America uses a disproportionate share of
the worlds oil
Why pick out USA to discuss the effect
of an internal recession on decreased use of the worlds oil supplies?
Simple. Because the USA uses a hugely
amount of the oil resource
available to the worlds people (in 1999 USA burnt over 17 million
barrels a day - four times the amount China burnt, eight times more
India burnt, over four times more than all the former Soviet empire
burnt, six times the amount Germany burnt, and so on). Because USA
takes hugely more than its
fair share, any internal USA recession will drive down the profligate
American waste of this finite resource. As a result, the globes common
be able to be spun out just a little longer.
The American government
has had an unique ability to delay or mitigate a recession through
unilateral military action, possible because of its immense military
power, and because of the weak form of democracy in America.However, as
of late 2008, that strength has been eroded by the financial collapse
flowing from the greed of American and European bankers.
The historical and present political, societal and
economic conditions now make a deep recession in USA inevitable; but
would the effects of a deep USA recession be sufficient
to slow global oil depletion?
The American form of democracy is
structurally weak and subject to special interests
"...the word “democracy” is not only never mentioned in the
the United States, but democracy was something that the founding
fathers hated... Our founders feared two things.
One was the rule of the people, which they thought would just be a
mess. And they feared tyranny, which we had gone through [with] King
III, and so they wanted a republic, a safe place for men – white men of
property to do business in. This is not ideal, but it's better than
what we have."
Gore Vidal, author of 'Imperial America: The United States
The American system of governance is via a 'duopoly' (the 'simple
majority' form of voting effectively means Republican and Democrat
parties are the only parties available to vote for; therefore huge
numbers of American people are effectively disenfranchised, so don't
vote at all) which has entrenched unelected business and military
relationships within all administrations. This erosion of democracy is
made worse by an 'office of presidency', whose candidates are under the
heavy influence of business-military 'special relationships'.
The presidential office then assigns itself 'special powers' beyond
purview of the peoples elected representatives. The power in the hands
of the president - who is also the head of the military - allows him to
and/or kill people in any country he choses (in consultation with his
military and his secret service; some would say and in consultation
with business interests 
The partial capture of the American system of Governance by unelected
allows a great deal of room for rewarding party
donations from big business. It allows a great deal of 'special
interest' support - which must be 'paid back'. Pay back is in part by
giving important and handsomely paid jobs in governance to party
'friends', instead of to professional and uncorruptable servants of the
public. Payback for big money donations from business can come from
awarding contracts within USA, and in countries the USA government has
in which it has based itself.
contract became the subject of controversy soon
after it was awarded in March 2003
without competitive bidding.
was originally contracted to protect Iraq's oil infrastructure from
sabotage. Instead, the government retained it to buy and deliver fuel
to Iraq to stave off civil unrest after the fall of Saddam Hussein's
regime. Halliburton shipped in gas, kerosene and other fuel from
Kuwait, Jordan and Turkey.
officials have said they gave the company the contract without bidding
because of the need to move quickly. However, questions remain over the
role of administration appointees in its awarding. At least two
civil servants have raised the possibility that political pressure was
applied in different stages of the contract process.
released a preliminary audit in December 2003 that raised questions
over $61 million in possible excess charges. The latest audit increases
the total amount in question to $108 million and is much sharper in its
Los Angeles Times, 15 March 2005, reporting on a Defense Department
audit available only to the presidency; an audit withheld from the
Peoples elected Representatives in Congress.
It can come from designing legislation to favor business
(not a citizen of USA i.e. not a 'natural person', and maybe partly
foreign), even over the
interests of the ordinary citizens. It can come from payment to
taxpayer money as 'subsidies'. Yet the money was paid by American
People for Public Governance, not
informed public, poor presidential accountability, criminal actions
The nett effect of extremely weak democracy and a somewhat autocratic
presidential office (with reserve dictatorial powers to repress
citizens rights not yet used) is that a climate
of control of information can arise through a 'soft', 'patsy' and
'beholden' mainstream press. The elected representatives of the duopoly
are focussed on almost entirely on the American mainland - relatively
congressmen and congresswomen have even travelled to Europe, for
example. It is not in their
interests - in any sense - to 'stir up' popular apprehension by telling
the American People the truth. And so they don't. (With the sole
exception of 'the man' - the man bigger than his politics - Roscoe
Bartlett, Republican truth teller).
The interests of the American political body is little different to the
interests of business, and by extension, its military. The American
administration has always protected its business interests in other
countries with little regard for human rights; supporting and equipping
thugs and dictators (including Saddam Hussein) where it suited American
business/military interests, and thereby assisting brutal gangsters to
murder and torture huge numbers of ordinary citizens in 'countries of
interest' around the world. Until the eighties, the US government even
ran a torture
school in USA.
The American public are fed half
truths, managed headlines and misleading sound bites
Twisting and suppressing 'inconvenient' facts has become an
art-form of successive USA administrations. For this reason, hiding the
America is now a dependant state for its oil has been easy - so far.
manipulation of the popular media (and particularly television) has
extraordinarily thorough and astonishingly effective.
Hiding the fact that America is now dependant on the goodwill of
'heathen foreigners' - peoples of Saudi Arabia, Iran and Iraq in
particular - for its economic wellbeing has been easy so far.
had made in
a speech at the London Institute of
Autumn lunch in 1999
was Chairman of Halliburton
from his speech was: "For the world
as a whole, oil companies are
keep finding and developing enough oil to offset our seventy one
million plus barrel a day of oil depletion, but also to meet new
demand. By some estimates there will be an average of two per cent
annual growth in global oil demand over the years ahead along with
three per cent natural decline in production from
existing reserves. That means by 2010 we will need on the order of an
additional fifty million barrels a day. So where is the oil going to
come from? Governments and the national oil companies are
control of about ninety per cent of the assets... the Middle East with
two thirds of the
world's oil and the lowest cost, is still where the prize ultimately
“By 2020, Gulf oil producers are
projected to supply between 54 and 67
percent of the world’s oil. Thus, the global economy will almost
certainly continue to depend on the supply of oil from Organization of
Petroleum Exporting Countries (OPEC) members, particularly in the Gulf.
This region will remain vital to U.S.
Dick Cheney, Chairman of the
National Energy Policy Development Group, in Chapter 8 of the National
Energy Policy Report, handed to President Bush in May 2001
weakness of American democracy has historically allowed the USA to
install puppets in other peoples countries whenever it suited its
interests; American democracy was so much further weakened by the
breath-takingly cynical contempt for American citizens (and ordinary
military) by the unelected officials and presidency in misrepresenting
why they were willing to forgo the US traditional and highly effective
indirect 'sponsored brutal puppet regime system' and 'use'
their military directly to invade Iraq to secure the oilfields.
with best friend status by the west for its cooperation. There has been
little concern that the government is undemocratic and breaches human
rights, nor that it is in the grip of an extreme form of Islam.
American support it has been believed that the regime can be protected
and will do what is necessary to secure a supply of oil to the west at
reasonably stable prices.
Since September 11, however, it has
become increasingly apparent to the US administration that the Saudi
regime is vulnerable. Both on the streets and in the leading families,
including the royal family, there are increasingly anti-western
voices... Reports of the removal of billions of dollars of Saudi
investment from the United States may be difficult to quantify, but
they are true.
the world's largest oil reserves falling into the hands of an
anti-American, militant Islamist government is becoming ever more
likely - and this is unacceptable.
The Americans know they cannot
such a revolution. They must
therefore hope that they can control the Saudi oil fields, if not the
government. And what better way to do that than to have a large
military force in the field at the time of such disruption. In the
name of saving the west, these
vital assets could be seized and controlled. No longer would the US
have to depend on a corrupt and unpopular royal family to keep it
supplied with cheap oil. If there is chaos in the region, the US
forces could be seen as a global saviour. Under cover of the war on
terrorism, the war to secure oil supplies could be waged.
This whole affair has nothing to do
with a threat from Iraq - there isn't one. It has nothing to do with
the war against terrorism or with morality. Saddam Hussein is obviously
an evil man, but when we were selling arms to him to keep the Iranians
in check he was the same evil man he is today. He was a pawn then and
is a pawn now. In the same way he served western interests then, he is
now the distraction for the sleight of hand to protect the west's
supply of oil
- Mo Mowlam, Parliamentarian and member of UK Labour cabinet from
1997-2001 under prime minister Blair
"As many studies show, companies and their sponsor governments do not
shrink from backing dictatorial governments, using bribery and
corruption, promoting civil
violence and even resorting to
war, to meet
their commercial goals and best their competitors. The
modern history of the Middle East bears witness to this process.
notorious example, US intelligence
services recruited in 1959 a young
Iraqi thug named Saddam Hussein to take part in the assassination of
Iraqi Prime Minister Abd el-Karim Qasim. Washington feared that
nationalist Qasim might act independently and alter the
under which their oil companies operated.
A few years earlier, in 1953, the CIA
engineered a coup in Iran,
overthrowing the democratic government of Mohammed Mossadegh and
installing the autocratic Shah, in order to gain control over Iranian
oil and redistribute British production shares to US companies
- James A. Paul, in 'Oil Companies in Iraq: A Century of Rivalry and
War' 2003 (emphases added)
What bearing does the seriously flawed nature of American democracy -
including influencing and manipulating the mass media -
have on the USA domestic rate of use
, let alone conditions for a recession?
The importance is that the American People have had the opportunity to
make informed choices - to act quickly to reduce
consumption for instance -
stolen from them because they have been deliberately kept
a result of a weak form of democracy that
information and power by a small elitist
clique of rich people at the top
American People have not been fully or truthfully informed by the
USA administration. The most popular and wide-reaching media are
unlikely to provide the sort of impartial, relatively high quality,
information that highly professional non-partisan information
sources such as the BBC provides. The values of personal enrichment and
low-cost personal indulgence on TV promote a culture where there is low
popular awareness of the world, and low popular awareness of issues of
fairness and equity in other societies. The popular expectation is that
everything will always be OK
. In a business beholden duopoly, no
going to say otherwise.
public-spirited press, with trained intelligence to know the right and
courage to do it, can preserve that public virtue without which popular
government is a sham and a mockery.
A cynical, mercenary, demagogic
press will produce in time a people as base as itself."
- Joseph Pulitzer
People have not been truthfully told petrol will never be cheap
again. When they learn that petrol prices will increase
from now on, that the alternatives are illusionary, they will be deeply
People will be shocked when they learn that increased oil prices
will structurally 'cement in' higher prices for almost all goods and
services, and that some businesses will become uneconomic, and some
people will lose their jobs.
When it is finally revealed to American workers that the value of the
USA dollar has been backed not by gold (as it used to be prior to
oil, and that backing is no longer there,
they will start to ask questions.
When the citizens of America find out for themselves - their political
tell them - that in fact the value of the greenback is now based on
psychological confidence and little
, they will worry how long it
can last before the value of the greenback drops.
And drop it will.
The USA government indebtedness is
managed by issuing IOUs unbacked by collateral
“If the American people ever
private banks to control the issue
of our currency, first by inflation, then by deflation, the banks and
the corporations that will grow up will deprive the people of all
property until their children wake up homeless on the continent their
fathers conquered. The issuing of power should be taken from the banks
and restored to the people, to whom it properly belongs.”
The USA national debt is huge (about 500 billion dollars 2004/5). The
USA has been printing money on a
massive scale. In the six years from from mid 1999 until mid 2005 the
Federal Reserve - a private, bank-owned, organisation - 'increased'
money supply by a massive 55%, from $6,237
billion to $9,727 billion. The money supply due to deficit money
creation is expected to be 1 trillion dollars or more by the end of
2009. The money supply between 2005 and 2009 will have easily doubled.
The Fed increases the supply in the main by in effect printing and
'treasury bonds'. The
utterly worthless unless someone buys them. The inducement is that the
bonds pay interest. They become a government instrument to manipulate
the economy. High interest to attract overseas borrowers. Low
interest to encourage domestic loans and consumer spending and dissuade
saving. As at july 2005, average national individual savings in USA
0.6% - a record
low. Bonds are made high interest again when 'excess' consumer spending
(often on credit cards or personal loans added to mortgage loans)
more demand than supply, and shop keepers can cream more profit by
raising their sales margins (this is 'inflation').
So long as the huge American internal economy was
doing well, treasury bonds were a fairly safe bet. Now, at the start of
the USA recession,
be a safe bet. In a deep
recession consumer spending slows right down. Domestic loans are
unaffordable. Then overseas bond sales are essential to fund the
government deficit spending. Normally, interest rates
must go up. But the International market has been for government and
AAA rated industrial bonds is almost as bad as the USA market. There
are few 'better' bonds. All are pretty much as bad as each other.
Therefore, fear of losing their money in the bank pushes people to
continue to back government bonds. In turn, to 'stimulate' the economy,
the bonds can be issued at extremely low interest rates and still find
buyers. Whether the international market continues to buy the bonds -
loaning money to the USA government to cover its debts - depends on
the market believes the bonds will be redeemable in the longest term.
USA depression, bonds would reflect both the value the
international market puts on both the US dollar, and the fundamental
soundness of the USA oil-based economy.
The other way the US government has printed money was by taking all
for mortgage loans written by private business via its
Congress-created-and-backed 'Fanny Mae' and 'Freddie Mac' mortgage
businesses. Fanny Mae and Freddie Mac buy mortgage debt from private
enterprise, guarentee the repayments, then bundle the debt it into
securities, which they re-sell to overseas investors. Those private
businesses privileged to sell home loans to Fanny Mae seize the public
benefit offered them with both hands, and write as much low deposit
mortgage they can - and socialise their private risk at the same time!
The taxpaying public is burdened with the risk, the mortgage writers
take the benefit. With such an ironclad gift for the rich, it is
business has managed to create $US1.5 trillion of mortgage debt to the
account of these two corporations - with USA tax-payers as guarentors
of this massive sum.
Many of these Fanny Mae securities are for short periods. In a deep
recession, maturing securities are unlikely to be able to be re-sold,
unless interest rates on them are very high. There will be little
ability for people to repay higher interest rates on re-newed mortgage
loans. Luckily for the banks and businesses that wrote the loans in the
first place, Fanny Mae guarantees repayments. Which means the
government - the taxpayer - is finally saddled with the debt. The debt
must be added to the government deficit - requiring further sales of
As at july 2008 Freddie Mac owed $5.2
than the value of its rapidly devaluing 'derivative' and poor-quality
mortgage assets - making it now technically insolvent. The value of
Fannie Mae's 'assets' have fallen by 66%, and its debt is likely to
exceed its asset base by the end of the 2008. USA congressman from both
parties insist the US government - the taxpayer - must pick up the debt
to prevent collapse of these two banks. Adding the bank debt to the
public liability would about double the 'official' federal government
in time,cause a fall in the value of the US dollar. So far, the
USA Treasury has been authorised to spend 'only' $4.5 billon dollars to
'buy' virtually worthless debt 'assets' in these two companies.
The loan guarantors and insurers have themselves indulged in non-core
high risk 'investment', lost their liquid assets, and thus are unable
to fulfill their function of paying out when loans go bad.
High risk 'interest only'
'mortgage-backed securities' ('bundled' in groups and sold in the bond
market as interest-bearing securities) increased rapidly; more
than half are 'adjustable' in 2 years. Adjustment direction is most
likely now 'down' as treasury bonds provide money to banks at virtually
no interest, and house values are falling. But the value of the banks
asset itself is falling even faster. Average personal savings in USA
are close to zero. There is no
'cash cushion' to mitigate or ride out personal indebtedness. Many will
walk away from their house and their
loan. Houses are selling in a flat market.
The equity that banks assumed they would have
house prices "always" go up disappears. The cheap-credit real estate
bubble has burst. Bankruptcies have increased, as have layoffs. The USA
deficit has gone up. Private sector debt is now three
(gross domestic product). In 1929, prior to the
stockmarket crash, private debt was about one and a half times GDP.
"Derivatives markets guarantee a
winner for every loser, but they will
over time concentrate the losses in vulnerable sectors."
- Martin Mayer
As the recession results in more and more lay-offs, risk of default
attaches to 'better quality' 'sub-prime' mortgages (mortgages to people
such as tradesmen, with intermittant but good income streams and with
the ability to give good deposits on a property). Even
a few percentage points rise on a very large loan creates a large
increase in interest repayment dues.
The vast loan industry has lent money for housing
speculation, cars, holidays and other lifestyle loans at low rates.
(From 1997 to 2004 bank lending for mortgages almost doubled to $US7.4
trillion! In 2003 alone, $US1 trillion in new mortgages were written).
Banks have made loans to people with no collateral. Commercial risk to
the banks has been socialised by Federal guarantees of bank loans, no
matter how flakey or imprudent the banks actions were.
The vast multiple layers of bank and money market bad debt has been
exposed. Lending itself has ground to a halt. In the first quarter of
2007, that is, before the crisis hit, capital markets sold about
$US1,500 billion in bonds and other debt instruments issued by federal
agencies, municipals, corporates, mortgage prospectors, and asset
bundlers. In the third quarter of 2008, only about $US680 billion was
sold, a drop of around 55%. And debt-sales dropped off even further
thereafter. Commercial activity is severly restrained, with flow-on
effects to employment.
activity has decreased, and as a result, less oil is being consumed.
Oil prices temporarily dip
down. Oil prices in december 2008 were over $100 lower than mid
july 2008, when they were at an historic high.
World central banks hold vast amounts of USA dollars (Between 60% and
70% of currency reserves around the world, whether from oil sales or
export trade surplus over spending on imports, are kept in US dollars
and US dollar-denominated securities such as US treasury bonds -
although the trend as of november 2005 is to reduce USA dollar
Central banks worldwide have sold down their gold to relatively low
levels (as at september 2005, a few central banks - Argentina, South
Africa, Russia - are re-building gold reserves) or even 'leased' them
out to non-existent levels. What would
happen, banks muse, if the dollar declined dramatically in value? Their
mainly US dollar currency and bond reserves would be worth a great deal
less. The USA is heavily indebted.
It depends on continuing to issue bonds. As confidence in the dollar
dropped, bond yeilds dropped.
USA 30 year bonds and 6 month bonds now pay a
very similar interest rate, indicating very little long term confidence
in the USA economy, and a desire to earn as much interest as possible
for as long as possible before the bonds ultimately become totally
unredeemable. As a result, some of the major buyers are
now turning to the Euro.
The USA is now dependant on other nations oil - as are all the worlds
industrialised and industrialising nations. The question then is, can a
nation dependant on other peoples oil dictate to the world that the
world should trade in oil only in that dependant nations currency?
So far, for convenience, the answer has been 'yes'. The dollar has been
the de facto
international settlement since the gold
standard was disengaged from backing paper currency. But at that time,
the dollar was fully backed by USA oil production, as the USA was the
dominant oil producer. That oil reserve backing disappeared with
consumption - until USA invasion of Iraq.
But Iraq has not been able to produce significant volumes of oil. It is
in desperate financial straits. It must sell to the best advantage. The
euro may be the best currency of trade if the dollar weakens. The test
of Iraqi 'democracy' will be whether or not the supposed Iraqi
'sovereign nation' can sell its oil to its best commercial advantage in
the currency of best commercial advantage.
If most of the oil producers in the Middle
payment in the Euro rather than the greenback, oil, the thing of real
value underpinning of the greenback, will be increasingly strengthening
the euro - not the dollar. Is it likely that Saudi Arabia and Iran will
move away from dollar payment?
The Saudis are financially literate. Social unrest can only be kept
capped so long as the current 'boom times' continue. They must be aware
that selling some oil in currencies other than the dollar will result
in a weakening of the dollar and thus devalue their huge dollar
holdings, but, on the other hand, help insulate against falling dollar
values. A gradual re-weighting can be done by trading central bank
reserves for other currencies and for gold, but the mere fact of
continuously selling dollars in order to buy other currencies (and
gold) will tend to weaken the dollar anyway. There are already moves
for regional currencies, either partially backed by gold (Middle East)
or a basket of linked regional currencies (ASEAN). These west Eurasian
(euro), Middle Eastern, and East Eurasian/South Asian currencies would
provide stable-currency competitiveness within the region for regional
exports and imports. And perhaps even beyond.
In the event that any regional currency starts to strengthen
significantly against the dollar, Saudi Arabia would be foolish not to
price at least some of its oil in that emerging regional currency. This
would accelerate the process of re-weighting away from the US dollar.
As it stands, China's need to subsidise exports by holding the yuan
artificially low, plus its antipathy toward Japan, means an ASEAN
regional currency is unlikely to emerge soon.
A Middle Eastern gold-tied regional currency is, on the other hand,
more likely. As one of the only currencies to be backed by both black
and yellow gold, such a currency might gain an impressive international
following. The financial meltdown of late 2008 must give impetus to
facing decreasing volumes of oil exports (and already imports
petroleum) and a huge domestic dependence on its vast natural gas
resources. 30% of Irans oil goes
to European markets. Many of Irans imports come from Europe. As a
result of European trade, 60% of Iran's foreign
reserves are now held in Euros. If Iran
had not switched to the euro, it would have experienced significant
losses through having to pay for European imports with a depreciating
USA dollar, as well as exchange costs.
Like Russia, Irans main volume trade in gas is increasingly by pipeline
to regional users on long term contracts. Its main trading is within
Eurasia, especially as the USA prohibits USA businesses from trading
with Iran. Obviously, Iran saves considerable banking fees by directly
selling oil and gas to buy regional products and services, using
regional currencies such as the euro, the rupee and the yuan. Iran
trades oil and gas in
regional currencies. If it trades
increasing proportions of oil and gas in currencies other than the
dollar, will it have any influence on the backing of the US dollar by
Iraqi and US domestic oil reserves? Not dramatically, no.
Russia, along with Saudi Arabia, is for the moment the key high volume
oil producer, and pricing of its oil will have a far greater
the dollar (USA produces half the amount of oil Russia does, but it is
consumed internally; albeit US remaining reserves are similar to
Russias - but consumption rate of those reserves is very dissimilar
In november 2005
Russia started preparations to denominate
its trade in oil and gas exports to europe in the euro. Russias
European market is 66% of its total oil and gas
export business. Logically, it should price 66% of its around 9 million
barrel a day production in euros. Russia
launched an internet-based oil trading bourse in septemember 2008. This
move helps to strengthen the Ruble, as well as the Euro. When there is
a general turn toward
paying for oil and gas with euros in West Eurasia, plus central bank
desire to 'rebalance' their currency weightings away from dollar
dependence, that is when the greenback will start to
Then the greenback becomes a 'hot potato'. No one wants to be caught
holding it. The difficulty is that neither of the two 'mega-holders' of
the USA dollar, Japan and China, want to be caught selling off
Why? Well, oversupplying the market drives the
value of the dollar down, decreasing the value of the dollar, both
making Chinese and Japanese holdings worth less and making their
exports more expensive for the USA to buy. But both countries would be
very badly affected if there was a sudden 'bargain basement' 'fire
of the USA dollar. (Japan at november 2005 held $US824 in foreign
exchange reserves. As at december 2005 China has a massive $US819
billion dollar value money
reserve, and although some of it is in Euros, an estimated 70% of which
is in US dollars. China holds US treasury notes alone to
the value of $US247 billion - second only to Japan - as well as US
dollar currency holdings. Its dollar holdings have been partly boosted
by massive gambling by foreign exchange dealers, who have used US
dollars to buy the Yuan in the expectation it will strengthen against
the greenback. Paradoxically, China must also buy the USA dollar to
keep it strong against the Yuan.)
The game now is for Japan and China (and other countries) to manage the
ultimate slow quitting of the US dollar so that their central banks
holdings of US dollars in 'lock step' with any shift
to sale of oil in other currencies than the greenback. There is some
evidence this is already happening to a small degree. China floated a
small part of its
currency in July 2005,
allowing an almost imperceptible tiny daily float, but over time
allowing a considerable shift above the dollar to "better absorb the
impact generated by an unstable US dollar" as the Chinese put it. The
gradual appreciations against the US dollar from july 2005 to december
2005 has been in total small so far, at 0.5% for the period. This
gradual approach is in everyones interest. The deepening recesssion
means the USA will be progressively
less able to buy cheap Chinese imports anyway, and at a time when the
USA is inflating its domestic money supply (at end 2008, about 1
trillion dollars was in circulation).
Thus, in the longer run, USA money will decrease in value due to
inflation, notwithstanding the current (early 2009) deflationary
conditions. The inflationary effect of the non-existant vlaue held by
banks hidden wild investments could be wiped out by allowing the banks
to bring these losses back onto their books, and then declare
bankruptcy. The government prefers to gift the guilty bankers yet more
public money, ensuring the money supply tidal wave will hit in years to
Right now, China has
the opportunity to use US dollars to go on a strategic hydrocarbon and
mineral asset buying spree, using its vast reserves of US dollars while
they are still relatively strong and commodity prices have fallen
through the floor. In january 2006 China scrapped the
law limiting the amount of domestic currency Chinese companies could
China is unlikely to suddenly
float its currency at this time, as the yuan would suddenly rise,
making its exports
expensive just as the USA spending boom has fallen through a hole in
the ground and its imports of Chinese goods are dropping fast. A strong
would make raw materials cheaper, but with more expensive and therefore
reduced exports, any benefit to the internal Chinese consumption
economy is far outweighed by the loss of even more export orders.
China does at some point suddenly floats its
it can certainly absorb the 'hit' with its massive padding.
In the event of a sudden
Chinese float (now unlikely), or either China
or Japan commencing
selling down quickly, the other country might decide to cut
its losses and sell the dollar massively.
"All Beijing has to do is to mention the
possibility of a sell order going down the wires. It would devastate
the U.S. economy more than any nuclear strike."
- Asia Times, January 23rd 2004
So what? So the dollar is then not worth a great deal. Good news for
exporters. Good news for China if its yuan floats higher than the
greenback - it can buy cheaper oil, and imported raw materials also
cheaper due to the favorable exchange rate.
But a large section of the USA
economy makes its living from the selling of cheap (mainly Chinese)
imports. If the Chinese yuan is strong, the cost of imported goods goes
up. The cost of oil goes up in
USA (but not in countries whose currency/curency mix is used to trade
oil). Once more, there is a rachet down in consumer spending.
Retail profit margins are cut to the very bone. Some businesses simply
fail. There are even more
layoffs in the retail sector than at present. And there have been 3.6
million jobs lost in USA since january 2008. As at february 2009, the
impetus of job losses is climbing steeply in the USA. Discretionary
spending on imported goods is sliding month by month. China is aware of
this, and will defend the dollar - up to a point. For the moment, this
is a deflationary environment.
Prices are held down, small business can't make a buck, staff are shed
to cut costs, some businesses fail. The unitended consequence is that
oil demand is reduced, and further rises in oil prices are put on
'hold' - for the moment.
Structural oil-component price increases are added to the cost of goods
over time, as world oil demand continues, and the ability to physically
stuff out of the ground come close to matching demand. The tension
by 'oil futures' traders) causes swings up and down in the cost of oil.
But the overall trend is driven by the broad trend of diminishing
ability to suck it from the ground as fast as the world wants it. The
overall trend is for oil prices to remain at higher levels, or
incline up as physical supplies diminish. The rate of incline is
unknowable, as it is dictated by
market forces and whether or not USA seizes further Middle East oil
fields (for example, seized fields could be offered exclusively to USA
far below the world price).
How does it all play out?
Inevitable oil price rises from
supply not fully meeting demand happened briefly in mid 2008, when oil
reached an historic high. But the 'oil-demand-killing' USA
recession has resulted in a significant fall in oil prices. As it has
turned out, the recession has started before
there is an actual
reducing oil demand and reducing oil prices until falling production
once more co-incides with the new lower demand level.
Wildcard - The American
administration/business/military complex may back the dollar with Irans
oil and gas
The American administration has long known oil is about to peak.
It knows the medium term future for the world is a future of dependance
on natural gas (despite difficulties transporting gas).
It knows it will be dependant on Middle East oil and gas for at least
half its supply, probably within ten years.
It knows Iran is the one country with the greatest amount of natural
gas, and with gas fields that have not yet peaked.
It knows that so long as Saudi Arabia cooperates by pumping to
capacity, oil prices will not spike following an invasion.
The Middle East is the great prize for American business and military
interests - and Irans gas is the
most important part of it
Whether the American administration takes Irans natural gas by invasion
or by standover tactics (selective missile strikes until favorable
contracts are written for American oil companies, blockading food
supplies), the question remains
- is it enough to put real collateral behind the dollar?
In the best
case from the American perspective
seizing or controlling significant portions
of the Middle East hydrocarbons keeps the dollar as the currency of
payment for oil and gas, and so the dollar is seen as firm once more.
USA control of Middle East oil and gas is unlikely to influence the
price at which oil and gas is traded globally, as price is ultimately
set by supply and demand in an era of depleting supply. (Unless the USA
'sells' Middle East oil to itself at
favorable prices - an unlikely scenario).
Permanent high oil and gas
prices due to continuous slow depletion of Middle East reserves past
their peak of production will continue the recession in USA and the
of the world
- regardless of who
the major oilfields. Regardless of oil
backing, the US dollar is likely to slowly drift down.
Bizarrely, the recession is the best
case from the perspective of
to slow the rate
of oil depletion. The dollar is likely to remain relatively weak and
continue to slowly lose value. It now appears (from the perspective of
february 2009) that interest rates will eventually rise, as huge
injection of paper money into the money supply must eventually cause
inflation. If capital is to be drawn from the community (to dampen
inflation), rather than the government printing presses (which causes
inflation), bank interest rates will have to be more attractive. This
won't be of much help to businesses looking for capital. Therefore job
losses, bankruptcies, static economic activity, shrinking taxpayer
base, even higher demand for social security, and so on - will unfold quickly
If it unfolds quickly enough it may result in psychological panic, when
it is then called a
and a crash may be followed by a depression
of unknown duration.
In a depression there is relatively less spending, as people have less
money and there is a very large number of unemployed. It is harder to
make money, harder to do any kind of business. What government money
there is has to be spent on relief, and relief contracts are usually
for bulk commodities from a few suppliers, and do not stimulate the
wider economy. Depressions can be deflationary. There is only inflation
if central banks literally print money. This is what happened in
Germany prior to Hitlers expansionary war of 1939.
Again, recession or depression in the major oil using country, will it
help in an oil production decline crisis?
really help oil last longer?
It is very hard to quantify what overall
percentage drop in oil consumption there will be in USA due to the
recession, let alone if it tips into depression. In the 1973 oil
shock some countries experienced a 17% drop in oil consumption. This is
somewhat artificial, as it happened with extreme rapidity, there was an
immediate and sizable absolute shortfall in supply, there were
compulsory car-less days, and in many countries a mass
shift to powering vehicle with compressed natural gas. At that time,
there were willing buyers, but shortfall in supply. This time, there
will be no shortfall in supply, but the number of buyers will be fewer
due to reduced spending power. How fewer buyers is speculative.
If there were a 17% reduction in USA oil use, the roughly
882,000,000 tonnes of oil used by USA every year would drop to about
732,000,000 tonnes used annually. The about 150,000,000 tonnes saved
each year could be removed from the world consumption figures of about
3,462,000,000 tonnes per year, dropping them to 3,312,000,000 tonnes
consumed per year.
As the estimated total world recoverable oil reserves are about
140,400,000,000 tonnes, if world demand (including USA) remained static
at this level into the future (it won't, of course), oil will last six
more before running out entirely. As the USA uses roughly
quarter of the worlds oil, then worldwide
to the life of oil
- again recognising that this is based
artificial 'extravagent level' of use for the purposes of illustrating
a broadly true principle.
The principle is inescapable. Neither
a world recession - or
depression - will make a
material difference to the rate of fading of the oil economy. It is
happening in our lifetime, and there is nothing that can be done to
prevent it. There is very little that can be done to soften the shock.
Is there any silver lining to the cloud? Perhaps. Perhaps not.
"The First Half of the Age of Oil now
closes. It lasted 150 years and
saw the rapid expansion of industry, transport, trade,
financial capital, allowing the population to expand six-fold. The
financial capital was created by banks with confidence that
Expansion, fuelled by oil-based energy, was adequate collateral
The Second Half of the Age of Oil now
dawns, and will be marked by the
decline of oil and all that depends on it, including financial
It heralds the collapse of the present Financial System, and related
political structures, speaking of a Second Great Depression.
But there are survival strategies.
Governments may be persuaded to sign the Depletion Protocol
whereby imports are cut to match world depletion rate, such that
prices fall into reasonable relationship with cost, and
from shortage avoided; the current monumental waste of energy may be
reduced; renewable energies from wave, tide, wind, solar, hydro
geothermal sources may be brought in; and the nuclear option
-C. J. Campbell, 2005
'Secret US plans for Iraq's
story reported by Greg Palast.
Published by BBC NEWS: 2005/03/17 15:41:31 GMT
© Copyright 2005.
2006, 2007 minor edits
2008 noted update
Feb 2009 extensively revised
A Naturalhub Publication