ALAN FRANKLIN writes: This is something I have spoken on for years: the demise of the petrodollar, which underpins all of America's prosperity. America is fast collapsing, morally and economically, as we outline in our book, Goodbye America, Goodbye Britain. Here's one writer's take on the situation. I disagree with his conclusion about weaning people off gasoline. The real solution is to drill for the abundant oil in Alaska and ignore greenie extremists.
In 1971 a deal was struck between OPEC and the United States in which every barrel of oil purchased in the global marketplace would be bought with U.S. dollars. Any country, therefore, wanting to buy oil must have first exchanged its currency for U.S. currency. This “petrodollar” system has created an artificial demand for the dollar as global oil demand has increased.
Today several countries are moving their oil purchases into other currencies, in spite of this agreement. When OPEC officially decides to denominate oil sales in other currencies, the value of the U.S. dollar will decrease rapidly, leading to massive inflationary pressures on the U.S. economy.
Currently, the world consumes more than 80 million barrels of oil per day. And with each barrel sold, more demand for U.S. dollars is created. This continual demand for dollars means the Federal Reserve must keep dollars in plentiful supply, meaning printed regularly. More money in circulation leads to expansion of the monetary base, and a larger monetary base typically means higher standards of living.
All this is assuming the demand for U.S. currency and for U.S. debt securities remain strong. But if the petrodollar system ever crumbled, America would be stuck with lots of extra dollars that would no longer be in demand. Those dollars would quickly return to the U.S., which would lead to massive inflation.
Today America is living proof that having the world’s most important currency translates into a higher standard of living than most nations. At one point in our history, our nation’s largest export was a variety of consumer goods. Now our largest export is the U.S. dollar…a dollar that costs us practically nothing to create. How long will it be before the nations of the world figure out the dollar fiasco is a fraud?
The petrodollar system has served America well. It has enriched our nation at the expense of other nations’ potential prosperity. On September 11, 2001, however, America’s relations with the Middle East would be altered forever. Six days after the attacks, President George W. Bush named Osama bin Laden as the “prime suspect” and Washington began building a case for the full-scale invasion of Iraq.
As the petrodollar system begins to break down, there will be a shift toward other stable currencies. Based on recent events, that new currency of choice for many oil-producing nations is the euro. Iran now pays most of its oil purchases in euros, with the remaining balance in yen. North Korea also uses the euro to buy its oil supplies.
On the sales side, OPEC producer Venezuela is preparing to move all its oil sales to the euro. Other OPEC countries appear to be seriously considering similar moves. This would, of course, be devastating to U.S. attempts to maintain its grip on global hegemony.
Two questions remain: (1) how realistic is it the dollar could lose its crown to the euro; and, (2) if that were to happen, how close are we to such an event?
In 1940, 7 major oil companies known as the “7 Sisters” dominated international oil production. Of these 7 companies, 5 were American, 1 was Dutch/British and 1 was solely British. In 2007, however, the Financial Times listed the 7 Sisters as owned by Saudi Arabia, Russia, China, Iran, Venezuela, Brazil and Malaysia. These new 7 Sisters control nearly 1/3 of world oil and gas production, while the old 7 Sisters (now shrunk to 4 by consolidation) control only 10% of global oil and gas.
Consider China with its population of 1.3 billion people, economic growth at 9%, family savings averaging 40%, and more second-language English speakers than American native English speakers. If Chinese demand for oil matched that of the U.S., it would consume all the world’s production. China is the world’s fastest-growing automobile market.
Consider India, the world’s second fastest-growing automobile market. The newly announced “Nano” car by Tato Motors will sell for around $2300 and get around 50 mpg. This priced-within-reach car will enable a majority of 1.1 billion Indians to soon own autos. And consume petroleum products.
Exacerbating the increasing demand for oil are concerns about decreasing oil supply.
- Mexico is the 3rd largest exporter to the U.S., yet has its own increasing demand and shrinking production. Experts predict Mexico will be out of oil available for export by 2012.
- Indonesia is no longer a member of OPEC, due to declining reserves, and is now a net importer. In 2008 its oil production reached the lowest level in 30 years.
- North Sea reached peak production in 1999 and its output is decreasing rapidly.
- Russia is the 2nd largest oil exporter in the world, but in 2008 its production declined for the first time in a decade, increasing fears it may no longer be able to increase its production as demand goes higher.
Peak oil production has already been reached in the U.S. and is apparently impacting other major oil exporting nations, as well. Can peak oil be averted? No, because the supply of oil is finite and will someday run out. However, the effects of peak oil can definitely be averted if economies around the world will develop viable energy strategies weaning the public off petroleum-based products and transportation.