The Fall of the Petrodollar

Tito Pulsinelli agrees with the opinion of many analysts that the rise in oil prices is just showing the first of many signs that are yet to come in the following months. The author believes that the next struggle between oil producing and oil consuming nations will take place in the oil financial field. New actions will take place in order to escape from both the New York-London hydrocarbons Stock “bipoly” and the use of the dollar as the only currency for oil and gas transactions.

The price of the oil barrel is on its way to surpassing the 65U$ mark by the end of next December, when the cold winter increases consumption. The price last August was 39U$. At this moment, as I write this analysis (November 23rd), the price is 53U$. Beyond circumstantial factors like hurricanes that hinder oil extraction in the Gulf of Mexico, the Nigerian oil strike, and the failure of the Russian company Yukos to pay its fiscal debts, which makes it liable to a renationalization; the trend towards a steady increase in hydrocarbon prices is the result of a specific option.

News reporters who are at the service of speculation are never tired of exercising their fantasies in their search for reasons to generate extreme volatility: meteorology, opulence and /or anorexia of the United States strategic reserves, non existent shortages of world reserves (or the contrary), and statistical stunts about proven reserves, potential reserves, hypothetical reserves, etc.

Argentina keeps royalties at 12%

They were even shocked because Venezuela had raised its taxes on the reservoirs at the mouth of the Orinoco river, from an outrageous 1%,to 16%.

It’s a simple matter: production capacity has reached its all-time peak, and there is a need for considerable investments in technology, in order to increase this production rapidly. For instance, in order for Venezuela to increase oil extraction from 3 million to 5 million barrels per day (b.p.d.), it will invest 5 billion U$ in the next three years.

World consumption has increased, not counting Iraqi oil production, which has been restrained by sabotage, civil war, and structures that have become obsolete due to the pitiless embargo.

M. Simmons, a banking official and an expert in investments in the oil sector (besides being a friend of Bush and Cheney), predicts and wishes a price hike of the oil barrel up to 182U$. Bin Laden is more moderate in prophesying (in a clandestine manual circulating in Beirut, attributed to him) an increase up to 144U$.

Venezuelan president Hugo Chávez is among them: “... a price above 44U$ is not attributable to the OPEC (Organization of Petroleum Exporting Countries) but to the illegal invasion of Iraq. We expect a price variation range between 30U$ and 40U$. Price stability is convenient to us as well as to the consumers”.

The spectacular scenario of the “war on terrorism” coarsely conceals the reality of a war for energy, with a geopolitical and a financial front.

In the long run, the unrestrained rise of oil prices, will ruthlessly hit China, Japan, India, South Korea, and to a lesser degree, the European Union. Nevertheless, these countries will be affected to a much greater degree than will the U.S., since the extraction costs of its internal deposits will then become advantageous.

The oil barrel today, at old prices, should be at 80U$
Oil reached its top price when Colonel Ghaddafi said: “the people of Libya lived thousands of years without oil, we can perfectly continue to survive without it”. The current price of 50U$ is not equivalent to the real value of the price reached on that occasion: it is worth 78U$ at the current dollar value.

The “green bills” have devaluated significantly, as a consequence of the “visible” U.S. debt, currently equivalent to 300% of its exports. [1]

Oil trade in dollars is a punitive reality for the producing countries as well as for the OPEC, especially since 1983, with the creation of the “futures market”, the Nymex bonds from New York, and the IPE bonds from London. Since then, the OPEC does not determine its prices unilaterally: it declines its political power to the full advantage of “financial oil”.

The least profitable part of the oil business is again the one that is directly productive: refining. The last open refinery in the US operated until 25 years ago. The ones who really cash in on this case are the “futures”, that is, those 128 million “paper” barrels that tax the consumer’s pockets and that must always yield profits, whether they rise or drop in the oil market.

Between petroleum producers and gas station clients is the parasitic and speculative activity by Nymex and IPC (that is, BP and two banks: Morgan Stanley and Goldman Sachs) and their “hedge funds”, or risk coverage funds.

An average of 75% in taxes -charged indistinctly by all governments, fills the gap between the cost of a barrel of oil and the price paid by a European consumer. Only 0.3U$ of each liter sold go to the producers .

The world of petroleum is not immune to the neoliberal dogma that imposes a system in which those who are the most distant from production are the ones who accumulate the most. The Nymex-IPE “bipoly” consolidates the power of Anglo-U.S. financial capital in this strategic sector- where it relies on the four largest multinationals- and shows the growing vulnerability of the economies of the blocs of the competition.

The NY and London petroleum stock markets do not benefit the producing countries

The Iranian government is determined to confront this financial “bypoly”, and is making considerable efforts to place its oil in the market. Last June 16th, Terry Macaliser said in The Guardian: “the main oil producing countries are determined to attain greater control of oil trade after being convinced that the existing markets -like Nymex and IPE- do not favor them.

Mohammad Javad Asempour, personal advisor of the Iranian minister of energy, declared that the new pricing of petroleum would have to start by the beginning of next year. A consortium by the name of Wimpole, which gathers Iranian and foreign companies, including an ex-director for Nymex and P.A. Consulting; won the contract.

It is worth pointing out that in the recent months, “concerns” over Iran have intensified, and verbal attacks against Teheran have become more fierce. The most concerned, by the way, are those that already have nuclear weapons.

Nobody has forgotten that Saddam Hussein’s overthrow certificate was signed the day that the price of Iraqi oil was fixed in euros.
We do not know how likely it is for Iran to open its own oil market, characterized by a mixed offer of crude oil, natural gas, and petrochemical products.

There’s no doubt that this is the form to break away from the “Brent” (British) indexes and to be able to sell non renewable natural resources in a way that it is neither exclusively favorable to neo-liberal greed, nor to the complete disadvantage of consumers and producers.

Saudi Arabian and Iranian exports, for instance, are linked to the “Brent” mix of the North Sea. Why?. These Persian Gulf countries do not own “hedge funds”, that is, participation in investments banks.
Breaking the Nymex-IPE “bypoly”, will be an impossible feat if the most important economies that are vulnerable to oil price rises like China, Japan, and India don’t join the leading Iran (exporting 3 million b.p.d. and the world’s second most important potential gas producer).
The solution will be based on the approach that the OPEC producers will decide next year, and on the measures that they will take in order to set a limit for the superpower that the financial sector’s has over oil. Pentagon economist Robert Looney, points out that the “OPEC lacks direct control of prices in the main crude oil markets” [2]. According to what was mentioned above, it seems evident that it is not able to adopt the “petroeuro” unilaterally, and therefore, the choice they have left is to join the Iranian initiative and to create a new offer that includes a wider range of products, especially natural gas and petroleum.

“Petrodollars” vs. “Petroeuros”

The U.S. consumes 20 million barrels per day, half of which it imports: it is the world’s largest consumer and the Earth’s greatest pollutant. So far, it has paid its oil bills thanks to its imperial privilege of the “petrodollar”; while the others provide the raw material, it provides a devaluated currency. It literally steals 80% of the savings of mankind, with which it finances its enormous deficits, the arms race, and its reckless consumerism [3]; thanks to the “Nixonian” abolition of monetary backing in gold reserves in 1971.

The clash against the Nymex -IPE is an ulterior episode of the struggle against a 60- year-old international financial system that, besides being iniquitous, is evidently unstable.

In 2005, when oil prices could hit three digits, the crisis of “dollarcentrism” will be evident to all. The matter will be discussed in the meetings of the powerful, like Davos and the G-7 summits; and will be subject to public debate.

When the dollar was the expression of another economy, not comparable to today’s, which is structurally founded on the debt; when the US produced 55% of the commodities circulating around the world, the price of a barrel of oil was below 10U$.

Nowadays, the Asian central banks control 80% of the dollars in circulation, and finance 65% of the U.S. trade balance [4]. How much will oil cost if it were valued in euros or in gold? How much if it were traded for other commodities? How much would it cost if the European monetary surpluses were not sacrificed before the “petrodollar” altar?

The extreme volatility of the value of a barrel indicates that the driver is losing control of the train: will it be possible to stop it before a collision with an “energetic emission?” Is the Federal Reserve train conductor - a veteran “emitter”- deliberately maneuvering in that direction?

Bush’s unipolar extremism is pleased with the cynicism contained in the phrase “let Samson and all of the Philistines die”, based on the belief that the “world-market” can be paralyzed, caught in a dreadful paranoia. But in plain words, it means “we stand alone against everyone else”. Everyone else is our enemy, although at different degrees; concurrent enemies, strategic enemies, dependent enemies; but in any case never on a level playing field: anything can be discussed except the imperial metropolis’ standard of living. In consequence, “everyone else” has a range of variables at hand, which allow them more moves and greater mobility. This encourages them to move closer together, and to establish greater cooperation against the unipolar adversary, something unthinkable until today.

The European bloc, without its right wing, can approach the Arabs and Russia, thus conquering a market and attaining energy security. Eurasia, so much despised and feared by the Pentagon, would then begin to take shape. It’s a matter of deciding whether there is the will to become something more than just a subordinate variable that tries to model itself after the greatest competitor.

A Europe extending from the Atlantic Ocean to the Ural Mountains (de Gaulle’s geopolitical vision) is the only option to connect Europe with China by land, thus making it possible to do without the Anglo-Saxons and their byproducts, their past superiority in the seas, and their present superiority in the skies.

Caught between the devil and the deep blue sea, Asians could get tired of collecting “inflationed” dollars and guarantee their own lines of energy supply directly, bypassing the N.Y. and London stock markets.
There could be oscillatory movements with either Russia or the petro-Arab world, where China will be the one who makes the decisive moves, thus shaking the foundations of the current unipolar sytem.

Petrosur is indispensable in South America

The Venezuelan initiative of promoting Petrosur (Petrosouth) in South America implies gathering 15% of the proven world’s reserves in a public consortium. Furthermore, it is already vital for the energy strategies of Mercosur (Common Market of the South), a community of nations that has been the antithetical and halting regional bloc to the FTAA and its expansion.

The oil issue is intimately related to the “health” of the dollar, which is the expression of oil economics. The recipe of the neoliberal hawks to preserve and expand their hegemony is simple and brutal: to use their military superiority in order to guarantee a supply from the energy reserves, thus mercilessly putting the competition in its place.
This implies a strong dependence on external monetary flow, like the sick who require uninterrupted transfusion, and to preserve the dollar as much as possible in substitution of gold.

The growing volatility and disorder in the energy market are caused by the fact that it is priced with an unstable currency; it should be priced with a currency that is trusted by everyone, that allows a greater balance, one with which consumers and producers are not the favorite tray for the neoliberal banquet and for its dangerous financial “engineering”.

The goal to fight for is in the financial context of the “war on terrorism”, in which the objective is to break the stock market asymmetry with the apparition of a third protagonist.