Risk to the Petro Dollar from Iraq War and Iranian Crude Oil EchangeCommodities / US Dollar Apr 19, 2007 - 01:32 PM GMT
The focus on gold and the USDollar alone lacks a crucial factor in maintaining the world currency reserve on its fragile pedestal. The PetroDollar is a term used to describe the close relationship between the USDollar and the crude oil export business dominated by Saudi Arabia , manifested in the superstructure of the global banking system. So one could say the oil world provides the pool from which the US $ exchange rate valuation is applied and enforced.
The gold community pays far too little attention to crude oil factors in my opinion, but Adam Hamilton does indeed. Gold investors love to point to Iran war tensions as a factor to lift the gold price, but they might overlook how the associated earthquakes in banking shift the very ground under the world currency reserve.
Iran has begun to sell its oil in euro currency transactions, already to China , and next to Japan . The gold market should rejoice, when they are actually not paying attention to this grand development. Petro sales outside the US $ realm represent the first of several tectonic shifts in global banking. Direct impact is assured to gold, once the certain changes are realized to bank systems. Imagine Japan changing the emphasis of their entire FOREX reserves management because they purchase a large block of crude oil from Iran , and pay in euros. How much more Persian Gulf oil will China purchase? How much will their future bills be due in euro terms? This article contains a capsule summary taken from the energy section of the April Hat Trick Letter, with a finale based in dark humor.
As a preface, the Gulf Arab currency talks ended with little progress in Medina Saudi Arabia . The meeting was to work toward a monetary union plan by its deadline of 2010. Governor of the United Arab Emirates central bank Al-Suweidi cast doubt in January that the six key Persian Gulf oil producers could hammer out any currency exchange rate regime as preparation for a single currency. The group wishes to clinch a deal like what the European Union has in place. My gut says such a unified currency would help defend the USDollar and its unofficial oil standard, by means of a single controllable device. The USGovt and bankers might require this device in order to exert strong influence on the increasingly independent sheikdoms scrambling to prevent massive losses in the foreign reserves.
Great strain has come when Persian Gulf nations, friendly sheikdoms, decide to diversify their vast FOREX holdings away from US$-based securities. When Qatar last autumn announced some minor diversification of their national FOREX savings account, the US Military ordered a pullout of several thousand troops. There lies evidence of a connection, the quid pro quo in the protection game to fortify the sheiks in power, as they each sit atop national treasures. When South Korea in 2005 twice suggested similar diversification of their FOREX account, suddenly US Military exercises were conducted off their shore, visible from the office buildings. Anyone who misses the linkage between foreign reserves held in US$-based securities and US Military support for the global banking system is at best in need of broader exposure, and at worst ignorant, compromised, or deceived. The USDollar is backed by many forces and factors, including a powerful military on an increasing basis. For four years running, the military has had a prominent presence in the center of the Middle East , inside Iraq .
THE PETRODOLLAR BACKGROUND
The history of the PetroDollar could be described as a syndicate contract between the United States and Saudi Arabia to subsidize the USDollar, to prop up the Western banking system, to enable the Arab royals (sheiks & emirs) to continue to claim their national treasures as their private property. Without the contract, the United States would not be able to perpetuate the privilege abused by the USGovt and Wall Street, whereby money is printed at will, private entities benefit routinely, trillion dollar budgets are hammered out, and no process exists either for foreign participation or approval. Bear in mind that the Saudi economy has among the highest national debt per capita among prominent nations, and has a pathetic per capita income among its citizens. The Saudi royals have cornered their national treasure, invested broadly across the world in private accounts, in a manner which seems totally beyond simple reproach.
The USGovt requirse three extremely important concessions from the Saudi Royal family. They stand as cornerstones to the PetroDollar system (if not defacto standard):
The Saudis must honor oil sales only in US$ transactions from their vast production fields across the kingdom. They must recycle their vast ill-gotten wealth (due to its private nature) in New York and London banks, so as to support the US $-based banking system, and thus enable the funding of vast loan portfolios for Western usage. They must purchase vast military weaponry in order to secure their grip of power and to keep stability in the hostile Persian Gulf region.
An aside, to drive home the point of corruption among Saudi royal families. The dirty little secret in Saudi business life is what is called ‘appropriation' among the citizens. The royals are attempting to halt the practice, but that is like Wall Street attempting to eliminate insider information used for profitable gain. Royal underlings extort independent business owners into selling their businesses for 10% of value, under threat of imprisonment on trumped up charges like tax evasion, sexual misconduct, or other serious crimes.
The basis of the PetroDollar contract is that the Saudis keep firm its foundation, that being a strong link between the USDollar and oil sales. A better description is that OPEC members, led in particular by the Saudis, have subsidized the USDollar since 1971 when Nixon broke the Bretton Woods Accord for the gold backed USDollar. That is why in my work, the name PetroDollar Standard has been used, despite the lack of any formal standard. It is a de facto standard. Such a link between oil and US$ serves as a fait accompli for entire national banking systems being US$-based in their foundations. The PetroDollar basis for banking is not well understood nor publicized. That is because its vulnerability is so huge, and US institutions take it for granted. Foreign nations discuss the concept, while US circles do not.
If the PetroDollar prop were to be removed, entire national banking systems like the Japanese or Korean or German would shift, which would come as a delivered shock wave to the USTreasury Bond complex. The USTBond system is the active working manifestation of the USDollar, the world reserve currency. Large blocks of FOREX reserves held in US$-based securities would undergo change if the system changed, all harmful to the USDollar. Nowhere has the vulnerable condition of the PetroDollar been more pronounced than in the year 2000 when Saddam Hussein demanded payment for oil in euro currency. Probably near the top in reasons why Iraq was annexed and its oil reserves commandeered, his euro-based oil sales remain near the bottom in stated reasons in the subservient US press & media, if mentioned at all. That issue has returned to the forefront, with Iran .
ENTER THE ISLAMIC REPUBLIC OF IRAN
Iran has, with some measure of hesitation if not trepidation, traveled down the same path as Saddam. Back in the summer of 2005, Tehran leaders indicated their intention to create an Iranian Oil Exchange by September of that same year on the Isle of Kish. For various reasons, they delayed. Back then my sources informed me that fear of connection with European and London banks was a deep concern. Once integrated, the Western banks could inflict damage by formal bank seizures or blockage in some manner. Tehran officials also were fearful of computer viruses injected by probing Westerners. Iranian leaders are not so much kooks as thieves, who like their Saudi counterparts, raid their national treasures. In Tehran the practice is more akin to ‘skimming' from operations whereas in Riyadh it is outright plunder of wealth.
On March 28-th, The International Herald Tribune provided an update on Iranian oil finances, with of course little or no coverage inside the US press. To do so would have put forth a secondary motive for pressure aimed at Iran by the United States . Their national affairs have been reported frequently, mainly nuclear in nature. Little focus has been given to tangents aligned with the oil business and banking systems tied to the PetroDollar itself. The IHT piece said “‘More than 50% of Iran 's oil income is paid in other currencies. We are reducing the dollar share and asking clients to pay in other currencies,' Sheibany said. Sheibany said that almost all of Iran 's European clients and some of its Asian customers have accepted making payments in non-dollar currencies.” This is the first public admission, or boasting, made by an Iranian official on non-US$ oil sales. This is highly significant, and could be construed as a realistic cause for war by those who choose to think without the usage of red state prisms or blue state prisms.
Iranian oil sales attack the fragile global banking system extended from the Western dominated financial world. There are only two important props to the United States Govt and Economy, according to William Engdahl: ownership of the US $ world reserve currency, and command of the US Military. This was conveyed at the Munich Gold conference last November in a brief private conversation. He is a brilliant man who has specialized in the political, financial, and military aspects of the oil wars, with particular emphasis on the United States versus Russia . See his website which concerns itself with Geopolitics & Geoeconomics (click here ).
Japan and China have been pushed into a corner by Iran . Of course, neither nation wishes to anger the United States . The precedent is important for payment in oil in euro transactions, much like a crack in the dike. If Chinese leaders were to push for all their oil imports to be purchased in euro terms, then the USGovt and its USDollar and its USTBonds have a big problem indeed. Japan continues to pay for oil sales from Iran in USDollars. Tokyo leaders are dragging their feet. Tehran leaders want euros for their oil sales, but to date do not demand euros, that is clear. Nippon Oil Corp, a major Japanese refiner, along with other purchasers from Japan , received ‘inquiries' from Iran to pay for oil sales in euros. It seems like Tehran wants Japanese firms to ‘volunteer' to pay in euros.
To further complicate the matter, the USGovt has pressured Japan not to purchase Iranian oil. The cited reason was ‘doing business with terrorist states' or something to that effect. Consequently, more Iranian oil has been purchased by China and South Korea . In the process Japan has been left vulnerable. Watch both Japan and China in this tug of war, the former subservient, the latter unruly. Details on these several relevant points are provided in the April report.
Something is worth stressing related to the Shanghai Coop Org cited at the end of the outlined points. The SCO has the potential muscle of OPEC for new energy supply but also the potential military power of NATO on the security side. Obstructing, undermining, and interfering with the SCO formation and cooperation might be an integral motive for the USGovt and US Military as it engages Iran on its embryonic nuclear program. SCO is a very big problem, also never mentioned in the US press.
Mixed into the dangerous bubbling cauldron is Israel , which has been openly threatened by Iran 's leader Ahmadinejad (aka My Dinner Jacket) in a manner to whip up emotion regularly. Mullahs are bad business men, who do not think or plan beyond the next few months, hence do not invest prudently in future oil production. Their refinery business leaks enormous amounts of oil and end product, as much as Iranian leaders leak blather as though addressed to school pep rallies.
This is a cat & mouse game, but a deadly one. A crack in the PetroDollar foundation coincides with US Military pressure put upon Iran for its ‘nuclear ambitions' when the true motive might be to avert fracture of the PetroDollar system. This is otherwise known as a protection racket coming unglued (see next section).
FLASHBACK TO APRIL 2005 ( FULL CIRCLE 360)
What is described on the periphery of the PetroDollar foundation is a protection racket. Financial support is provided, or money is outright extracted, from one wealth center or source (here the Saudis with USTBond support), in return for prevention of their ouster from corrupt rule and access to a national treasure. Check out my past public article “PetroDollar & Protection Racket” (click here ) from April 2005, which is still highly relevant today. Since the time of that written article, Norway has moved to sell oil in euro transactions in the Brent Crude market. The PetroDollar superstructure, so labeled since it includes not only transactions but also banking systems, is as shaky and weak now as the US Economy and banking system is vulnerable to the housing and mortgage crisis underway. That is not a coincidence in my view.
This article has resulted in more reader comments and kudos from fellow analysts than any other article penned by me, bar none. It hit a nerve. Here, two years late, the PetroDollar factor serves as the crosshairs for weapons aimed. The target is not Iraq but rather Iran . In fact the forces described are more relevant today than when written , since the Iraq War is going so badly, military forces are stretched fatigued recycled, more questions arise on accurate intelligence information (falsified or politically steered), and another war is seen as an additional morass and larger disaster potentially.
Taken as excerpts from the 2005 article, several quoted points made are:
What we have is a system for purchasing minerals and resources, totally bound in US$ denomination pricing and transaction settlements. The most visible element is energy trade, whose supplies clearly make for the largest bill payments.
The PetroDollar system is the practical commercial flipside, the visible evidence to the USDollar as world currency reserve in central banks. The financial effect is for banking systems across the globe to accumulate reserves in US$-based assets. What began as a checking account for oil payments has morphed into a gigantic bloated beast of a dangerous financial pyramid whose foundation has corroded and weakened as the USDollar bear market progresses.
The EuroDollar was created for many purposes. One was to facilitate payment for energy supplies in US$ terms, without the necessary step to convert trade surpluses back to DeutscheMarks or Swiss francs or British pound sterling. A EuroDollar is a US $ held in European banks, not converted to local currency units, and serves as a buttress to support the PetroDollar system.
The world is ‘obliged' to sop up and purchase all the debts we generate, whether they approve or not of our policies, behavior, tendency, or justification for military actions. Almost without enforced discipline, the US system has evolved with unchecked abuse on a massive scale.
US federal debt, mortgage debt, and indirectly household debt are all absorbed by Asia . Exporters are somewhat bound to buy our US Treasury debt in order to continue selling in our market. Foreign central banks have few alternatives to sock away $20 to $30 billion per month, each month, every month.
Asia feels obliged to continue, in order to keep their industries and work force busy (avoid unemployment), and to prevent their banking systems from imploding. They cannot abandon support for the USDollar, and demonstrate that support with frequent central bank interventions.
The PetroDollar system is under new attack. Russia and fringe nations of OPEC are responsible for dissension. Their motive is self-preservation. Rather, they desire a stable or rising currency. If a nation can manage to trade a host of commodities (like oil, natural gas, copper, iron, cotton, coffee) in euro denomination, that national economy would be far less subject to the distress of systemic rising prices.
The Iraq War [had] numerous grounds for its justification, surely the weapons of mass destruction among them (although not taken seriously by me here). Also, stemming the sale of Iraqi crude oil in euro denomination was another motive, which in my view was far more important even in March 2003, just as important two years later now. The PetroDollar system is that important to defend.
OPEC refuses to confront the USA , since it owns no military and is quite dependent upon the USA for its protection. They sell us oil; we protect their leadership (see Kuwait and Saudi Arabia and Qatar ).
The new Shanghai Cooperative Group represents a potential supply network which will have member nations of China , India , Russia , former Soviet Republics , and Iran as its core. Energy (crude oil & natural gas), industrial metals, and more are to be bought and sold by this new network, outside OPEC and its gaggle of disunity and diverse puppet strings held by Washington DC . The COOP is a direct answer to the corrupted OPEC cartel, which seems overly influenced by US leaders.
Pricing oil in euros helps nations to reduce domestic price inflation within their own economies, and to add to incoming revenue from oil sales. Removal of the PetroDollar system [would] have a magnificent effect on the crude oil price or the USDollar exchange rate or US Treasury yields. An effect on currencys and bonds as a secondary effect. Then we might see a gold effect. An acceleration down with USDollar could trigger a world bank crisis.
ENERGY TIDBITS, BROAD IMPLICATIONS
The stability of the PetroDollar depends heavily on keeping the confidence of the Persian Gulf oil producers. JPMorgan activities emanating from the Bank of Baghdad cannot be dismissed. Effectively, after JPMorgan was chosen to run the Iraqi Central Bank, they began issuing letters of credit using Iraqi oil assets to collateralize the loans. What exactly is this powerful bank and derivative book (mis)manager doing with the entrusted Letters of Credit on payments for Iraqi oil? When my writing expressed distrust of US Administrators and their integrity in managing the Iraqi oil, the response was hate email. My distrust was justified. The advent of a large new phenomenon in crude oil futures contracts coincides with the arrival of JPM and the US presence in Iraq. See the data for evidence and oily fingerprints. Details are provided in the April report, where some fine sleuth detective work by Rob Kirby is cited.
When explaining the crude oil price, politics and war account for most variation, not economics bound by supply & demand. It might be
- the prospects of Iran War, or the military barrage probe on Beirut in summer 2006
- the grand scale of US Military sale of crude oil & diesel in late summer 2006
- the Goldman Sachs Commodity Index adjustment of the gasoline weight just three months before the US Midterm Elections
- the State of the (dis) Union message related to the Strategic Petroleum Reserve
- the total relaxation of pressure on Iran during those same Midterm Elections
- the latest pressure on Iran .
An analysis is given. The greatest dynamics for the crude oil price changes emanate from decisions by the White House, the Pentagon, and offices at JPMorgan & Goldman Sachs. Arguments to the contrary seem very secondary and immaterial, much like noise.
Lastly, hats off to Peter Schiff during a CNBC interview opposite clownish Ned Reilly on Monday afternoon. It was worth a loud laugh and a captured quote by Peter. The US stock markets are hitting new highs in true Weimar fashion. Pundits and anchors suspect something has gone awry, since the European euro and British sterling currency are pounding away at new highs. The US S&P500 index is not doing well at all in euro and sterling terms over the last 3 or 4 years. Peter made a point that the higher stock prices are offset by a weaker US$ exchange rate and diminished purchase power within the USEconomy. That has been precisely my point for a couple years also. The S&P has maintained constant value, even if higher price. Schiff delivered a quote worth saving on the office wall. Pardon me if not word for word, as I was busy making myself an egg omelet, with onions and red peppers and olives and cheese. My prices for food have dropped by 30% since arrival in Costa Rica . Oh yes, fresh luscious cantaloupes for 80 cents, or a half dozen bananas for 20 cents. Pura Vida! Peter said:
“The Dow [and US stocks generally] cannot even compete in price with a carton of eggs in the United States , which is up 30% just last year.”
The challenge for the Dept of Treasury and US Federal Reserve is that in order to defend the USDollar, they must keep numerous fingers well placed in the dikes for the gold market, the oil market, the housing & mortgage market, the China trade war, the hedge fund mushroom, the credit derivative market, and the foreign central bank revolt. The USTreasury market is surrounded by several bands of hostile barbarians. The latest bizarre news has that Freddie Mac will purchase $20 billion in acidic bonds. Do taxpayers get stuck with the bill? Do their bond investors bear the risk? The watch word is desperation . USGOVT OFFICIALS DON'T GOT ENOUGH FINGERS TO PLUG THE DIKES. There are simply too many digits to the debt and money growth (pun intended)!!!
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