Fading of the oil economy
Slowing the progressive fading of the oil economy - Recession in the USA
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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 disproportionate 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 than 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 resource will 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 Constitution of 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 George 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 of Amnesia'.

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 invade 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 [1]).

The partial capture of the American system of Governance by unelected interests 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 invaded, or in which it has based itself.

"Halliburton's contract became the subject of controversy soon after it was awarded in March 2003 without competitive bidding.

Halliburton 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.

Pentagon 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 career civil servants have raised the possibility that political pressure was applied in different stages of the contract process.

The DCAA 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 criticism."
 -The Los Angeles Times, 15 March 2005, reporting on a Defense Department audit; an 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 corporations of taxpayer money as 'subsidies'. Yet the money was paid by American People for Public Governance, not 'corporate welfare'.

Weak democracy leads to a badly 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 few 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 fact that America is now a dependant state for its oil has been easy - so far.

The manipulation of the popular media (and particularly television) has been 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.

Dick Cheney had made in a speech at the London Institute of Petroleum Autumn lunch in 1999 when he was Chairman of Halliburton. A key passage from his speech was: "For the world as a whole, oil companies are expected to 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 conservatively a 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 obviously in 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 lies.... "

“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. interests.
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

The structural 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.

"Saudi royal family has been rewarded 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. With 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 possibility of 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 stop 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 armed 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.
In one 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 the nationalist Qasim might act independently and alter the favorable terms 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 of oil, 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 uninformed as a result of a weak form of democracy that has enabled capture of all 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, relatively in-depth 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 one is going to say otherwise.

"An able, disinterested, 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 shocked.

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 1971), but by American 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 'masters' are afraid to tell them - that in fact the value of the greenback is now based on psychological confidence and little else, 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 allow 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.”
-Thomas Jefferson

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 issuing 'treasury bonds'. The bonds are 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 were negative 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) creates 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, they are still 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 - thus loaning money to the USA government to cover its debts - depends on whether the market believes the bonds will be redeemable in the longest term. In a 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 liability 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 unsuprising that 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 'treasury bonds'.

As at july 2008 Freddie Mac owed $5.2 billion more 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 debt, and, 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 because 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 times the GDP (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.

Economic 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 holdings). 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 currency of 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 East insist on 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 this idea.

Iran is 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 already 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 impact on the dollar (USA produces half the amount of oil Russia does, but it is virtually all 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 lose value.

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 significant amounts.

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 sale' 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 reduce their 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 come.

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 invest overseas.

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 yuan 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.

If China does at some point suddenly floats its currency, 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 USA exporters. Good news for China if its yuan floats higher than the greenback - it can buy cheaper oil, and imported raw materials also become 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 drag the stuff out of the ground come close to matching demand. The tension (generated 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 consumers at 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 oil supply shortfall, reducing oil demand and reducing oil prices until falling production once more co-incides with the new lower demand level.

Wildcard - The American presidential 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, the strategy of 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. But 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 rest of the world - regardless of who controls 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 the world 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 and dramatically.
If it unfolds quickly enough it may result in psychological panic, when it is then called a 'crash'; 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?

Will a USA recession and depression 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 months more before running out entirely. As the USA uses roughly a quarter of the worlds oil, then worldwide recession might add two years to the life of oil  - again recognising that this is based on an artificial 'extravagent level' of use for the purposes of illustrating a broadly true principle.

The principle is inescapable. Neither a USA nor 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, agriculture and financial capital, allowing the population to expand six-fold. The financial  capital was created by banks with confidence that Tomorrow’s Expansion, fuelled by oil-based energy, was  adequate collateral for To-day’s Debt.

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 capital. 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 world prices fall into reasonable relationship with cost, and profiteering from shortage avoided; the current monumental waste of energy may be reduced; renewable  energies from wave, tide, wind, solar, hydro and geothermal sources may be brought in; and the nuclear option  re-evaluated."
-C. J. Campbell, 2005

'Secret US plans for Iraq's oil' story reported by Greg Palast.
Published by BBC NEWS: 2005/03/17 15:41:31 GMT
URL:  http://news.bbc.co.uk/go/pr/fr/-/1/hi/programmes/newsnight/4354269.stm

© Copyright 2005.
2006, 2007 minor edits
2008 noted update
Feb 2009 extensively revised
version 18

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