Iranian Oil Bourse - The ultimate nuclear weapon!!!
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1. Albertans will happily accept American dollars for their oil, and there is far more locked up in the Tar Sands than in all of Persia!
2. Since the EU is suffering from many long and short term structural defects, the Iranians might suddenly discover they have backed a loosing horse. Sure they can still charge three million Euro per barrel......
3. China and India, the number two and three markets for oil, deal in USD (and hold vast quantities of American funds). They might be a little less than pleased with this situation, and the customer is always right.
2. Since the EU is suffering from many long and short term structural defects, the Iranians might suddenly discover they have backed a loosing horse. Sure they can still charge three million Euro per barrel......
3. China and India, the number two and three markets for oil, deal in USD (and hold vast quantities of American funds). They might be a little less than pleased with this situation, and the customer is always right.
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Maybe not quite as stable as we might like.
What happens if, for example, China backs the Euro and India decides to do what it has done since 1947 and plays down the middle. It is not the oil supply that is the problem. It is whether the Dollar will remain as the dominant factor in international trade.
As it stands the US gets to decide how much money is in circulation internationally and that ultimately is what keeps the value of the Dollar where it is. If the Euro becomes a real player then the Dollar is no longer controlled by US policy but by international markets, just like the Canadian dollar.
What happens if, for example, China backs the Euro and India decides to do what it has done since 1947 and plays down the middle. It is not the oil supply that is the problem. It is whether the Dollar will remain as the dominant factor in international trade.
As it stands the US gets to decide how much money is in circulation internationally and that ultimately is what keeps the value of the Dollar where it is. If the Euro becomes a real player then the Dollar is no longer controlled by US policy but by international markets, just like the Canadian dollar.
Most currencies in the world these days are "fiat currencies" where the issuing government can print as much money as they want ("currency by fiat") Accordingly, the value of these currencies float relative to each other based on supply/demand and perceived value, just like corporate stock (although corporate stock represents a share of ownership, where currency does not)
The big problem with fiat currency is inflation, becuse the more money you print, the less it is worth. You can't just create value out of nothing.
( Mind you, there were problems with having the currency hard-backed with gold as well - notably, you could get "currency shortages" (if there isn't the gold to back it up in the reserve, you can't print money, so you could wind up in the situation where you couldn't get a bank loan because there literally wasn't any money for the bank to lend to you) I'm no "gold bug" who will argue a return to currency explicitly backed by precious metals)
The interesting bit of analysis out of that article is the observation that the US Dollar is *effectively* backed by oil, due to the need to buy oil with US currency. (Assuming that that's actually true - I haven't fact checked it)
That's a very convincing point, to the effect that a little "click" went off when I first read it. Suddenly, a whole lot of very stupid behaviour by a whole lot of intelligent people starts to make sense....
Currencies aren't like engineering units, where you can convert losslessly from one to the other, like metres to feet. If somebody will only accept a certain currency for a product, then someone who wants to purchase that product must first purchase that currency. Modern banking systems streamline the process a great deal, such that most of the mechanics are hidden, but every time you buy a product from a foreign country, a currency transaction takes place somewhere.
Because the various world currencies float relative to each other, the value of the currency is subject to the laws of supply and demand. As demand grows, the price of the currency increases. As demand drops, the price of the currency decreases. Similarly supply - as the government prints more money (increases supply) then price of the currency decreases.
A government whose currency is in high demand can print more money and keep the price (or value) of the currency constant - meaning, in effect, that there is more wealth floating around, because there is more money out there and the face value has remained the same. You get to print more money without creating inflation, because the inflationary aspects of printing more money are offset by the increased demand for the currency in order to purchase oil.
And the more money there is floating around (where value has remained unchanged by the extra supply) the richer the country is. If you create demand for your currency, you quite literally create wealth out of nothing.
Now the traditional way to increase wealth is to create demand for products sourced from your country. If my country produces an excess of food, or raw materials, or manufactured goods, other countries will want to purchase those goods. That creates demand for the currency used to purchase those goods, which increases the value of that currency, which in turn allows the printing of more money. As manufactured goods carry a price premium over raw materials (due to the added value of manufacture) a country that does a lot of manufacturing and export creates a lot of demand for its currency. At one time (especially during WW2, where the US was arming and feeding most of the Western world) this was THE major engine of US wealth.
But as globalization and the increasing standard of living in the US has driven the costs of manufacturing in the US exessively high, those manufacturing processes have moved elsewhere, lowering demand for US currency. That in turn lowers the value of the US Dollar, and leads to inflation.
BUT - OPEC will (so it seems - as I said, this is the central fact that must be checked) will only accept US currency in exchange for its (cheap and plentiful) oil. This creates demand for US currency independant of any US contribution to the value of the product. This demand is completely artificial - the more oil coming out of OPEC, the higher demand for US currency, the more US currency is worth, the more money that can be printed while keeping the price of the dollar constant. This is effectively "free money" for the US for doing absolutely nothing. And because oil is in such high demand, it is a LOT of free money.
But it also means that anything that threatens to bypass the requirement to buy oil with US currency threatens the value of the currency itself - especially as the US is no longer the manufacturing powerhouse it once was. If it became possible to buy substancial amounts of oil with, say, Euros, then demand for the US Dollar would drop, and each dollar would be worth less than it was - hello, inflation! And given that the oil-related demand for the USD is THE major engine for propping up the dollar, given the absence of huge exports to create alternative demand for the USD, it is no stretch to say that the USD is "backed" by oil.
(Who'd've thunk Greasy Pete's economics classes would take, huh?)
So anybody who threatens to put large, CHEAP oil reserves on the market and who will take currency other than the US Dollar is materially threatening the US, because they could trigger runaway inflation and the eventual devaluing of the USD. Imagine if your house was suddenly worth $20,000 instead of $200,000, or if a loaf of bread cost $10.....
And Iraq has oil reserves estimated to be equal in size to Saudi Arabia, has crushing debts (mostly related to the Iraq/Iran war of 1980-1988) and no signifigant exports save oil and dates. A Saddamn willing to sell oil in Euros at prices that undercut OPEC literally threatens the ecomomy of the USA.
*click* And now the war on Iraq makes PERFECT sense.
And now we effectively have Iran saying/doing the same thing, and now all of a sudden Iran is the next great Satan.
And what is the background of the Bush family (and most of the people in power in the US right now?) Oil.
Things that make one think.....
Yes, Canada has huge reserves in the oil sands, but the economics of extracting that oil are such that Middle Eastern oil is cheaper to produce. It's not so much the *amount* of oil that counts, as how *cheap* it is. But I wonder - once the "easy oil" from the Middle East is gone, or if a major breakthrough occurs that makes Alberta oil as cheap to produce as Middle Eastern oil (meaning we could flood the market and drive the price down, plus take payment in our own currency) would we find ourselves in the sights of the US Army?
Yes, China has huge reserves of US currency and US debt, and I suspect they would not be too keen on having that devalued. But I also suspect that they could weather that storm better than many other countries.
DG
The big problem with fiat currency is inflation, becuse the more money you print, the less it is worth. You can't just create value out of nothing.
( Mind you, there were problems with having the currency hard-backed with gold as well - notably, you could get "currency shortages" (if there isn't the gold to back it up in the reserve, you can't print money, so you could wind up in the situation where you couldn't get a bank loan because there literally wasn't any money for the bank to lend to you) I'm no "gold bug" who will argue a return to currency explicitly backed by precious metals)
The interesting bit of analysis out of that article is the observation that the US Dollar is *effectively* backed by oil, due to the need to buy oil with US currency. (Assuming that that's actually true - I haven't fact checked it)
That's a very convincing point, to the effect that a little "click" went off when I first read it. Suddenly, a whole lot of very stupid behaviour by a whole lot of intelligent people starts to make sense....
Currencies aren't like engineering units, where you can convert losslessly from one to the other, like metres to feet. If somebody will only accept a certain currency for a product, then someone who wants to purchase that product must first purchase that currency. Modern banking systems streamline the process a great deal, such that most of the mechanics are hidden, but every time you buy a product from a foreign country, a currency transaction takes place somewhere.
Because the various world currencies float relative to each other, the value of the currency is subject to the laws of supply and demand. As demand grows, the price of the currency increases. As demand drops, the price of the currency decreases. Similarly supply - as the government prints more money (increases supply) then price of the currency decreases.
A government whose currency is in high demand can print more money and keep the price (or value) of the currency constant - meaning, in effect, that there is more wealth floating around, because there is more money out there and the face value has remained the same. You get to print more money without creating inflation, because the inflationary aspects of printing more money are offset by the increased demand for the currency in order to purchase oil.
And the more money there is floating around (where value has remained unchanged by the extra supply) the richer the country is. If you create demand for your currency, you quite literally create wealth out of nothing.
Now the traditional way to increase wealth is to create demand for products sourced from your country. If my country produces an excess of food, or raw materials, or manufactured goods, other countries will want to purchase those goods. That creates demand for the currency used to purchase those goods, which increases the value of that currency, which in turn allows the printing of more money. As manufactured goods carry a price premium over raw materials (due to the added value of manufacture) a country that does a lot of manufacturing and export creates a lot of demand for its currency. At one time (especially during WW2, where the US was arming and feeding most of the Western world) this was THE major engine of US wealth.
But as globalization and the increasing standard of living in the US has driven the costs of manufacturing in the US exessively high, those manufacturing processes have moved elsewhere, lowering demand for US currency. That in turn lowers the value of the US Dollar, and leads to inflation.
BUT - OPEC will (so it seems - as I said, this is the central fact that must be checked) will only accept US currency in exchange for its (cheap and plentiful) oil. This creates demand for US currency independant of any US contribution to the value of the product. This demand is completely artificial - the more oil coming out of OPEC, the higher demand for US currency, the more US currency is worth, the more money that can be printed while keeping the price of the dollar constant. This is effectively "free money" for the US for doing absolutely nothing. And because oil is in such high demand, it is a LOT of free money.
But it also means that anything that threatens to bypass the requirement to buy oil with US currency threatens the value of the currency itself - especially as the US is no longer the manufacturing powerhouse it once was. If it became possible to buy substancial amounts of oil with, say, Euros, then demand for the US Dollar would drop, and each dollar would be worth less than it was - hello, inflation! And given that the oil-related demand for the USD is THE major engine for propping up the dollar, given the absence of huge exports to create alternative demand for the USD, it is no stretch to say that the USD is "backed" by oil.
(Who'd've thunk Greasy Pete's economics classes would take, huh?)
So anybody who threatens to put large, CHEAP oil reserves on the market and who will take currency other than the US Dollar is materially threatening the US, because they could trigger runaway inflation and the eventual devaluing of the USD. Imagine if your house was suddenly worth $20,000 instead of $200,000, or if a loaf of bread cost $10.....
And Iraq has oil reserves estimated to be equal in size to Saudi Arabia, has crushing debts (mostly related to the Iraq/Iran war of 1980-1988) and no signifigant exports save oil and dates. A Saddamn willing to sell oil in Euros at prices that undercut OPEC literally threatens the ecomomy of the USA.
*click* And now the war on Iraq makes PERFECT sense.
And now we effectively have Iran saying/doing the same thing, and now all of a sudden Iran is the next great Satan.
And what is the background of the Bush family (and most of the people in power in the US right now?) Oil.
Things that make one think.....
Yes, Canada has huge reserves in the oil sands, but the economics of extracting that oil are such that Middle Eastern oil is cheaper to produce. It's not so much the *amount* of oil that counts, as how *cheap* it is. But I wonder - once the "easy oil" from the Middle East is gone, or if a major breakthrough occurs that makes Alberta oil as cheap to produce as Middle Eastern oil (meaning we could flood the market and drive the price down, plus take payment in our own currency) would we find ourselves in the sights of the US Army?
Yes, China has huge reserves of US currency and US debt, and I suspect they would not be too keen on having that devalued. But I also suspect that they could weather that storm better than many other countries.
DG
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RecceDG:
In addition to oil, doesn't the dominance of Wall Street, the NYSE and the Chicago Board of Trade, as well as the US Treasury also work to skew the market for Dollars in the US's favour?
Please note - I am not suggesting this is a bad thing. The stability of the US Dollar has been as good for me and my family as it has for all Canadians.
In addition to oil, doesn't the dominance of Wall Street, the NYSE and the Chicago Board of Trade, as well as the US Treasury also work to skew the market for Dollars in the US's favour?
Please note - I am not suggesting this is a bad thing. The stability of the US Dollar has been as good for me and my family as it has for all Canadians.
Well, maybe. My major personal epiphany hit over the oil thing... but yes, I suppose it's fair to assume that the entire US financial sector is more or less on the same side. 
But it's also necessary to note just how different the US of today is from the US of even 30 years ago. The amount of domestic manufacturing has gone way, way, way down.
We're not talking about the days of "General Foods, General Electric, and General Motors" any more.
Without demand for hard goods to back their currency, I think the US Dollar is becoming heavily overextended, and something has got to give somewhere, eventually.
I work in Detroit, and I'm paid in US currency. Over the last few years, the value of the US Dollar has fallen from almost 1.5 to 1.1 versus the Canadian Dollar. There was a day when I made $1500 CAD for every $1000 US - now it is just $1100, and for the same work! Let me tell you, that hurts.
Even more interesting is to compare the Euro against the USD. When it was first created, the Euro was intended to have a value of 1E == 1 USD. For the longest time, 1E was equal to about .88 USD. Today it is 1.22 USD, and it has been 1.20 - 1.25 USD for a little while. Put another way, the Euro is to the USD as the USD is to the Canadian dollar (although that isn't all that true anymore either, as the $ CAN is so strong - 1.15 CAD today!)
I can understand why the Canadian dollar is so strong; we've had awesome fiscal management for the past 8 years at least. Big surpluses, a shrinking national debt, and an economy that is 50% exports of raw materials. But I think that the stength of the Euro is actually indicative of weakness in the US economy - HUGE debts, and a shrinking manufacturing base, plus little exports in raw materials. If the whole "backed by oil" thing really is real, then the US could be in a lot of trouble.
DG
But it's also necessary to note just how different the US of today is from the US of even 30 years ago. The amount of domestic manufacturing has gone way, way, way down.
We're not talking about the days of "General Foods, General Electric, and General Motors" any more.
Without demand for hard goods to back their currency, I think the US Dollar is becoming heavily overextended, and something has got to give somewhere, eventually.
I work in Detroit, and I'm paid in US currency. Over the last few years, the value of the US Dollar has fallen from almost 1.5 to 1.1 versus the Canadian Dollar. There was a day when I made $1500 CAD for every $1000 US - now it is just $1100, and for the same work! Let me tell you, that hurts.
Even more interesting is to compare the Euro against the USD. When it was first created, the Euro was intended to have a value of 1E == 1 USD. For the longest time, 1E was equal to about .88 USD. Today it is 1.22 USD, and it has been 1.20 - 1.25 USD for a little while. Put another way, the Euro is to the USD as the USD is to the Canadian dollar (although that isn't all that true anymore either, as the $ CAN is so strong - 1.15 CAD today!)
I can understand why the Canadian dollar is so strong; we've had awesome fiscal management for the past 8 years at least. Big surpluses, a shrinking national debt, and an economy that is 50% exports of raw materials. But I think that the stength of the Euro is actually indicative of weakness in the US economy - HUGE debts, and a shrinking manufacturing base, plus little exports in raw materials. If the whole "backed by oil" thing really is real, then the US could be in a lot of trouble.
DG
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so if the US dollar collapses then what's that mean for us?
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DG:
I think you are right on the Euro. BTW I used to work in the States as well but (unfortunately) severed that tie before the USD started to fall against the CAD. Consider yourself lucky you still have any Dollars mate.
WRT the Euro, IIRC when it was released it was expected by the Eurocrats that it would have a value of 1.25 Eu / 1.00 USD. They were mightily disappointed when it opened at 0.88. I was importing Danish and Swedish goods into the US at the time and the pricing regime helped me beat out Japanese competitors.
It seems they have got up to the 1.25 mark but they European economy has suffered from their monetary policy and has hurt their chances when it came to getting their EU constitution approved.
CFL:
Nothing good.
I think you are right on the Euro. BTW I used to work in the States as well but (unfortunately) severed that tie before the USD started to fall against the CAD. Consider yourself lucky you still have any Dollars mate.
WRT the Euro, IIRC when it was released it was expected by the Eurocrats that it would have a value of 1.25 Eu / 1.00 USD. They were mightily disappointed when it opened at 0.88. I was importing Danish and Swedish goods into the US at the time and the pricing regime helped me beat out Japanese competitors.
It seems they have got up to the 1.25 mark but they European economy has suffered from their monetary policy and has hurt their chances when it came to getting their EU constitution approved.
CFL:
Nothing good.
Keeping in mind that I'm not actually an economist; I just play one on the Internet....
The US Dollar collapsing can't be good for Canada, given that most of our international trade goes there. In particular, I think the Canadian auto industry would be flattened almost overnight.
What we have going for us though is a lot of raw materials, plus a fair amount of specialized manufacturing. With the aforementioned exception of the auto industry, all we have to do is find new customers for what we already produce, not try and rebuild lost capability.
I do know that we can prepare for it by paying off as much of the National Debt as we can, as quickly as we can, plus working hard to establish trade relations with as many non-American growing economies as we could - like, oh, maybe China? Plus we can sell to Europe.
But I don't think the USD will *suddenly* collapse, like we all wake up next morning and the USD is worth 0.10 CAD. If it goes, I think it goes slowly, giving us time to adjust.
DG
The US Dollar collapsing can't be good for Canada, given that most of our international trade goes there. In particular, I think the Canadian auto industry would be flattened almost overnight.
What we have going for us though is a lot of raw materials, plus a fair amount of specialized manufacturing. With the aforementioned exception of the auto industry, all we have to do is find new customers for what we already produce, not try and rebuild lost capability.
I do know that we can prepare for it by paying off as much of the National Debt as we can, as quickly as we can, plus working hard to establish trade relations with as many non-American growing economies as we could - like, oh, maybe China? Plus we can sell to Europe.
But I don't think the USD will *suddenly* collapse, like we all wake up next morning and the USD is worth 0.10 CAD. If it goes, I think it goes slowly, giving us time to adjust.
DG
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If it does collapse, it won't just impact them and us. Other countries would take a major hit too. As has been pointed out, China and India hold massive reserves of USD. The fact that so many influential countries hold so much US currency means that there's very little chance of it becoming greatly devalued overnight, or even over a period of a couple years. And if it did happen? WW4 doesn't seem like much of a strech. Such a massive shift in global economics wouldn't go over peacefuly.
Brad Sallows
Army.ca Legend
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As noted above, to buy oil priced in Euros one must first obtain Euros.
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The risk of an Iranian oil bourse is probably one (if not the biggest)
reason why US Vice President Dick Cheney recently paid a visit
to the Alberta Tar Sands project.
Even if the Iranians don't implement a bourse, there is still
a risk that the US and Israel may attack over the nuclear
weapons development programme that Iran will not discontinue.
If war breaks out, oil will become stratospherically expensive, if not
hard to get because all of the Middle East will become a
theatre of war.
The bottom line seems to be that America is looking at
its oil supply options - one of them being the Tar Sands.
reason why US Vice President Dick Cheney recently paid a visit
to the Alberta Tar Sands project.
Even if the Iranians don't implement a bourse, there is still
a risk that the US and Israel may attack over the nuclear
weapons development programme that Iran will not discontinue.
If war breaks out, oil will become stratospherically expensive, if not
hard to get because all of the Middle East will become a
theatre of war.
The bottom line seems to be that America is looking at
its oil supply options - one of them being the Tar Sands.
- Reaction score
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While the discourse on the valuation of the dollar was very interesting and informative, I suspect you are somewhat overstating the amount of structural change in the United States and their economy. While the big vertical integration companies like GM and now Ford are indeed hurting, and the percentage of manufacturing and agriculture is down quite a bit over the last 30 years or so, in absolute terms the United States still has a staggering amount of production in these areas of the economy.
The American economy is large, diverse and actually insular enough to carry on producing for their domestic markets even in the face of large external shocks. One telling example is the growth of "mini mills" in the steel industry. While the big steel producers in the US were taking hits or even going bankrupt due to the importation of cheap foreign steel, the mini mills actually proliferated and increased market share. It is a case of looking for dinosaurs and not noticing the small furry mammals running around underfoot. Indeed, even the mammals might be coming under siege by an infestation of "cockroaches", tiny companies which use the power of the Internet to create high end products combining the ability to individually craft each item for the customer with the latest in production technologies and manufacturing economies. See: http://www.wired.com/wired/archive/13.09/fablab.html.
WRT Europe; their highly complex and all encompassing regulatory environment, coupled with high levels of taxation leaves them moving very slowly in the wealth creation department, especially compared to the United States, China and India. Indeed, many of the high tech industries the Eurocrats had been counting on to make them competitive have instead fled to greener pastures, creating new wealth in the US, China and India instead. Over the long term, their demographic bust means their internal markets will slowly collapse, along with their demand for imported oil etc. You can read more in this thread: http://forums.army.ca/forums/threads/38075.0.html
I think I would be more worried about Iranian nuclear ambitions long before I would worry about their effects on international finance.
The American economy is large, diverse and actually insular enough to carry on producing for their domestic markets even in the face of large external shocks. One telling example is the growth of "mini mills" in the steel industry. While the big steel producers in the US were taking hits or even going bankrupt due to the importation of cheap foreign steel, the mini mills actually proliferated and increased market share. It is a case of looking for dinosaurs and not noticing the small furry mammals running around underfoot. Indeed, even the mammals might be coming under siege by an infestation of "cockroaches", tiny companies which use the power of the Internet to create high end products combining the ability to individually craft each item for the customer with the latest in production technologies and manufacturing economies. See: http://www.wired.com/wired/archive/13.09/fablab.html.
WRT Europe; their highly complex and all encompassing regulatory environment, coupled with high levels of taxation leaves them moving very slowly in the wealth creation department, especially compared to the United States, China and India. Indeed, many of the high tech industries the Eurocrats had been counting on to make them competitive have instead fled to greener pastures, creating new wealth in the US, China and India instead. Over the long term, their demographic bust means their internal markets will slowly collapse, along with their demand for imported oil etc. You can read more in this thread: http://forums.army.ca/forums/threads/38075.0.html
I think I would be more worried about Iranian nuclear ambitions long before I would worry about their effects on international finance.
it's the massive structural imbalance of the global forex market that makes the possibility of iran pricing its oil in euros so scary. the dollar is propped up by asian central banks, which effectively finance the massive us fiscal deficit. a move to petro-euros could easily set off an avalanche of dollar-selling -- or more properly, a correction. not something i would look forward to, but at least in the long run we would wind up with more healthy forex markets, and be rid of a number of really dorky trade distortions (such as low domestic consumption in rich asian economies). even the us would benefit from a (forced) return to fiscal sanity. all this will have to happen eventually, but the iranians could probably force the situation if they are dumb (or desperate) enough.
it is fitting in some ways that someone is comparing this to a "nuclear" option, though, since it's a card the iranians could only play once.
it is fitting in some ways that someone is comparing this to a "nuclear" option, though, since it's a card the iranians could only play once.
Brad Sallows
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How much oil does the US buy from Iran, and how much does the EU buy?
Also, how much does China buy, and how much could China buy, in either currency?
There can't be an avalanche of dollar sellers unless there is also an avalanche of dollar buyers.
Other than the Europeans, who have Euros, and countries from whom the Europeans buy gobs of imports priced in Euros, who will be buying oil priced in Euros?
Also, how much does China buy, and how much could China buy, in either currency?
There can't be an avalanche of dollar sellers unless there is also an avalanche of dollar buyers.
Other than the Europeans, who have Euros, and countries from whom the Europeans buy gobs of imports priced in Euros, who will be buying oil priced in Euros?
Brad Sallows said:
there sure can be, if the price is right. the most important fact here is that thare are far too many dollars out there. the central banks will only keep them hoarded safetly under their mattresses for as long as they believe other central banks are doing the same.
i can't say exactly how much oil the chinese and japanese buy from iran, but it's a lot, and it's all paid for in dollars. and the japanese importers are not likely to care whether they have to trade their yen in for dollars, euros or canadian tire money to keep buying that oil.
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