Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Why The EU Will Not Resist Putin's Ukraine Military Coup

Politics / Energy Resources Mar 02, 2014 - 10:51 AM GMT

By: Andrew_McKillop

Politics

Gaseuro Recycling and Petrodollar Recycling

Much more discreet and more easily denied than also-denied petrodollar recycling operated by the US and Saudi Arabia, the EU's gaseuro and petroeuro recycling operated with Russia, especially by Germany, Italy and France but also by other EU states is starkly different to the “petrodollar system” because it is an economic win-win. Because of this, the EU after ritual blethering and cries of alarm will avoid operating economic, trade, monetary or other sanctions against Russia.


Using the monetary and economic leverage of gaseuro recycling, the EU's national treasuries and financial institutions of the ECB and BIS, as well as private banks, can hope to finance the massive black hole of Ukrainian national finances. Conversely, any sanctions operated against Putin's Russia will backfire immediately as Russia cuts all gas supplies to, and passing through, the Ukraine triggering an instant continental economic crisis, backed up by Putin's additional ability to suspend or limit oil shipments to Europe.

The simplest way to understand why the gaseuro and petroeuro recycling system is a win-win is that the EU, led by Germany runs a major trade surplus with Russia. Buying Russian gas and oil, paid for with euros, enables Russia to buy European goods and services, and create credit for further buying. When or if the EU was foolish enough to run sanctions against Russia, this major economic support to the continent's basically weak and stagnant economy would collapse. It would be lose-lose.

Gas Trumps Oil

World reserves of natural gas are massively larger than oil reserves, although the magic adjectives “conventional and unconventional” heavily change any figure you care to use. One handy figure is that world conventional associated (with oil) gas reserves plus stranded (not associated with oil) gas reserves are roughly equivalent to 100 years of present world total gas consumption. Conventional oil reserves are enough to cover about 40 years of world total oil consumption. Making things a lot more complicated, with little-appreciated but major coming impacts, which include impacts on world money systems and the shadowy but real “petrodollar system”, gas can substitute a lot of oil. It can be converted to synthetic light oil albeit at large energy loss, it can substitute oil for petrochemicals, it can replace oil for road, rail and marine transport. For heating, both industrial and residential, gas is the best and easiest energy fuel. Oil is substitutable.

Outside of Europe, all major regions and economies are raising their gas demand faster than their oil demand. For diehard Global Warming believers, gas is also “low carbon” meaning lower CO2 emissions per unit energy used, and non-carbon pollutants in gas are almost zero. This can be compared with typical heavy crudes such as Saudi Heavy of 27.5 degrees API weight, containing 2.92% sulphur and a string of metals starting with iron, vanadium and nickel, and able to include zinc, manganese, mercury, chromium and others. Heavy oils sometimes even include thorium and uranium.

Heavy oils can only be heavily polluting, meaning heavy oil spills are always an environmental disaster and extracting them is always dirty. As we know, the extraction and refining of heavy oils and oil sands generates as much as three times the total CO2 emissions compared to conventional oil, simply due to the energy needed to extract and then refine oils which in extreme cases can have a weight of 10 degrees API, that is bitumin or asphalt. Key examples of heavy oil production as in Venezuela, Canada, Saudi Arabia, Kuwait and Iran are rarely able to extract more than 5%-25% of the crude oil in place. The so-called “upgrading” of these ultra-heavy crudes can only pollute and can only cost money.

This locks-in the high price of oil because the extraction and refining process is so resource-intensive. Put another way, when oil prices decline the economic rationale for heavy oils disappears.

For as long as oil demand was believed to be hard or impossible to substitute and no energy policy action was taken to reduce or substitute its consumption, high oil prices locked-in the upstream production and refining side. This enabled continually-increasing production, and the so-called “producers' rent”, that is overpriced oil, could operate. When it did not operate – notably the period of roughly 1983-1999 with low or very low oil prices (and of course the entire postwar period to 1973 and the famous Arab Oil Shock) – the petrodollar system had a role to play. Its fundamentals included the notion that world oil demand could only increase, oil was scarce and controlled by OPEC and only in exceptional conditions – as in 1983-1999 for geopolitical reasons (including the Iran-Iraq war) – could oil prices be pushed down and kept low.

Taking world gas prices of today, which are massively distorted by region and nearly always underpriced relative to oil, current European gas prices around $11 per million BTU are equivalent to oil at about $63 per barrel. As we know, due to the USA's stampede into shale gas, prices in the US (although rising) are less than one-half European gas prices, while Asian gas prices are the highest at close to the oil price (about $16 per million BTU).

No Gas Opec and Nopec Oil

In both cases this especially concerns Russia, which has many times tried to create a “Gas Opec” group and organization of major gas producers and exporters, without success. Russia is also the biggest “Nopec” oil producer and exporter. It is a key player in the undeclared and “off the radar screen” petro-euro recycling system, especially concerning Russia-Germany financial and monetary relations, utilising euro surpluses and deficits, linked with financial entities including the ECB and BIS.

The financing of government deficits across Europe draws, in part, on this petroeuro and gaseuro recycling system operated near-exclusively with Russia.

The US-Saudi petrodollar system is a lot older and better known, although treated as “confidential and/or secret” and often denied. For a valedictory rationale using uncertain logic, the US Federal Reserve Bank of NY has a full statement http://www.newyorkfed.org/research/current_issues/ci12-9/ci12-9.html.

Gas was always the “poor cousin of oil”, for many years priced at below $2 per million BTU (equivalent to oil at $11.60 per barrel), and pre-1973 at prices around 40 US cents/MBTU. It was rarely transported and sold across frontiers, and accounted for less than 12.5% of world total energy consumption (23% today). Gas never featured in the US-initiated petrodollar system but it was a key player in the Europe-Russia gaseuro recycling and financing operation, from the start.

Always thought of by its US and Saudi inventors as a win-win, the “petrodollar system” has many downsides and for the global economy it is only lose-lose, because since at latest 2005, it operates to maintain oil at artificially high prices and enables (or forces) the US to run huge trade deficits. Just as important, the system started as a secret political initiative and will end political, but possibly public. Its economic, financial and monetary roles were always placed in the back seat, and only one aspect was treated as paramount. Favouring US-Saudi economic relations and bolstering the US dollar.

One key factor turning a theoretical geopolitical win-win into an economic, financial and monetary lose-lose, certainly for the USA, stems from US debt and “dollar hegemony”, both of them pushed only one way – further - by the petrodollar system. Put another way, the US of today can only operate its debt financing-money printing binge for as long as oil prices stay high, or very high.

The petrodollar system is above all political and concerns the US and Saudi Arabia. Due to current-ruling Saudi potentates, notably the very recent “Intelligence supremo” Prince Bandar bin Sultan claiming there should be Saudi rule over US decisions – notably on Syrian bombing -  the threat of Saudi Arabia “abandoning the petrodollar” has been given a whorl in the media.

What You Don't Expect – You Will Get
When or if Saudi oil exports were increasingly billed and settled in currencies other than the USD, the present semi-monopoly of the dollar for global oil trade would disintegrate. The pat-analysis is that when or if Saudi Arabia “abandons the dollar” for oil sales, the dollar will sink out of sight. The exact opposite is more likely - a strengthening of the USD's world value after a ritual and probably impressive period of “trial by market”. To be sure, market logic - we mean engineered panic - would take some time to adjust to the real world, as ever, but the main reason the dollar would strengthen would be the USA's need to print and issue far less and far fewer “chaff dollars”.

The exact inversion of trade relation between the US and KSA on one hand, and the EU and Russia on the other explains why petrodollar recycling is on its way out, but the gaseuro recycling operation will be a key player deciding what happens in the geopolitical shakeout of eastern Europe presently under way, starting with the carve-up of the Ukraine. The US, for as long as it remained an importer of oil and considered to have “constantly increasing oil import dependence”, could only run a trade deficit with KSA and other Opec suppliers.
The European Union, and especially Germany run a major trade surplus with Russia. Supplying petroeuros and gaseuros to Russia enables it to buy EU products.

For decades, Washington has bowed and cowed, and gone to extraordinary lengths to mollycoddle the Saudis, despite the huge Saudi exposure – due to nearly all its money reserves of about $700 billion being in dollars - to any theoretical crash of the USD's value. Putin's Russia is less exposed to this form of blackmail. Russia can import more from Europe if the euro depreciates, and use gas prices and oil prices to tilt the playfield towards a weaker but not crippled euro. Europe in fact has a present win-win with Russia, due to the artificially high value of the euro plus gaseuro recycling. The EU is unlikely to throw this win-win away to “save Euromaidan hopes and expectations”.

In another vast difference with US-Saudi petrodollar recycling,  US debt would have in no way grown so fast, to such extremes, nor would the US trade deficit have ballooned, if the “petrodollar system” had not existed. Petrodollar recycling was designed and operated to print money – long before Ben Bernanke, Janet Yellen and QE.  US gains throughout all the phases or formats of “the system” which started in 1972 under Nixon and Kissinger were always more apparent than real – but the US political elite feeds off appearances. One of its key basic defects.

Without the prop of petrodollar recycling and its leverage, operated by the US Federal Reserve banking system and the leading US money market banks, for decades, it would be unlikely that the US could run its present fantastic annual trade deficits. The US economy would have to “re-localize”, or “de-offshore”. Europe, although deindustrializing, has avoided this – as shown by Germany remaining an industrial power, proud of it, and rich because of it.

How the Ukraine Crisis Sealed Gaseuro Recycling
Europe has no leverage over Putin's Russia. Europe also gains from the gaseuro recycling system. After the ritual cries of alarm, Europe can build on the gaseuro recycling system to lever part of the heavy financial aid that must go to Ukraine – simply to prevent its total economic collapse.

For the US and inevitably, the end of petrodollars and their recycling will mean an end to the era of cheap imports and super low interest rates, but will also reset the global economy – not at all to the disadvantage of the USA. China, now the world's No 1 oil importer, will be obliged to move fast to replace dollars for its oil trade. This will mean the RMB appreciates, which is what China doesn't want, but has to accept. One thing is certain, any attempts by KSA to sabotage the US dollar will not be germane to China – which holds about $1.25 trillion of US Treasury bonds.

Only a quick glance at Europe's gas and oil supply, transport, refining and distribution system is needed to show that the EU has massive dependence on Russian hydrocarbons – and profits from it, but denies this. As Putin's Kremlin, and Russian ministries including the Finance ministry are well aware, EU dependence on Russian hydrocarbons has a direct counterparty in Russian dependence on European industry, services and trade – and the euro. Conversely the real economic interdependence and counterparties between the US and Saudi Arabia are tiny and transient. The US can terminate petrodollar recycling tomorrow. After the ritual gyrations of financial markets for a ritual period, it will suffer no enduring economic loss.

When or if the EU tried to terminate the gaseuro and petroeuro recycling system with Russia, there would be massive economic loss in Europe. The Ukrainian crisis, probably sooner rather than later, will bring this energy-economic and monetary dependence, and interdependence with Russia into full view at the top of the agenda. Both the EU and Russia have every reason to cooperate in preventing the Ukrainian crisis from ruining a system that works!

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

Andrew McKillop Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules