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SBD
Admiral
Joined: 19 Aug 2004
Posts: 1022
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 Posted: Mon Apr 18, 2005 4:19 pm Post subject: Highs and Lows of an Oil Currency-The Truth about Gas Prices |
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Highs and Lows of an Oil Currency-The Truth about Gas Prices
I have yet to see a story written about the high gas prices that tells the the truth behind them. We've heard, "Oil Companies are gouging us" to "The Chinese increase in demand for oil" as the reasons for the high prices. The one thing that they won't say is the truth. The real reason for the high prices at "American Pumps" is the continued and unebated decline of the US Dollar. They don't teach you in Economics 101 class that the US Dollar is the "Oil Reserve" Currency of the world which means that every country in the world holds US Dollars to buy their Oil for their country. This arrangement has created the "Petro Dollar" which finances our debt so we can fund space explorations and build a superior military, to name just a few things.
The price of gas has always been significantly cheaper in the United States as opposed to Europe where it costs 4 times what it costs in America. Their prices at the pump haven't really changed at all. They are used to paying high prices for Oil, so they al drive cars that get 60 to 80 miles to the gallon. This is also why the United States continues to build cars that get 10 or 14 miles to the gallon.
In order for Oil Producing countries to keep their same level of income, they have to raise the price of Oil to reflect current value of the dollar. For the most part, this has not been an issue because the dollar has remained steady. The last time we had a crisis of this magnitude was in the 1970's. I am sure most of us can remember the long gas lines, the rising prices at the grocery store, etc. These problems culminated in the rise of the "Mullahs" in Iran, the hostages, and the "Oil Embargo". We knew then that the Middle East was of significant importance to the economic security of the United States and yet, nothing has really changed.
On September 11, 2001, America was attacked, not only emotionally, but economically as well. America's enemies had struck at the heart of the world economy and destroyed the United States' symbol of world trade dominance with the destruction of the World Trade Center. In one day, 1 Trillion dollars vanished from our economy and thus began the decline of the value of the dollar.
An interesting occurence to note is something that at the time seemed of little importance. On November 1, 2000, there was something else that happened to the infamous "Oil for food Program". Out of no where, Saddam Heusain decided he wanted all oil for food program money to be conducted in Euro's instead of dollars. He said it was a protest against Washington. At the time, most thought it was a very stupid protest since the Euro was only worth $0.80 cents for every dollar. After 911, Saddam made out like a bandit to the tune of billions as the dollar fell and keeps falling to this day. All of these funds were in a French bank and reached over 10 billion dollars in value.
I believe that the French and Germans, with the help of Saddam were attempting to convince OPEC to make the Euro the world reserve currency once the Sanctions were lifted from Iraq. If you think the gas prices are bad now, you couldn't even imagine what things would be like if OPEC switched to the Euro. Every country in the world would exchange their dollars to Euros which are mostly in the form of IOU's that could no longer be redeemed for oil. Those IOU's finance the growing deficit which could never be paid for.
I am thankful that President Bush put a stop to the possible OPEC switch, but I do hope he does something soon about the value of the dollar before it is too late. We can no longer afford to be at the mercy of OPEC and the Petro Dollar.
SBD |
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FireFox
Seaman Apprentice
Joined: 11 Sep 2004
Posts: 84
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| Posted: Mon Apr 18, 2005 8:20 pm Post subject: |
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The Europeans wouldn't want oil to
be denominated in Euros. It would
strengthen their currency and further
crush their economies.
They are already laboring under
Asian beggar-thy-neighbor and would
probably not fare well if the US was
in that situation. The falling dollar has
hurt the EU as far as jobs go.
Countries can generally choose between
a strong currency which is good for
consumers and a weak currency which
is good for businesses. |
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SBD
Admiral
Joined: 19 Aug 2004
Posts: 1022
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| Posted: Tue Apr 19, 2005 2:42 am Post subject: |
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| FireFox wrote: | The Europeans wouldn't want oil to
be denominated in Euros. It would
strengthen their currency and further
crush their economies.
They are already laboring under
Asian beggar-thy-neighbor and would
probably not fare well if the US was
in that situation. The falling dollar has
hurt the EU as far as jobs go.
Countries can generally choose between
a strong currency which is good for
consumers and a weak currency which
is good for businesses. |
The EU definately would want the Euro to be the Oil currency. They would become the Super Power and America would become a Third World country overnight.
Revisited - The Real Reasons for the Upcoming War With Iraq:
A Macroeconomic and Geostrategic Analysis of the Unspoken Truth
by William Clark
I read this essay back in January of 2003 and was shocked by how ignorant we all are regarding how the world economy functions. I was so shocked, that I very rarely discuss it with others as it is not an easy subject for some to understand. Ultimately I came to the realization that it is our governments duty to protect us from all threats including an economic threat.
"The effect of an OPEC switch to the euro would be that oil-consuming nations would have to flush dollars out of their (central bank) reserve funds and replace these with euros. The dollar would crash anywhere from 20-40% in value and the consequences would be those one could expect from any currency collapse and massive inflation (think Argentina currency crisis, for example). You'd have foreign funds stream out of the U.S. stock markets and dollar denominated assets, there'd surely be a run on the banks much like the 1930s, the current account deficit would become unserviceable, the budget deficit would go into default, and so on. Your basic 3rd world economic crisis scenario."
"The United States economy is intimately tied to the dollar's role as reserve currency. This doesn't mean that the U.S. couldn't function otherwise, but that the transition would have to be gradual to avoid such dislocations (and the ultimate result of this would probably be the U.S. and the E.U. switching roles in the global economy)."
SBD |
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FireFox
Seaman Apprentice
Joined: 11 Sep 2004
Posts: 84
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| Posted: Tue Apr 19, 2005 3:02 am Post subject: |
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The effects of the strong Euro on Germany
http://news.bbc.co.uk/2/hi/europe/4456087.stm
Germany's new 'great depression'
According to the research, by a German health insurance firm, cases of depression among Berliners have risen by 70% since 1997.
Up to 70% of Germans also say they are prepared to seek professional help for psychological problems.
Mental health experts blamed the rise on Germany's faltering economy, which has seen unemployment rise to over 5m.
I don't think that they want more of this. |
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SBD
Admiral
Joined: 19 Aug 2004
Posts: 1022
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| Posted: Tue Apr 19, 2005 8:56 am Post subject: |
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| FireFox wrote: | The effects of the strong Euro on Germany
http://news.bbc.co.uk/2/hi/europe/4456087.stm
Germany's new 'great depression'
According to the research, by a German health insurance firm, cases of depression among Berliners have risen by 70% since 1997.
Up to 70% of Germans also say they are prepared to seek professional help for psychological problems.
Mental health experts blamed the rise on Germany's faltering economy, which has seen unemployment rise to over 5m.
I don't think that they want more of this. |
Firefox, I think we are talking about two different things. You are describing microeconomics, I am talking about macroeconomics. The US dollar is the world's reserve currency which gives the US certain advantages that no other country in the world has. As long as the world's reserve currency remains the dollar, America will remain the super power.
Think of it this way, if god forbid the Euro becomes the reserve currency, every nation in the world will sell off their dollars to exchange them for the Euro. What are we going to do with all of these worthless pieces of paper because that is what they will become, a worthless piece of paper. The flood of dollars which have not been backed by gold since 1971 would cause inflation on a scale never before witnessed in the world. If you were to pay for a loaf of bread in cash, you would probably need a suitcase full of dollars to pay for it.
Maybe this article below will help put it in perspective.
History of Dollar Hegemony
March 19, 2005
The core advantage of the US economy, the source of its financial dominance, is the peculiar role of the US currency. It is because the dollar is the world’s reserve currency that the US is able to maintain its twin deficits (fiscal and trade) and depend on the world’s generosity. It needs a subsidy of at least 1.2 billion dollars per day to keep up its level of spending. Its military superiority is one reason why it it is unlikely ever to face an embargo, but more importantly, it can continue to live beyond its means because of US dollar hegemony. But for long?
The dollar mechanism has been described extensively elsewhere,3 so we will merely summarise here. The strength of the US economy after second world war enabled the US dollar, backed by gold, to become the world’s reserve currency. When the US abandoned the gold standard in 1971, the dollar remained supreme, and its position was further boosted in 1974 when the US came to an agreement with Saudi Arabia that the oil trade would be denominated in dollars.4 Most countries in the world import oil, and it made sense for them to accumulate dollars in order to guard against oil shocks. Third world countries had even more reason to hoard dollars so as to protect their fragile economies and currencies from sudden collapse. With everyone clamouring for dollars, all the US had to do was print fiat dollars and other countries would accept them in payment for their exports. These dollars then flowed back into the US to be invested in treasury bonds and similar instruments, offsetting the outflow.
As a reserve currency fulfils world needs in addition to the functions of a domestic currency, the favoured country can build up debt for a protracted period on a scale that would wreck any other country’s currency. But this advantage is a double-edged sword.5 It allowed the US economy to decline unnoticed, its fiscal and trade deficits to climb steeply: by 2004 the US trade deficit had reached $503 billion, the current account deficit $413 billion, the gross national debt around $7 trillion. Globalisation destroyed the US as a manufacturing nation; the outsourcing of services means that even this sector is gradually being shifted out of the US.6 Only its pre-eminence in the global financial services industry remains intact.7 And this is underpinned by US dollar hegemony.
As Pierre Lecomte, a French financial analyst and supporter of the campaign ‘Dette et dollar’ (to reject the dollar as world currency) says, “while the rest of the world must toil hard to earn dollars which are needed to buy goods internationally, or to pay off foreign debt, the US just needs to print dollars”.8 And as Frederic Clairmont wrote in Le Monde Diplomatique (April 2003): “Living on credit is the credo of the foremost power in the world”.
Various campaigns around the world have asked people to ‘boycott Brand America,’9 but most products with American brand-names are not made in the US. Therefore refusing to buy such things may reduce royalties to America, but will not seriously undermine US economic power. On the other hand, ‘the longest-lived and most widely seen American ‘brand’ in the rest of the world is almost certainly not Coca-Cola nor McDonalds, but rather the US dollar.’10 Taking this into account, the secretariat of the international ‘Boycott Bush campaign,’ based at the Mother Earth association in Belgium, recently asked members if they were ready to open another front, ‘to boycott the dollar’. Most of them have responded ‘yes’.
Dollar hegemony is what concealed the costs of Empire, which were effectively being paid for by the rest of the world, from US citizens. Other countries were compelled to accept fiat dollars because they had no choice. It was the world’s only reserve currency.
Choosing the Euro
Until…the euro came into being. Even then, the choice was only a potential one, as the euro initially lost value, making it unattractively risky as a reserve currency. The first non-European countries that made a move in its direction did so for political rather than economic reasons. When Saddam Hussein switched to the euro in late 2000 and converted Iraq’s $10 billion reserve fund at the UN to euro, some analysts commented that this political gesture would have a heavy economic cost.11 But against all expectations, he actually made a profit when the euro staged a recovery.12 Iran is another country which in 2002 converted more than half its foreign exchange reserves to euros.13 Both Iraq and Iran being oil-producing countries, the impact of their shifting currency allegiances would be significant. By contrast, North Korea’s official shift to the euro for trade in December 200214 was negligible from the standpoint of the world economy, yet it signified a trend that US imperialism had to stop at all costs. Suddenly George Bush’s diatribe against the ‘Axis of Evil’, which seemed so arbitrary and laughable at the time, does not appear quite so funny. Add to this picture the fact that Hugo Chavez – against whom the US supported a coup in April 2002, and who continues to be under attack by the Bush regime – has taken a large part of Venezuela’s oil trade out of the orbit of the US dollar,15 and the economic compulsions driving US foreign policy become clearer. Military might alone does not seem to be a sufficient basis for sustaining an empire: economic power is crucial. And for the declining US economy, US dollar supremacy is essential for maintaining its economic clout.
This is no longer unchallenged. Before the Iraq war, one Iranian economist and the Moroccan magazine, L’Indépendant, suggested that Islamic businessmen and countries should drop the dollar as their foreign exchange reserve currency, in order to weaken the US or at least deter them from their aggressive foreign policy. Given the deteriorating relations between the US and the Arab world, quite a few west Asian oil-exporting countries have begun to increase the proportion of international settlements made in euros. Reportedly, Russia may also follow suit. In 2003, a senior Iranian oil representative suggested in a speech in Europe that European oil purchases might be increasingly traded in euros in future. China and Russia have hinted that they may begin to hold more of their foreign currency assets in euros instead of dollars. An article in China Daily on September 28, 2004 by Jiang Ruiping, the director of International Economics at the China Foreign Affairs University, pointed out that China is already losing due to the dollar slide and would lose even more if it crashes, and recommended moving out of dollars into euros and possibly also yen, as well as using its dollar reserves to stock up on oil.16 Other countries like South Korea and Taiwan also plan to shift some of their foreign currency assets out of dollars.17
All this has weakened the US dollar, but this does not necessarily mean that it will decline to the point where it ceases to function as world currency. There are contradictory pressures, both from the US and from its major creditors. Within the US, there could be hopes that a weaker dollar would spur exports, but this now seems unlikely, given how uncompetitive US industry has become.18 More importantly, the US deficits shrink as the dollar declines. Federal Reserve chairman Alan Greenspan summed up the US dilemma in November 2004, in a speech where he seemed to accept the inevitability of the dollar decline in order to help ease US deficits. This would be a boon to the US so long as the dollar retained its role as world currency, but it would inflict enormous losses on countries that have amassed large quantities of dollar reserves. China and Japan alone hold about a trillion dollars, and while countries like India (and smaller economies) may hold much smaller quantities, the devaluation of those reserves is already hitting them, and would hit them even more if the dollar crashes.19 These countries could therefore think of selling dollars and moving their reserves to some other currency, which in turn would jeopardise the status of the dollar as the world currency.20 An attempt to counteract this is probably what was responsible for rumours in January 2005 that the Federal Reserve might hike interest rates. For countries exporting to the US there is also a dilemma. Japan, for example, bought billions of dollars in order to hold down the value of the yen and keep its exports competitive. In the short term, it may benefit from propping up the dollar, even though it would lose massively if the dollar crashes. Debtor countries would gain from a dollar slide, since their debt is denominated in dollars; but if they have foreign exchange reserves in dollars, these would be devalued, and they would also suffer if they depend on exports to the US which the US would no longer be able to afford. Thus there are also powerful forces resisting the displacement of the dollar as the world’s reserve currency.
This brings us back to the dilemma posed by David Ludden. The costs of empire will become apparent to the US public only when they have to pay those costs, and this will happen only when (a) other nations stop subsidising its imperial adventures by colluding in them, and (b) the dollar loses its role as the world’s reserve currency. A weakening of the dollar while it retains its role as world currency, which is what has been happening so far, could actually help US imperialism by reducing the value of its fiscal and trade deficits; only when there is a large-scale shift away from dollar reserves will the rest of the world stop paying for the US empire. This may not happen in the near future if it is left entirely to economic forces, and meanwhile the occupation of Iraq and Palestine will go on, Iran may be invaded (as Bush has threatened repeatedly), and so on and so forth. On the other hand, if currency speculators get into the act and the dollar goes into free fall, it could pull down the world economy with it! Avoiding this, too, requires planning and coordination.
SBD |
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FireFox
Seaman Apprentice
Joined: 11 Sep 2004
Posts: 84
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| Posted: Tue Apr 19, 2005 12:28 pm Post subject: |
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I'm quite familiar with macroeconomics and the position of the dollar. I just disagree with your position that Europe wants their
currency to be the world's reserve currency. |
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