Saturday, May 31, 2008

OPEC and the Dollar Peg

As I've pointed out in the past, the 1974 US-Saudi Arabian Joint Commission on Economic Cooperation established the Dollar as the sole Monetary Instrument for the purchase of oil through OPEC and this action reaffirmed the US Dollar as the World's reserve currency after the years of currency turmoil brought about by Nixon yanking the gold-dollar peg in 1971.

This agreement has allowed the US Dollar to flourish for many years, as countries who needed oil had to earn or borrow dollars to buy oil and trillions of these Petrodollars were eventually recycled through New York and London banks -- allowing for the creation of new credit, holding dollar interest rates lower than they would have been otherwise, and helping to expand our credit/debt bubble economy.

I have also pointed out that: (with the exception of IRAN and mainly due to inflation pressures internal to their domestic economies: 1) Vietnam removed their dollar peg; 2) IRAN (an OPEC Nation) no longer accepts US Dollars for oil and opened their own Oil Bourse this year; 3) Kuwait (an OPEC Nation) has pulled their dollar peg; 3) Venezuela (an OPEC Nation) has been very vocal about moving to price oil in other currencies.

Well, the OPEC rhetoric is heating up:

U.A.E., Qatar May Drop Dollar Pegs Within Months

May 26 (Bloomberg) -- The United Arab Emirates and Qatar could abandon their currency pegs to the U.S. dollar in favor of a basket of currencies within months, and Saudi Arabia may follow the move late next year, The National said, citing a Merrill Lynch & Co. report.

Gulf states have been under pressure to drop their dollar pegs after inflation hit record levels. Kuwait dropped its currency's peg to the dollar last May, but others have all kept their links, citing the need to keep currencies fixed until they form a monetary union in 2010, and the limited inflationary impact of the weak dollar.

The heat is on, so today Henry Paulson, US Treasury Secretary and leader of the US Plunge Protection Team, met with Saudi's Finance minister to reiterate his typical B.S. propaganda about supporting a "Strong Dollar" and publicly stated that any dollar-peg transition would be a "sovereign" decision... Yea right! I wonder what is stated behind closed doors?

Paulson says strong dollar in US interest, Saudi peg 'sovereign decision' UPDATE

JEDDAH Saudi Arabia - US Treasury Secretary Henry Paulson reiterated his support for a strong dollar today after meeting with Saudi Arabia's finance minister, but he also said the decision on whether to maintain the Saudi currency's dollar peg is entirely up to that country's government.

Asked about increasing talk that Saudi Arabia and other Persian Gulf countries might decide to remove their currency pegs to the dollar, given the effects of its plunge, Paulson signalled the US would not try to deter them.

'That is a sovereign decision,' Paulson said, adding, 'the dollar peg I think has served this country and this region well.'

On the same question, Saudi Arabia's finance minister Ibrahim al-Assaf said 'We have no intention of de-pegging or revaluation.'

Well folks, as I see it, it's only a matter of time. We have very few barganing chips left and our geopolitical goodwill is completely shot. When the dollar peg is eventually removed and then when oil is priced against a "basket" of currencies vs just the dollar, we'll be praying for the God-send of $4 gal gas.

Hold on to your hats!



Anonymous said...

Hi Randy,
I hope it was OK to post this article in your comments section. It relates to the subject, OIL, and makes for some interesting reading. Nyquist isn't considered a conspiritist either, so there's probably a lot of truth in it.

Please let me know if you don't want long articles like this posted and I will refrain in the future. I couldn't find 'rules' for your comments section, and I didn't have your personal email to get permission. I appreciate your blog...Thanks!

The Oil Problem, Part II
by J. R. Nyquist

Weekly Column Published: 05.30.2008
According to Thursday’s Wall Street Journal, “petroleum products shipped by the world’s top oil exporters fell 2.5 percent last year, despite a 57 percent increase in prices…” We are told, further, that leading petroleum producers are using more oil for themselves. And yet, at least one expert believes there is a coordinated campaign of supply strangulation underway. Quite obviously, if you’re choking off the oil supply of the world’s most powerful country you might be afraid to admit what you’re up to.

Are the Saudi’s really using more oil themselves, or is this a convenient excuse? With the U.S. military poised in neighboring Iraq would you want to admit withholding oil from the world market? Recent huddles between Russian and Saudi leaders crave explanation. What does Moscow have in common with the House of Saud? Both countries export oil. Last month the Wall Street Journal suggested that the rise in food and oil prices was “a monetary phenomenon.” But let us not be fooled by the old chicken-and-egg problem. Interpretation allows many variations on the truth, and many nuanced readings. A commodity boom has been underway. One might even say there’s been a provocation.

In a recent interview with the Telegraph (UK), George Soros told the paper’s economics editor that speculation “is increasingly affecting the price” of oil. He noted, “The price has this parabolic shape which is characteristic of bubbles.” Soros believes that real estate prices are going to plummet further. Stagflation is here. Oil prices are connected with the value of money, the state of productivity, and general economic expectations.

It may be argued that Federal Reserve policy is responsible for a commodity bubble, just as Fed policy previously sparked bubbles in the stock market and real estate. Perhaps we are approaching the hour in which there are no safe havens because every haven has, in turn, been “bubbled.” Is the civilized world about to suffer the greatest, most total “correction” in economic history? As our civilization has lost its sense of reality, its taste for truth, recent economic growth may have been more fictional than real. We think there is money in our pension funds. We imagine that our homes are worth twice their previous value. We believe our stocks and bonds are worth holding onto. But thinking, imagining and believing in wealth doesn’t make it real. Perhaps we are on the brink of the greatest revaluation of economic values in all history. And it’s all connected to oil.

Consider the fate of the dollar: If the dollar is doomed, what will replace it? Perhaps the new global currency is the hydrogen bomb. As the free world is shaken the dictators arise. In their world power isn’t measured in dollars. It is measured in missiles, bombs and guns. Someone recently suggested that the Fed won’t exist in a decade. Perhaps the Fed won’t next year. If oil prices continue to rise, if the recession worsens, if the red flags indicating defaults on car loans, housing loans and credit cards plays out: we will be living in a different world come January 2009.

I cannot help thinking back to the Russian Duma hearings of June-July 2001, when economist Tatyana Koryagina warned that America was about to be attacked by “shadow forces.” She said the dollar would become worthless. Several weeks later, Arab terrorists hijacked planes and flew them into the World Trade Center and the Pentagon. The financial damage was hard to calculate, given the tipsy tipping point in our overvalued stock market. No doubt the Fed was bound to respond with easy money. Here we see the damage done by our own damage control: The real estate bubble began after 9/11 – arguably, in response to 9/11. The problem now metastasizes. To prevent the bursting of one bubble, a new bubble has been created in real estate and now commodities. Food and oil prices have soared. The problem metastasizes further. OPEC chooses its moment for revenge.

Consider the May 22 testimony of Anne Korin before the House Committee on Foreign Affairs, which begins as follows: “Mr. Chairman, Members of the Committee, about ten years ago, Osama bin Laden stated that his target price for oil is $144 a barrel….” Now isn’t that remarkable? “At the time,” noted Korin, “$144 a barrel seemed farfetched to most.” Yet here we are, within $20 of bin Laden’s target figure. Whether owing to our own stupidity or the enemy’s expert calculations, we’re on the verge of defeat. “I would like to impress upon this Committee,” said Korin, “that $144 a barrel oil will be perceived as a victory for the Jihadist movement and a reaffirmation that the economic warfare component of its campaign against the West is a resounding success.”

One may also take into consideration our relations with the Muslim world which contains “more than 70 percent of the world’s proven oil reserves and over a third of production….” As Korin explained to the House Committee on Foreign Affairs: “While the U.S. economy bleeds, oil-producing countries like Saudi Arabia and Iran – sympathetic too, and directly supportive, of radical Islam – are on the receiving end of staggering windfalls.”

The Bush administration has angered the Saudis by installing a Shiite “democracy” in neighboring Iraq. “OPEC, spearheaded by Saudi Arabia, is deliberately keeping oil supply tight to prop up prices,” says Korin. “Not only is Saudi production lower today than it was two years ago, despite the increase in demand, but the cartel has effectively deleted 2.4mbd from the global oil market in what amounts to an accounting scam.”

How quickly we have forgotten, and how quickly we congratulated ourselves at getting out from under the stock market debacle of 2000 and the financial hit of 9/11. What we managed, I suspect, was a postponement. More recently the Fed spent half a trillion in support of teetering financial institutions; and American citizens are losing billions more in higher gasoline prices. To avoid catastrophe we have weakened our currency. And now we’re at the end of the tether.

The addiction to easy money comes to grief, as all addictions do. Yet there’s been no panic, no crash, no Great Depression. Instead, a giant pillow has been applied to the financial sector, smothering the gasping victim quietly. We cannot let the air out of the Great Bubble. We forget that one must exhale as well as inhale. And so we continue to suffocate. The dollar will continue to fall and oil will continue to rise.

Copyright © 2008 Jeffrey R. Nyquist
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Randy said...

No problem David. Feel free to post anything you feel relevant - I have no rules set for the comment section and it is there for all to use.

Bottom line: The intention of this blog is to educate/share info. The more the merrier!

With that said, if you look down four posts, that same article was posted up Friday evening. :>)

All the best!



Opec is not what it used to be.


Oil is king.