It is mentioned often carelessly
when talking about crude oil and its Persian Gulf sales. Yet little is
written on the topic, and little is easily found to read and learn. A
recent radio show with Al Korelin delved into this subject, although we
only scratched its surface to identify some warning signals on economic
impact. Changes are occurring under our feet to a critical foundation of
both world commerce and world banking.
The Petro-Dollar system is a vast banking and commerce system designed
by major world economies. Japan, South Korea, France, Germany,
Argentina, these nations are typical in purchase of oil without the
benefit of domestic production. So they must create a system for having
cash ready to make timely payments, much like a checking account. The
systems overt original purpose was to enable and facilitate payment for
extremely large supplies of delivered energy products, principally crude
oil but also natural gas. The commodity payment system has actually
evolved to become much more far reaching. Try to purchase copper or
cotton or forest timber or grains, and payment is almost assuredly
demanded in USDollar terms, the international currency for commerce in
commodities generally. What we have is a system for purchasing minerals
and resources, totally bound in US$ denomination pricing and transaction
settlements. The most visible element is energy trade, whose supplies
clearly make for the largest bill payments. Definitely the most
important payments for economic survival are for energy, the lifeblood
of industry and transportation. Nations keep funds liquid, and use
3-month TBills almost like cash. It bears an interest yield. Money does
not sit in banks without bearing a yield in return, a practical measure.
Considerable lead time is involved for orders and payment, for both
inventory management and delivery. The typical time lapse is 45 days
from Persian Gulf port shipment to exit from domestic refineries,
according to an energy expert colleague.
In response, due to an established system, world bank centers accumulate
US$-based liquid assets in what act like checking accounts. Nations must
be constantly prepared to be in position to pay for energy supplies.
Industrial & transportation costs are much larger bills than the human
food necessities. The Petro-Dollar system is the practical commercial
flipside, the visible evidence to the USDollar as world currency reserve
in central banks. The financial effect is for banking systems across the
globe to accumulate reserves in US$-based assets. Major components are
USTBonds across the maturities (3-month, 12-month, 2-year, 5-year,
10-year), and in addition even GSE Agency mortgage bonds. Longer
maturity bonds shore up and fortify short-term bonds like the highly
liquid 3-month TBills. The entire world accumulates US$-based reserves
for the purpose of buying their commodities, principally crude oil.
Two regions are unique, however. The primary export giants in Asia have
stockpiled $1800 billion in reserves. Their hoard is primarily
US$-based. What began as a checking account for oil payments has morphed
into a gigantic bloated beast of a dangerous financial pyramid whose
foundation has corroded and weakened as the USDollar bear market
progresses. Unless Asian banks print money to purchase (monetize) more
USTBonds, they will see erosion in their entire banking system capital
base. South Korean and Japanese painful pronouncements testify to this
corrosion and weakness. What is not reported in the intrepid US press is
that the entire banking system of South Korea is at risk. Their reserve
base has shrunk by 20% in value this last summer in the face of a
noteworthy SKwon currency rise. It has additional risk from principal
loss, as our rates rise. With fractional banking practices entrenched,
stress to bank portfolio ratios is clear but not emphasized. All we hear
in the USA is how Asians are showing lack of support for our beleaguered
US$ currency, showing lack of loyalty to their ally, are not grateful
for our open markets, and are doling out harmful effects manifested in
domestic inflation. This is shallow reporting, to be sure.
The other region of note is Europe. For thirty years, Europe has
employed a clever instrument as a device in banking. The EuroDollar was
created for many purposes. One was to facilitate payment for energy
supplies in US$ terms, without the necessary step to convert trade
surpluses back to DeutscheMarks or Swiss francs or British pound
sterling. Thereby a double currency conversion is averted. The money was
kept sterilized, in order to avoid pushing up the mark or franc or
sterling currencys. A rising continental currency trend would change the
export pricing structure to the detriment of European businesses. A
EuroDollar is a US$ held in European banks, not converted to local
currency units, and serves as a buttress to support the Petro-Dollar
system. It becomes more complex when futures contracts are involved,
where bearing yield is offered. The world is awash in USDollars, for
many reasons ranging from our abandoned manufacturing base, our
depletion of oil resources, our dependence on foreign commodities, our
profligate spending waste, to our lack of discipline in federal budgets,
and military spending for adventures and annexations.
PRACTICAL USA ADVANTAGE, ABUSED USA PRIVILEGE
Practical advantages to the USA are two-fold, industrial but mainly
monetary. World banks are absolutely drowning in US$-based assets, which
grants US firms a favored position in contract awards. Numerous large
contracts are won with large US firms, downstream in their economies.
See Halliburton, General Electric, Bechtel, and others. Large US energy
service firms typically win contracts with oil producing nations. It is
part of the Petro-Dollar game, with attached military protection
unwritten into the contracts. We protect their governments, even if they
are corrupt. We induce both monetary corruption and bank dependence,
even when other governments are honest and object to pressured tactics.
We are the big bully on the block.
With the USDollar as world reserve currency, the USGovt abuses the
privilege on a grand scale. Sure we donate heavily to charitable causes,
like disaster relief. But we are heavy handed in order to maintain the
privilege of running an uncontrollable printing press, which in private
circles is known as a counterfeit operation. That press funds our
operations, which in my view have clearly gone amok. In essence, the
USGovt runs the largest protection & extortion racket in modern history,
perhaps ever. The world is obliged to sop up and purchase all the
debts we generate, whether they approve or not of our policies,
behavior, tendency, or justification for military actions. Almost
without enforced discipline, the US system has evolved with unchecked
abuse on a massive scale. Do Europe or Asia have a say in Congressional
decisions which lead to huge federal deficits? Do they have override in
decision to go to war in the Persian Gulf? How about an unwise tax law
change based upon faulty self-serving analysis? The entire US system can
extend credit at will with seeming impunity, with little consequences.
Surely political repercussions surface.
US federal debt, mortgage debt, and indirectly household debt are all
absorbed by Asia. Exporters are somewhat bound to buy our US Treasury
debt in order to continue selling in our market. Foreign central banks
have few alternatives to sock away $20 to $30 billion per month, each
month, every month. Are they supposed to acquire a major US
pharmaceutical firm or major US technology firm or major retail chain
every two to three months? No, since that would cause alarm among the US
public. The US consumer market drives the Asian economies. Practical
implications are frightening. The USGovt can run a war on a credit card,
with foreigners paying the costs with no say on the prosecution of that
war. The USGovt can cut taxes without business growth, run deficits,
without paying the costs. The USGovt can fund pork projects to satisfy
Congressional members in certain key states. The USGovt can stimulate
and subsidize its financial asset bubbles, with foreign money used to
push the bubbles, all the bubbles. The USA provides security &
protection of shipping lanes and ocean ports in a grand international
contract. We harm our credit providers, by subjecting their debt
holdings on a regular basis to losses. If foreigners retaliate, they
hurt both their bank systems (from currency loss) and their export trade
with the USA (from currency changes).
THE PROTECTION RACKET DYNAMICS
Where the Petro-Dollar system seems to break down is in the writedowns
foisted upon participating nations. The racket seems complex but can be
described in extremely effective and simple terms. The US runs up
horrendous debts, which foreigners finance at $1.8 billion per day. We
continue to print money to pay bills and fund operations, with credit
supply taken for granted even though our national security on a
financial basis is routinely undermined. Our accelerating money supply
growth renders the USDollar vulnerable. The USDollar declines in value,
making for a constant writedown to foreign holders. Foreigners
continue to supply capital to the US system, to feed our USTreasurys, as
they recycle their trade surpluses. Asian surpluses are on the order of
between $250 and $300 billion per year. European surpluses are between
$100 and $120 billion annually. As the fabled Senator Everett Dirkson
once said a billion dollars here, a billion dollars there, before you
know it, you are talking about real money.
If foreigners halt capital supply, their bank systems implode worse than
they did inside Japan in the 1990 decade. Our US assets (housing, bonds,
stocks) rise in value without work, as our debts accelerate and jobs
disappear. If Asia withdraws support, then US consumers witness a sudden
disappearance of wealth and purchase power which immediately is felt by
Asian producers of finished products. If Asia withdraws support, then
the entire price structure for consumer products rises within the US
Economy, for a host of items like stereos, DVDs, video recorders,
cameras, photocopiers, printers, PCs, cars, engines, even construction
equipment. Asia feels obliged to continue, in order to keep their
industries and work force busy (avoid unemployment), and to prevent
their banking systems from imploding. They cannot abandon support for
the USDollar, and demonstrate that support with frequent central bank
interventions. One must suspect that some interventions are ordered by
the USGovt for execution overnight by the Bank of Japan, which my
description calls the Feds Far East outpost. They do the Feds bidding,
often under the cover of darkness. The question of the BOJ truly being
independent is a very big question nowadays.
RUSSIA & OPEC UNDERMINE THE PETRO-DOLLAR
The Petro-Dollar system is under new attack. Russia and fringe nations
of OPEC are responsible for dissension. Their motive is
self-preservation. They strive to avoid selling crude oil output in a
falling currency, which cuts into revenues. They dislike buying
commodities in US$ terms, as inherent prices are rising. Rather, they
desire a stable or rising currency. The rogue nations involved in the
act of insurrection include Russia, Iran, Venezuela, and Indonesia.
Being a European nation, Norway should also be so motivated, but so far
they have not made any rumbling noises. An added motive for selling oil
outside the US$ sphere addresses a larger economic issue. If a nation
can manage to trade a host of commodities (like oil, natural gas,
copper, iron, cotton, coffee) in euro denomination, that national
economy would be far less subject to the distress of systemic rising
prices. For instance, the Russian ruble is down 30% versus the euro, in
part from selling oil supplies in US$ terms, in part from the horrible
fallout from the Yukos legal treachery, in part from unusual fallout
from tampering in the Ukraine elections. Regardless of why, the
faltering Russian currency has contributed to 11.7% price inflation
inside this enormously important commodity powerhouse nation. Russia
might lead the pack in output for as many as a dozen commodity items
such as platinum, cobalt, titanium, tin, zinc, aluminum, and others.
Russia sells 81% of its oil exports to Europe, with 65% of its overall
trade with the EuroZone. Therefore, it is in Russias best interest to
sell oil in euro denomination. It appears Russia is the spearhead behind
the transformation toward the Petro-Euro and creating a new system.
Few observers seem to attach many military implications to the
Petro-Dollar, its defense, its dismantling, and geopolitical shifts it
might cause. Not here, no way! The Iraq War has numerous grounds for its
justification, surely the weapons of mass destruction among them
(although not taken seriously by me here). Any curious thinking person
with a pulse must consider that establishment of military bases in the
hot Middle East was another motive. Locking in multi-billion contacts
with oil field renovation and restoration is yet another motive. We did
not share such contracts with European firms, much to their anger. Also,
stemming the sale of Iraqi crude oil in euro denomination was another
motive, which in my view was far more important even in March 2003, just
as important two years later now. The Petro-Dollar system is that
important to defend.
The sleepy US press & media has given weapons of mass destruction 50
hours of air time for every 5 minutes of serious discussion of petro
sales in euros. Saddam Husseins defiant sale of Iraqi oil for euros
made for a highly profitable maneuver. In my analysis, Russia is
attempting to take the front position to attack the Petro-Dollar system
directly, first by selling oil and gas to Europe in euro terms, second
by attempting to lead OPEC in secret fashion with little publicized
meetings. OPEC refuses to confront the USA, since it owns no military
and is quite dependent upon the USA for its protection. They sell us
oil; we protect their leadership (see Kuwait and Saudi Arabia and
Qatar). Russia is willing to confront the USA, an adversarial role which
it seems unwilling or unable to be put to rest, a certain remnant from
the Cold War. The fact that Iran nuclear armament is no longer in the
news in the last few weeks speaks volumes about the tactical weakness of
the USA. Our nation is extraordinarily vulnerable to sales of USTBonds
by foreign central banks, and to sales of foreign produced oil in euros
(not USDollars). In my view, Putin showed Bush his weapons last month,
and the USA backed off.
Behind the scenes is anger by Russia for the construction of numerous
small bases for the US Military in former Soviet Republics like
Uzbekistan and Kazakstan. Their erection might have helped to drain
world cement supplies last year. We seem in Putins eyes to be
encircling Russia, who might retaliate by knocking the Petro-Dollar
system off its foundation pillars. The new Shanghai Cooperative Group
represents a potential supply network which will have member nations of
China, India, Russia, former Soviet Republics, and Iran as its core. New
nations are being actively courted, such as Venezuela and Brazil. Energy
(crude oil & natural gas), industrial metals, and more are to be bought
and sold by this new network, outside OPEC and its gaggle of disunity
and diverse puppet strings held by Washington DC. In my view the COOP
is likely to have been organized to be a direct assault on the
Petro-Dollar, if not a consciously designed network to blockade the USA
from the supply chain. The COOP is a direct answer to the corrupted OPEC
cartel, which seems overly influenced by US leaders. The Saudi oil
minister sounds as though he has been trained in FedSpeak, when he talks
of hiking oil output from already strained capacity (if it exists). It
is highly likely that the COOP creates the framework to undermine the
dollar-based supply system that is the PetroDollar. My guess is the euro
will be the COOPs transactional currency.
The latest development is the creation of an Iranian commodity exchange
market. The US press has yet to report on it, despite the extreme
importance. Would even 10% of the viewing audience understand the story
or its importance??? So why bother to air it? Its plan is to sell crude
oil and natural gas in euro denomination. So far China is a central
customer to participate in the new exchange. Again, behind the scenes,
deals are being struck. The CIA and other agencies warn that China is
selling far more than scud missiles to Iran, which fears an invasion by
the USA. Perhaps the most important factor of all which pertains to Iran
is the decision made independently by at least three multi-national
energy firms (including Agip of Italy and Elf Aquitaine of France) to
construct an oil pipeline south from the Caspian republics through Iran.
A pipeline through Georgia or Chechnya might not come to completion, due
to smaller measured oil deposits in the surrounding Caspian region. If
the key oil pipelines are to routed through Iran, then Iran rises in
strategic importance almost beyond what words can describe. Look for
stories by the obedient lapdog US press & media on Irans nuclear
threat, which might be about as accurate as Iraqi warnings weapons of
mass destruction. Fool me once, shame on you. Fool me twice, shame on
me. NOT ME. Iran sits in the most important location in the entire
Persian Gulf, and they are not friendly nor cooperative with the USA.
Any attack of Iran by US Forces will involve the Russian and Chinese
militaries !!!
FAILING TOOLS & THE VULNERABLE USA
Previously useful weapons used by the USA are likely ineffective here.
The IMF and World Bank have been used in devious ways in past years.
These organizations have been accused of serving as fronts for securing
contracts for US contractor firms, for disrupting foreign governments,
and more. Evidence abounds that the IMF blocked attempts for member OPEC
nations to firm the usage of an Islamic Dinar to be used in oil sales. A
gold-backed Dinar is not used much for international settlements, but
still is talked about between Iran and Indonesia. The role of the World
Bank might become more strategically important with Wolfowitz as its new
head. If you think this is a maneuver of no importance or consequence,
YOU ARE BRAIN DEAD.
The power of the IMF is blatantly evident in the 2001 collapse of the
Argentine bank system, and in frequent Brazilian debt writedowns. In
recent months, Argentina has since defied the IMF with a gold backed new
peso currency. Financial weapons prove ineffective in defending the
Petro-Dollar from Russian maneuvers. They sell directly to Europe. It is
an obvious next step. Not only will Russia continue to sell energy
supplies in euro terms, but Russia will balance its central bank
reserves toward the EuroBonds. Reserves will reflect their commerce.
My assessment is that a currency war is underway between USA and Russia,
with the Petro-Dollar the central battle ground. THAT WAS THE HIDDEN
AGENDA BEHIND THE PUTIN VS BUSH TALKS LAST MONTH. We are long past the
buddy-buddy horseback rides in Crawford Texas with Vladimir Putin. This
man Putin comes from the KGB and knows how to play chess. Our USGovt
leaders know how to use sledge hammers, not move chess pieces on a
complex chess board. A transition is in place to have the euro replace
the USDollar as world reserve currency, or at least to share it with the
euro during a transition phase. Russia, China, India, Indonesia, South
Korea all announced diversification away from the US$-based debt
securities in their central bank reserves management. Such
pronouncements serve as verbal after-shocks to basic shifts underway in
the Petro-Dollar foundation earthquakes.
Pricing oil in euro terms will help oil producing nations and oil
consuming nations to transfer higher costs to US Economy!!! They will
realize more supply sale income; the USA will realize higher costs for
those supplies. Pricing oil in euros helps nations to reduce domestic
price inflation within their own economies, and to add to incoming
revenue from oil sales. It is a zero-sum game with the USA the loser
when the Petro-Dollar fractures and slowly erodes into oblivion. Removal
of the Petro-Dollar system will have a magnificent effect on the crude
oil price or the USDollar exchange rate or US Treasury yields. Its
removal might have a significant effect on oil AND the USDollar AND the
USTBonds. The initial effect is to be an effect on the oil price and a
slew of commodity prices. Then might come an effect on currencys and
bonds as a secondary effect. Then we might see a gold effect. An
acceleration down with USDollar could trigger a world bank crisis.
Foreign banks have responded with diversification into the euro and to a
minor extent into gold. The Petro-Dollar foundation is being shaken
under our feet.
© 2005 Jim Willie, CB
Editorial Archive
Jim Willie CB is a statistical analyst in marketing research and retail
forecasting. He holds a Ph.D. in Statistics. His career has stretched
over 23 years. He aspires to thrive in the financial editor world,
unencumbered by the limitations of economic credentials.
Copyright © James J. Puplava Financial Sense" is a Registered Trademark
P. O. Box 503147 San Diego, CA 92150-3147 USA 858.487.3939
>
>
>
>
>
|
