On the heels of Russia's potential "holy grail" gas deal with China, the news of a Russia-Iran oil "barter" deal, it appears the US is starting to get very concerned about its almighty Petrodollar
*U.S. HAS WARNED RUSSIA, IRAN AGAINST POSSIBLE OIL BARTER DEAL
*U.S. SAYS ANY SUCH DEAL WOULD TRIGGER SANCTIONS
*U.S. HAS CONVEYED CONCERNS TO IRANIAN GOVT THROUGH ALL CHANNELS
We suspect these sanctions would have more teeth than some travel bans, but, as we noted previously, it is just as likely to be another epic geopolitical debacle resulting from what was originally intended to be a demonstration of strength and instead is rapidly turning out into a terminal confirmation of weakness.Zero Hedge
US Threatens Russia Over Petrodollar-Busting Deal
Tyler Durden
See also Thom Hartmann, The Wars We Fight – God Save the Petrodollar! (the coming collapse of the dollar), Wikipedia-Petrodollar Warfare, Henry C. K Liu, Dollar Hegemony.
This seems to be a pretty widespread perception and it is possibly the perception of TPTB in the US.
Tyler Durden
See also Thom Hartmann, The Wars We Fight – God Save the Petrodollar! (the coming collapse of the dollar), Wikipedia-Petrodollar Warfare, Henry C. K Liu, Dollar Hegemony.
This seems to be a pretty widespread perception and it is possibly the perception of TPTB in the US.
Is not the "petrodollar" itself perhaps a bit of a Libertarian shibboleth? I read the Henry Liu article you linked to which tries to explain "dollar hegemony" and does a decent job of putting things in a historical and institutional context, as seems to be his strength. What I don't quite get is why would it make any particular difference if oil is "denominated in dollars" or not unless they can "isolate the dollar" in some sense and develop a level of exclusionary integration between themselves such that a new balance of power emerges (including military). Or maybe all this is included in the idea of "denominating" oil in some currency other than the dollar.
ReplyDeleteWhich other country does the world run a multi-hundred billion dollar currency surplus against each year?
ReplyDeleteThe EU? They are doing everything they can to "become more competitive" aka pay workers less money in order to try and be net exporters at all cost.
China? we all know about their mercantilist export policies.
Russia?
Iran?
Why the hell would somebody want rubles or Iranian currency? To buy all the awesome goods and services those countries produce?
Lets get real.
just a FYI, Russia & China already trade in rubles/yuan bypassing the dollar for gas/oil & other bilateral trade since 2010
ReplyDeleteIran also sells oil in EUROs already also for years
Japan has 220%-240% debt, twice as high as the US' 100% debt (US had 120%+ debt during/after WW2 also)
US dollar strenght is actually more dependent on the $17 trillion in goods/services that it produces, NOT the petrodollar (which adds to US dollar value but is NOT essential to it) & the fact that US taxes & mortgages, loans/credit are payable only in US dollars ..
A nation's currency is like gift cards to a nation's production.. the value depends on what the nation produces & has available to sell, hence why yen, Euros, yuan, etc have value even though they are not petrodollars nor reserve currencies
All this was in the news years ago & is easily Googled so I don't know why the writer makes it seem why Petrodollar is the cause de etre
@Mike or Tom or Matt
ReplyDeleteI don't understand why David doesn't understand why dollar hegomony makes no great difference to the US, but perhaps I need to better understand.
The US went off the gold standard in 1971; in '73, it made the agreement with S. Arabia that the latter would only sell its oil in dollars, in exchange for "protection"--including armaments. In '75, the rest of the OPEC countries agree to the same thing. So now the world has to export to get dollars, whereas all the US needs to do is "print" dollars. Hence is easy prosperity and very disproportionate ecological footprint. This meant that the world basically is awash in dollars, with a host of consequences.
If now the demand for dollars greatly decreases, especially from the largest consumers, as in the BRIC countries, this, given the current hollowing out of the US economy, surely spells big problems for the US and its dollars.
Is this, grosso modo, the way you see it?
Henry
I've engaged Warren on this some time ago when he was commenting at his place and in his view it is a non-issue operationally.
ReplyDeleteHowever, "perception is reality" as they say, and if the US and other countries act as if this is important it will be important.
There's a lot of currency craziness out there so this could be one of those non-issues that becomes an issue. US policy makers seem to think so, and the BRICs have been pursuing an alliance to undermine the USD as the reserve currency for some time.
Henry, my issue is not that "dollar hegemony" does not make a difference, it's the notion of a "petrodollar" being of some transcendent importance that is sometimes bandied about. For example a few years ago there was some psuedo-sophisticated talk that the "real reason" for the Iraq war was the "oil-bourse" which I think is another way of saying "petro-dollar." When I think "denominating in dollars" I thinks thats like saying there's a great deal of difference if a barrel of oil is sold in terms of gallons as opposed to liters. If Saddam Hussein had started insisting that he would only sell oil in liters would that have been of some great disadvantage to the US? I think I understand pretty well geo-political importance of oil and the control of its production and movement around the world, but my point was that as long as the world economy and its currencies remain as integrated in a basically dollar-centric system how can it matter if a particular transaction is "denominated in dollars." So, maybe it is problem of insufficiently precise use of terms or something is wrong with my understanding of of them.
ReplyDeleteHenry,
ReplyDelete(#1 FD I am coming at this from the right/ I am "US right or wrong..." at core)
That said, I think you are correct to be concerned about the rejection of the 'petrodollar' but only short term as I believe "a world without oil for the US" while scary short term, would be very manageable for US eventually and perhaps even advantageous long term... as we would just reorient our economy to adjust to this scenario with nuclear/solar, etc...
BUT, for MENA, I have to say, even though "I don't like those people" so to speak, (Mohamadists, etc.. I personally cant stand them...) , if they lost the oil, I dont think they could literally feed themselves as the climate doesnt support the required food production...
So for now it looks like "win/win" for both the west and MENA as the oil interests in the west and the hungry populations in MENA both benefit from oil...
Here in the US we have as "oil states" Texas, Alaska, Oklahoma, Louisiana, California, Arkansas, Mississippi, New Jersey, Delaware, now North Dakota, South Dakota (22 Senators) and if you through Nat Gas in the mix as another "fossil fuel" now you have Pennsylvania, Ohio, New York, West Virginia so that is another 8 Senators, then throw in coal and you add Montana, Kentucky, Colorado, Wyoming, Virginia (40 "hydrocarbon" Senators) so we here in the US are just going to be stuck with oil/hydrocarbons for the foreseeable future...
then for outside the US in the Western Hemisphere you have Canada, Mexico and Brazil and Venezuela, so it just seems like we are not going to leave petro for perhaps ever...
This is (the way things are arranged now...) in the worlds best economic interests NOT imo the US best interests... I think we the US could "get off oil" effectively and away from oil and thrive, but I dont think MENA can...
so a lot of the neo-cons, who often appear anti MENA (and again I believe as a person of the US right I can understand their basic disdain of MENA as I dont prefer these people either... though I can "put up" with them at this point...) as these people are at the same time all caught up financially in our US "oil economy", these people are actually working to support the people of MENA in real terms thru trade (our providing provisioning for their providing oil) while purporting to be wanting to kick their ass...
so longer term I dont fear what would happen to our country if all of a sudden the MENA oil states said "no more oil for dollars" as I think that would be in our longer term best interests, but it would foment a holocaust of sorts over in MENA at the same time so I have to admit that the current arrangements of this "petro-economy" are probably better for humanity as a whole ... and dont look like they are going away any time soon (its probably better for humanity this way...)
rsp,
Thanks Tom and David.
ReplyDeleteA "non-issue operationally." Why is that? If to buy oil all I have to do is credit an account in dollars, instead of actually selling stuff to get yuan or some other currency to get dollars, why is that a matter of indifference? It would put the US in the position of any other country trying to buy gold now in the petrodollar regime. It seems to me that it is an imperialist regime that trades its dominion in exchange for guns and butter. It's demise must surely make a difference, in fact all the difference in the world; it's more than perception = reality, although that influences as well. What am I missing here?
Sorry, that should read:
ReplyDeleteinstead of actually selling stuff to get yuan or some other currency to buy oil from them
Anyone can buy dollars on the fx market to pay bills denominated in dollars, and no one has to hold dollars any longer than they want to, since this is a very liquid market in the first place, and central banks always stand by to ensure that their currency trade in an orderly fashion.
ReplyDeleteCountries that save in dollars (US tsys) do so out of choice. And as uncertainty increases globally or in times of diuress, the USD is the safe haven currency, the US being the world only superpower with the largest economy. The price of US tys increases and the yield curve flattens.
The US doesn't "print dollars" or run a deficit to buy oil other than for US government use, most of which is for the military. It's part of the defense budget. Would the defense budget be less if the US were either buying oil exclusively from domestic producers or converted to alternative sources? Doubtful.
US domestic users of oil — firms and consumers — buy oil with USD, most of which are created through bank credit. The oil companies purchase crude from revenue and process and distribute it for a profit. This is the bulk of oil sales in the US.
What the current monetary arrangement does is create a huge international demand for the USD as the reserve currency used in international trade. This means that the US needs to supply that demand as the monopolist, which it accommodates by running a CAD. If the US government did not accommodate, then desired USD would have to be borrowed instead.
This demand drives the desire to hold the USD internationally. The argument goes that this then allows the US to borrow more cheaply than otherwise, but it is the Fed that sets the policy rate, and the yield curve projects off the base rate.
The reality is that the twin deficits keep the dollar relatively abundant and therefore cheap. Being a net importer lowers domestic employment, which can be considered a cost of the dubious privilege of providing the reserve currency.
"What I don't quite get is why would it make any particular difference if oil is "denominated in dollars" or not...."
ReplyDeleteBecause it creates demand for dollars.