Excerpt GEAB 72 (February 2013) - 2013-2015: The end of the petrodollar’s rule over the world


- Excerpt GEAB N°72 (February 15, 2013) -



(excerpts)

Next, clearly oil plays a vital role in the whole of this story. When, in January 2006, the first GEAB issue anticipated the fall of the Dollar wall, the comparison was made between the Berlin Wall and the Iron Curtain which made it possible for the Soviet system to hold up for so long and the Dollar Wall which protects America. But this Dollar Wall itself is founded on oil, this so strategic raw material which oblige(s) (ed) the planet to resort to the US Dollar to get it. As long as oil is still paid for in US Dollars, the demand which it creates ensures the currency’s domination. The fact that the European Union followed the United States’ sanctions against Iran, rather than to pay for its oil in Euros, suits them well. But the easing of relations with Iran and the June 2013 elections which will see another president follow on from Mahmoud Ahmadinejad creates a situation favourable to abandoning these sanctions and oil imports paid in Euros. This action would strongly accelerate the petrodollar’s retreat.

Finally, this sliding out of the Dollar is being prepared for by many countries as the gold market shows: record purchases of gold by the central banks (26), record purchases by China as well (27), Germany’s wish (in particular) to repatriate its gold back home (28)... (29)

Chinese gold purchases in 2012 (in tonnes) - Source: ZeroHedge
Chinese gold purchases in 2012 (in tonnes) - Source: ZeroHedge
The objective of these gold purchases are, in particular, to ensure countries’ survival when confidence in the Dollar collapses and it won’t be used to buy oil anymore (30) and in order to get through the following monetary storm, perhaps also in the eventuality of the SMI restructuring itself around a Gold Standard.

The United States’ desperate search for short-term energy independence at the cost of their environment can be also read from this angle: if the Dollar isn’t the single central currency of the system anymore and it’s strongly devalued, how will the country import oil which has become too expensive for it?

The repercussions on the rest of the world

Needless to say oil geopolitics will be upset by this change, dormant since the beginning of the crisis. This is why we are devoting the telescope section of this number to studying oil. Incidentally, it’s not insignificant to note that the crisis’ beginning coincides with the time when emerging countries’ consumption exceeded that of the “developed” countries.

Crude oil demand: in red the US, Europe and Japan; in blue: rest of the world - Source : yardeni.com
Crude oil demand: in red the US, Europe and Japan; in blue: rest of the world - Source : yardeni.com
What has radically changed the landscape since the Iron Curtain fall is the appearance of two quite distinct blocs of oil consumers: a block around the West and the other around China and the emerging countries (or BRICS), in the knowledge that the consumption by the first is in a downturn whilst that of the second is expanding fast. When the West decides to no longer buy a country’s oil anymore, it is automatically bought by the BRICS, China in particular. Thus the West’s zone of influence and the territories of supply continue to shrink.

If one dares to make a comparison, like in the time of the cold war, an oil producing country now has two customers to turn to. When a country knows how to play, that gives it a certain amount of room to manoeuvre and makes its destabilization more difficult. Nigeria, for example, a traditional supplier to the United States, has recently been taken off-guard by the US announcement that they wouldn’t buy any more of its oil (31) (under the pretext that their shale oil production would be sufficient). No matter, China will be happy to extend its influence a little further in this country...

[...]

An increasingly reduced private domain

To protect their energy independence, the United States has favoured imports from producers with close geographical or political ties (63). Nevertheless, when Mexican production falls, it’s Saudi Arabia which is called upon as the swing producer, in spite of the intrinsic risk of latent volatility in the Middle East (64). For its part Venezuela, rebelling against Washington, is preparing to construct a pipeline via Colombia to diversify towards a Chinese clientele (65).

In the US-OPEC relationship, it’s the latter and especially Saudi Arabia which holds the initiative. It has an “anvil”, which protects it from being destabilized: the risk of disorder in the country which could take the price of a barrel to $300, with dramatic consequences for the world economy (66). It also uses a “hammer”, for example in 2012 to impose the biggest annual fall in its production and thus support the already high price of a barrel (67). As a sign of the times, OPEC even takes the liberty of reproving the United States over its financial problems (68).

United States’ oil suppliers – Source: Nelscon Hsu / NPR
United States’ oil suppliers – Source: Nelscon Hsu / NPR
Arabia is freeing itself from US influence to accommodate its primary customer: China.

Since America is less dependent on Middle Eastern oil than Europe or Asia, the enormous military cost of providing security to the region (69) - which meets the tacit 70s agreement with the Saudi authorities forcing dollar use in oil transactions (70) - is pursuing another challenge: the survival of the petrodollar which ensures global demand for the greenback and guarantees it an artificial value, independent of fundamental US economics. Here lies the only US option to continue financing its debt, the essence of its economic survival.

However, recent US intervention in the region, as much military (leaving Iraq in tatters, triggering disorder in Mali after Libya) as policies (generating dangerous chaos in Egypt following the “Arab Spring”, seeking a change fated to fail in Syria, supporting Israel in its bellicose threats against Iran), have only shown in the eyes of the world a complete failure to understand the terrain and a major inability to impose order. Their flexibility and credibility are shown as considerably weakened for the next few years.

China and the emerging countries question the petrodollar’s supremacy

In 2005, emerging countries’ consumption exceeded that of the Western nations. The appearance of this “second” customer, rich and gourmand, constituted an irresistible opportunity for the producers, pushing up oil prices and radically transforming relations between the Western powers and OPEC. This major oil market rebalancing was obviously not done for the Western powers’ benefit, deep in debt and unable to pay the slightest increase in the price of oil. The strategies then implemented by the West have contributed to splitting the oil market into two: on one side, an OPEC increasingly oriented towards the emerging nations and diversifying its sales outside the petrodollar; on the other, a “new” unconventional market based on extraction from Western lands by extremely polluting fracking, a market “invented” to put downward pressure on world market prices, to keep the petrodollar alive and reduce dependence on the world market. It’s not difficult to see where the future lies.

China’s oil suppliers – Source: EIA
China’s oil suppliers – Source: EIA
China makes its suppliers partners (71)

Growing rapidly, China is aware it’s vitally dependent on fossil fuels, in particular coal whose consumption is skyrocketing (72), but also oil. To guarantee stable development, it weaves an ecosystem politically and economically aligned to its interests.

With 25% of its crude imports coming from Africa, China has invested in Angola, Nigeria, and particularly in Sudan for exploration and refining (73), ignoring the Western position on Darfur.

In 2012, an agreement was signed with Saudi Arabia to build the largest refinery in the world there, a joint venture amounting to $8.5 billion (74).

The BRICS tools to break free from the petrodollar: bilateral agreements in rapid succession

Beyond this strategy based on co-operation which ensures the commitment of its partners on jointly produced long term growth, China places itself as engine of the emerging countries’ agenda to break free of the petrodollar monopoly and its constraints.

Under a Western embargo, Iran sells its oil to China for Yuan (75), much more effective than through the Iranian Oil Bourse project (76). And these agreements have multiplied in just a few months to exclude the dollar from oil purchases and other commercial transactions: with the United Arab Emirates (77), Brazil (78), Russia (79), the BRICS between themselves (80), but also with countries in the Western sphere, like Japan (81) or Australia (82). China takes a similar stand over territories which, a priori, are under US influence, with the huge $15 billion purchase of the Canadian oil company Nexen well underway, which will open up the options of tar sands operations and drilling in the Gulf of Mexico (83).

Outside of China, the emerging countries are following similar initiatives, for the purchase of Iranian oil through Turkey for gold (84) or for trade between India and Japan (85).

If one adds to this emancipation from the dollar in general and the petrodollar in particular, the political coherence of the oil producers’ bloc opposed to US power that Russia, Iran and Venezuela form combined with China, there’s no doubt for LEAP/E2020 that 2013 will see the end of the reign of a petrodollar whose territory is gradually shrinking away to nothing.

The splitting of the oil market into two

The national companies, at the heart of these agreements with the emerging countries, only handled 10% of oil production in 1970 against 90% today (86). A collateral consequence of this change in gravity, the private companies – the famous majors, primarily Western - making media noise with their latest profits due to the rise in the oil price, have actually completely lost speed. Currently, with production falling regularly these last few years (as is the case with Exxon and Chevron (87), Shell (88), BP (89), Total (90) or Gazprom (91)), but also in the future, since their prospecting territories are amongst the most difficult and thus the most expensive to operate. The parallel with the financial industry, which blusters thanks to results artificially inflated by Quantitative Easing operations to better hide a future condemned by an exponential dependence on debt, is striking.

[...]

Oil crisis: Special recommendations for European leaders

In today’s world undergoing acute transformation, the radical changes in progress can make the interpretation of a country or an area’s interests difficult if they are not correctly understood. Oil questions in particular, as we have seen, are playing a significant role in the current world’s reorganization. Within this framework and in order to clarify Europe’s interests to approach the future in the best shape, we give five simple recommendations (99) for submission to European leaders.

1. Lift sanctions on Iran

First of all, these sanctions won’t have any effect on the Iranian nuclear programme since the country sells the oil which it can’t get rid of in the West to China or others without any difficulty. They do nothing but instil a little more feeling of hatred towards the West in the Iranian population. Then, these sanctions distance Europe from the BRICS which, on the contrary, support Iran. It’s a very bad strategy so much as it’s clear that the future is on the side of these emerging countries. Lastly, whilst following the United States with these sanctions, Europe has shot itself in the foot. It loses a major supply of quality oil where the United States doesn’t suffer at all since they didn’t import Iranian oil. It is deprived of an opportunity to pay for its oil in Euros on the Iranian Bourse, thus reinforcing its dependence on the US dollar whose future isn’t brilliant however. The window of opportunity for this decision follows the Iranian June elections: the current President Mahmoud Ahmadinejad cannot in fact stand for a third term of office and another president will thus be elected. Whether the policy of the new Iranian President is to continue his predecessor’s or not, this change allows the argument of a more welcoming Iran to lift European sanctions without going back on its views.

2. Buy oil in Euros

Lifting sanctions on Iran is a first step towards payment for oil imported into Europe in Euros. Using the dollar is in fact a nonsense for several reasons: first, that requires a supply of dollars which is far from obvious when one recalls the attempt at draining of the flow of dollars to the European banks in 2011 (100); secondly, the exchange rate risks are far from negligible during the present turbulent times; thirdly, using the dollar is to support the US economy’s instability and weakness.

When you have the primary world economy’s currency, you shouldn’t hesitate to use it to pay for your oil. Not to do so serves to weaken the Euro’s role. Not to do so serves to carry the world-before at arm's length rather than invest in the world-after.

3. Play an active role in reforming the international monetary system

The two preceding recommendations fall within the more general framework of the problem of the dollar’s central role. The dollar’s key position as the international reserve currency could be justified after the Second World War when the United States dominated the world and gold convertibility was still guaranteed. But the dollar’s centrality as the principal reserve currency in the present “non-system” is at the source of the world crisis and encourages the United States to run fiscal and trade imbalances, pushes it to defend its currency and petrodollars at the cost of wars and destabilization, and finally transfer their problems to the rest of the world.

To turn the page on the crisis and set out again on solid foundations, it is essential to create a new international monetary system, based on a basket of currencies (including gold) or on some other solution. Europeans can and must play an active role here, thanks in particular to the experience gained with setting up the Euro. They will find powerful allies in the BRICS countries, convinced of the need for this reform.

Finally, let’s note that, paradoxically, this recasting will also benefit the United States enabling them to benefit from the new dynamic rather than getting bogged down in their insoluble problems.

4. Get closer to the BRICS

In fact it’s here where the future lies and not on the United States’ side. The dynamic about which we spoke above comes from this group of countries. Europe as a footbridge between the East and West has the choice between remaining anchored to the United States or turning to the BRICS. Between sticking to a declining power and turning towards the future of the world, there’s no need to hesitate. The strategic Euro-BRICS rapprochement must thus become a priority in 2013, especially with the G20 meeting in St Petersburg and the prior BRICS Summit in view.

5. Don’t enter into the suicidal rationale of shale gas on European soil

As we see in this GEAB issue, shale gas extraction is a flash in the pan which is quickly exhausted at the cost of considerable environmental damage. Mortgaging the environment for a few years of slightly higher growth, whilst preventing the weaving of tomorrow’s international cooperation, is quite a sad thought. And this thought prevents finding the alternatives to fossil fuels which will give the country controlling them a substantial advantage however. Europe’s future plays out permanently without shale gas.

---------
Notes:

26 Source : CNBC, 14/02/2013

27 Source : ZeroHedge, 05/02/2013. China seems to have an interest in hiding the true figure of its gold reserves since it claims to hold approximately 1,000 tonnes whereas it buys 800 tonnes a year.

28 Source : Le Point, 16/01/2013

29 On this subject it’s interesting to wonder why 300 tons of gold stored in Paris have been transferred immediately to Germany, whilst the 300 tons in New York will take seven years to be transferred... The reaction wouldn’t have been any different if the gold was no longer on US soil.

30 Read Petrogold: Are Russia And China Hoarding Gold Because They Plan To Kill The PetroDollar? (The economic collapse, 12/02/2013) and The Petro-Dollar Sunset (Silver Doctors, 18/01/2013).

31 Source : AllAfrica, 28/01/2013

[...]

63 Source : « Where The U.S. Gets Its Oil », Energy Information Administration, Avril 2012

64 Source : « U.S. Reliance on Oil From Saudi Arabia Is Growing Again », NY Times, Aout 2012

65 Source : « Venezuela-Colombia Oil Pipeline: Leaders Discuss Plans For Project », Huffington Post, Novembre 2011

66 Source : « Yamani: Oil could reach $300/bbl over unrest in Saudi Arabia », Centre for Global Energy Studies, Avril 2011

67 Source : « Saudis cut oil output to lowest in a year », Financial Times, Décembre 2012

68 Source : « OPEC Cuts Oil Output to 14-Month Low Amid Economic Uncertainty », Bloomberg, Janvier 2013

69 Source : «The Cost of Protecting Oil in the Persian Gulf», Resources For the Future, Janvier 2012

70 Source : « Washington-Ryad : les liaisons dangereuses », RFI, Septembre 2003

71 Source : « China’s crude oil imports by source 2011 », EIA, Septembre 2012

72 Source : « EIA: China rivals the world in coal consumption », PennEnergy, Janvier 2013

73 Source : «Sudan: China, Sudan Agree to Increase Oil Production - Officials », All Africa, Novembre 2012

74 Source : « Saudi oil refinery deal shows close ties », China Daily, Janvier 2012

75 Source : « Iran accepts Yuan for Oil trade with China, threatens US Dollar », Commodity Online, Mai 2012

76 Source : « Iranian Oil Bourse », wikipedia

77 Source : « Dim sum bonds sprout in Dubai », CNN Money, Mars 2012

78 Source : « Brazil and China agree currency swap », Financial Times, Juin 2012

79 Source : « China-Russia currency agreement further threatens U.S. dollar », International Business Times, Novembre 2010

80 « BRICS to sign pacts for trade in local currencies », Zeebiz India, Mars 2012

81 Source : « China and Japan to start direct yen-yuan trade in June », BBC, Mai 2012

82 Source : «Currency pact with Australia is ‘natural’: Zhou », Financial Review, Novembre 2012

83 Source : « Nexen sale to China's CNOOC backed by Canada government », BBC, décembre 2012

84 Source : « Turkey Swaps Gold for Iranian Gas », Wall Street Journal, Novembre 2012

85 Source : « India and Japan sign new $15bn currency swap agreement », BBC, Décembre 2011

86 Source : « National oil companies reshape the playing field », Bain, Octobre 2012

87 Source : « Exxon and Chevron toil in hunt for growth », Financial Times, Février 2013

88 Source : « Oil giants like Shell, BP struggle to increase output », First Post, Novembre 2012

89 Source : « Remaking BP has yet to pay off », Financial Times, Janvier 2013

90 Source : «PETROLE – Total : production en baisse, résultats en hausse», Enviro2B, Février 2013

91 Source : « Under Pressure: Once Mighty Gazprom Loses Its Clout», Der Spiegel, Février 2013

[...]

99 Simple, but requiring a certain political courage.

100 Cf. GEAB n°62 (February 2012). One wonders if that can’t happen again during a dollar debacle.

Lundi 4 Novembre 2013
LEAP/E2020
Lu 8095 fois

GEAB N°90 - Contents

- Published on December 15, 2014 -

Global systemic crisis 2015 – Oil, currencies, finance, societies, the Middle East : Massive storm in the Western port!

. « Global systemic crisis: the end of the West we have known since 1945 »
. The oil crisis is systemic because it is linked to the end of the all-oil era
. The US in one hell of a state
. Europe post-Ukraine: lots of questions
. Three missions for the new Europe: resolve the Ukrainian crisis, put Euro-Russian relations back on the right path, avoid a European QE
. Middle East: traditional alliances’ big waltz
. Saudi Arabia, Iran: the allies change sides
. And Western « values » in all this
Read the public announcement

2015 – new phase of the crisis: the oil systemic crisis

. The impact of speculation
. Price War
. Systemic oil crisis and finance
. Systemic oil crisis and geopolitics
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Investments, trends and recommendations

. Oil: beware!
. Energy intensive industries like airline companies
. Renewable energy: the good and the bad
. 2015: Euro & Yen rebound
. Gold: still safe
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Evaluation of our anticipations for 2014
(from GEAB N° 81 in January 2014): a 69% success rate
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