Did WikiLeaks Confirm "Peak Oil"? Saudi Said To Have Overstated Crude Oil Reserves By 300 Billion Barrels (40%)

Tyler Durden's picture

In what can be the "Holy Grail" moment for the peak oil movement, Wikileaks has just released 4 cables that may confirm that as broadly speculated by the peak oil "fringe", the theories about an imminent crude crunch may be in fact true. As the Guardian reports on 4 just declassified cables, "The US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show. The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%." Could the OPEC cartel's capacity for virtually unlimited supply expansion to keep up with demand have been nothing but a bluff? That is the case according to Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, who met with the US consul general in Riyadh in November 2007 and "told the US diplomat that Aramco's 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached." And yes, that conspiracy concept of peak oil is specifically referenced: "According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as "peak oil"." And it gets worse: "Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap." Look for Saudi Arabia to go into full damage control mode, alleging that these cables reference nothing but lies. In the meantime, look for China to continue quietly stockpiling the one asset which as was just pointed out is the key one to hold, for both bulls and bears, according to Marc Faber.

More from the Guardian:

One cable said: "According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray."

It went on: "In a presentation, Abdallah al-Saif, current Aramco senior vice-president for exploration, reported that Aramco has 716bn barrels of total reserves, of which 51% are recoverable, and that in 20 years Aramco will have 900bn barrels of reserves.

"Al-Husseini disagrees with this analysis, believing Aramco's reserves are overstated by as much as 300bn barrels. In his view once 50% of original proven reserves has been reached … a steady output in decline will ensue and no amount of effort will be able to stop it. He believes that what will result is a plateau in total output that will last approximately 15 years followed by decreasing output."

The US consul then told Washington: "While al-Husseini fundamentally contradicts the Aramco company line, he is no doomsday theorist. His pedigree, experience and outlook demand that his predictions be thoughtfully considered."

Seven months later, the US embassy in Riyadh went further in two more cables. "Our mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period."

A fourth cable, in October 2009, claimed that escalating electricity demand by Saudi Arabia may further constrain Saudi oil exports. "Demand [for electricity] is expected to grow 10% a year over the next decade as a result of population and economic growth. As a result it will need to double its generation capacity to 68,000MW in 2018," it said.

It also reported major project delays and accidents as "evidence that the Saudi Aramco is having to run harder to stay in place – to replace the decline in existing production." While fears of premature "peak oil" and Saudi production problems had been expressed before, no US official has come close to saying this in public.

The conclusion:

Jeremy Leggett, convenor of the UK Industry Taskforce on Peak Oil and Energy Security, said: "We are asleep at the wheel here: choosing to ignore a threat to the global economy that is quite as bad as the credit crunch, quite possibly worse."

Obviously, if true, the implications of this discovery are massive, and will have a huge impact on the price of oil imminently.

The four key cables can be found at the links below.


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Michael's picture

The elites will try anything to get the oil price higher. What was oil at today? Down to $86?

Don't worry. The 22.5% unemployed won't be using much of it in the foreseeable future.

Crude Oil is going up to $150-$200 a barrel: Lindsey Williams Predictions


More Critical Thinking Wanted's picture


Those libertarian idiots who are blaming the Fed for high global food prices need to read all this uncensored material to see how commodity prices like oil go up:

Poor Price Elasticity in China, India, ME: Food Price Inflation is a New Complication


5. (C) Bourland noted that given the widespread public subsidies in China, India, and the rapidly growing markets of the Middle East, there is no pass-through of these higher crude prices to the consumer in much of the world's market. Essentially there is no price signaling, "go slow" sign in the form of higher prices for consumers as crude rises. As a result, he expects we will continue to see unrestrained demand growth, especially in the Middle East and China.

6. (C) Bourland was not optimistic about prospects for encouraging greater price elasticity in the world energy markets. Inflation, particularly food inflation, recently has become a front-burner issue for many nations. Pressed consumers in many nations have recently found themselves on a knife's edge regarding food security, and are not likely to peacefully accept the rolling back of petrol subsidies which have become effectively institutionalized. Bourland also cautioned that Saudi Arabia's domestic consumption of crude continues to grow by about 100,00 bpd annually, ensuring a tight global market for the foreseeable future.


Summary: it's not the Fed, dummies :-) It's fuel subsidies in China and India that are driving up demand and are driving up food inflation as well ...


alien-IQ's picture

look at a 10 year chart of the USD and put that against ANY commodity at all and try to say with a straight face that the decline in the value of the USD has had no bearing on the rocketing price of...well...EVERYTHING!

More Critical Thinking Wanted's picture


LOL, yours is one of the most stupid replies in any of these threads.

Tell me, when India buys Saudi Oil, does it care about the price of oil in USD? :-)

No, it does not - it cares about the price of oil in Rupees.

The USD's decline matters to the US, but does not matter to India ...

Oil is denominated in dollars but its price is set by global demand and global supply - not by the strength of the dollar.

(And yes, there is some coupling - but only in proportion to how much oil the US consumes and produces - which is a small portion of the global picture.)


alien-IQ's picture

What does OPEC price oil in? Rupees? Euros? Pounds? Goats? or US Dollars?

More Critical Thinking Wanted's picture


Oil is denominated in dollars.

That does not mean that oil's real value (the global price) goes straight up and down by the value of the dollar.

Check the charts: on quiet days where the dollar strengthens by 1% oil's price in USD goes down by 1%. The reason? The real value of oil did not change.

Just like rice futures are priced in USD as well, still the real value of rice is obviously not set by the value of the USD ...

You get the real value of any commodity that is priced in USD by dividing the commodity price with the dollar index (DXY) value.

Why do you think is there a highly liquid dollar index instrument, while there's no notable 'euro index' equivalent? Because most commodities are traded in USD and the real value of the commodity has to be readily available as well :-)

Welcome to commodities pricing 101 ...


alien-IQ's picture

this is a fruitless conversation as it is obviously colored by your jingoistic view of the world.

I can't penetrate that wall...nor do I have any desire to try.

good luck.

and lay off the steroids. they shrink your brain also.

More Critical Thinking Wanted's picture


You are still in denial, why? You only need to google around a bit to see that commodity prices move inversely to the dollar.

One of the first hits is:





A rising dollar is noninflationary. As a result a rising dollar eventually produces lower commodity prices.

The reason for this is obvious: the dollar is just a unit of account. Oil could be measured in euros or in gold - that would not change its real value. You would buy gold then pay for oil and that's it. The price of gold would not play a role in the value of oil - it's just an intermediary currency.

Same goes for the USD.


Calmyourself's picture

RNR & MCT - Dumb & dumber, MCT your brain is probably no larger than your shrunken gonads, and RNR well your just a troll never to be taken seriously..

More Critical Thinking Wanted's picture


Here's an example of how India buys oil from Russia.

Say if India buys $1b worth of oil from Russia then the following happens (simplified):

  • India converts Rupees to 1 billion dollars
  • India transfers 1 billion dollars to Russia
  • Russia pumps the oil to India
  • Russia converts 1 billion dollars to Rubles
  • India uses its oil
  • Russia uses its Rubles

See how it was largely immaterial what currency the transaction was conducted in? 1 billion dollars were bought then sold within a short timespan. The real net transaction was Rupees to Rubles, for oil transport from Russia to India.

Again, this is commodities 101.

If you do not understand this and if you are trading then I welcome you as one of my counter-parties :-)


Sophist Economicus's picture

Hmmm.  Oh, I get it, you assume that ALL oil transactions are based on supply and demand!   But let's suppose we have speculators in the middle of these transactions, to 'grease' the wheels of hedging and the like.  And let's also suppose that these speculators are tied into the Fed fire-hose of liquidity and can borrow or carry-trade dollars at near free frictional costs.  Then, let's get really wild and assume that they place bets on oil - keep oil in tankers and rent storage on land, for a speculative profit.   That fire hose of liquidity has directly replaced that quaint, straight-forward supply/demand chart you read about in econ 101.    And, oh yea, the Fed chairman has EXPLICITLY stated that a ZIRP and steep yield curve is in place to ENCOURAGE the purchase of risk assets



More Critical Thinking Wanted's picture


Then, let's get really wild and assume that they place bets on oil - keep oil in tankers and rent storage on land, for a speculative profit.

Erm, do you realize how much storage just a million barrels of oil needs and how much it costs to store it? Oil is expensive to store. And even a million barrels of oil is a drop in the bucket: global demand of oil is above 80 million barrels a day ...

"Keeping oil in tankers" is awfully naive: tankers take years to build and especially now they are in hot demand. Letting one sit around 'idle' just to store oil is crazy. And even the biggest of tankers can hold only 1-2 million barrels of oil - a drop in the global bucket: about 1% of a single day's global oil consumption.

If you want to speculate in commodity prices, just use the futures. Holding oil physically only makes sense if you want to manipulate the demand and supply equation and thus manipulate prices via physical buffering - but that is rather hard with tankers being very inelastic bottlenecks and with governments being eager to find any speculator who can be blamed for high fuel prices and food inflation ...

Read the Wikileaks material referenced in the fine article - oil producing countries themselves were conceding it in secret talks that they do not think that any significant amount of oil speculation is behind the 2008 surge in oil prices. They were convinced that it's supply & demand.

Note the motivation: those oil producing countries would be happy to blame speculators and not be blamed for the shortfall in supply ...


Sophist Economicus's picture

Ok.   I don't have the data handy, but in the 1990s, I think a barrel of oil in USD was under $20.   Cut to about 10 or 11 years later it ramps up to $140+.    Do you mean to tell me the ACTUAL DEMAND for oil increased 7X, and that is what drove the price?

Then in the subsequent year, it drops to $30+.   Did demand then drop by 60+%????   and in the last 18 months, did demand TRIPLE, and that is why oil sits at about $90?

I wanna see your supply and demand data, cause from my vantage point, these violent price movements don't look correlated to spot demand

Dr. Porkchop's picture

Oil prices spiked right around the run up to the Iraq war as I recall.

More Critical Thinking Wanted's picture


The supply/demand curve is not like the parent poster assumes: the real numbers are that a roughly 1% cut in real oil supplies increases oil prices by about 10%. (!)

The reason: the demand side needs fuel badly and is only willing to cut consumption when price goes up by a lot. (demand is 'inelastic')

That 10x leverage makes prices fluctuate/spike and drop very quickly - even without any speculation ...



Flakmeister's picture

  Take another look at the definition of a supply-demand curce, oil demand is quite inelastic. IIRC, the inelasticity is ~0.05. You show you know nothing about oil supply and little about basic economic theory.

Sophist Economicus's picture

That was my point!   Demand has had a slow creep upwards, with a fairly predictable demand curve YET prices have increased and decreased wildly.    Simple supply and demand explanations would not explain those moves - since there were neither high spikes in demand, nor large disruptions in supply.   "simplistic" economic theory cannot get you to predict the prices we've experienced

More Critical Thinking Wanted's picture


Exactly because demand is inflexible it does not need "large" disruptions in supply for the price of oil to spike.

The inelasticity has roughly the following effect: only a relatively brutal, +$10 change in oil prices reduces daily demand by 1 million barrels - and that's still a drop in the bucket in the daily global consumption of 85 million barrels.

Consumers rather pay than face cuts in fuel use. Fuel subsidies in India and China increase this 'price multiplier' effect.

It does not take much to disrupt supply a bit: Iraq, Iran, Nigeria, Venezuela, you name it - not the most stable regions on the planet.

So whenever instability cuts (or threatens to cut) oil production, the price of oil reacts wildly, especially futures, which are volatile to begin with - but real delivery prices will react as well if the instability persists and the cut in production is real.



Simen's picture

"Keeping oil in tankers" is awfully naive: tankers take years to build and especially now they are in hot demand. Letting one sit around 'idle' just to store oil is crazy.


Congratulations, you are getting my first ZH-comment ever.


Tanker-rates are currently close to rock-bottom. Please see


(please site contrary sources)

As to storing oil in tankers - this has been done previously, and with the glut in the market, it will very probably be happening again unless the transport rates improve.



More Critical Thinking Wanted's picture


Tanker-rates are currently close to rock-bottom

As in "2 times higher than they were a couple of months ago"?

True that it's still not as high as in 2008, so I concede the point - it's plausible and possible to do it.

Still I maintain this point:

with governments being eager to find any speculator who can be blamed for high fuel prices and food inflation ...

It's risky.

Plus I maintain that it would need a lot of tankers to have any real impact on global prices. So you can use it for cheaper rollover, but to manipulate prices?


chumbawamba's picture

Oil tankers parked off British coast as speculators wait for prices to rise


Is speculation driving commodity prices to crash?

Yes, they've done it.  Yes, they've managed to impact prices globally.

You're ass has pretty much been handed to you on this one.


I am Chumbawamba.

More Critical Thinking Wanted's picture


Oil tankers parked off British coast as speculators wait for prices to rise

That looks real.


Is speculation driving commodity prices to crash?

This one is absolutely bogus. Have you read the article? It says:

They are instead trading as "hot money" repositories where speculators rotate in and out of various instruments literally on a minute-by-minute basis.

Delaying tankers is how it can be done. Flipping in and out of futures within minutes not: every new futures position is created symmetrically by creating a sell and a buy position. It does not affect physical supply.

Yes, they've done it.  Yes, they've managed to impact prices globally.

Maybe. More likely they lowered their rollover costs (and risks) and made a tidy profit on the price movements.

But yes, if then Brent is the one that has been manipulated. But look at the numbers: even at a dozen tankers (and look at the pictures, these aren't supertankers) it's maybe 5 million barrels of oil, so a value of $500m at $100 oil. Say they managed to win $10 or $20 - that's a profit of $50m-$100m. Chump change compared to the global oil turnover and chump change compared to all the Fed easing.

You're ass has pretty much been handed to you on this one.


I repent 20% for getting the tanker rent rates wrong :-)


Flakmeister's picture

Add up all the oil being parked off shore, now compare to daily world demand. It is a pimple on the ass of the market

Yeah, some speculators are selling forward. And its a cheesy way to make money, but it does not drive the market.

More Critical Thinking Wanted's picture


Add up all the oil being parked off shore, now compare to daily world demand. It is a pimple on the ass of the market

Yeah, some speculators are selling forward. And its a cheesy way to make money, but it does not drive the market.

Lets run a few numbers.

It can be estimated how much impact speculators can have on oil prices: lets assume they command a huge fleet of 50 super-tankers, 50 million barrels of oil.

That's less than a day's worth of world demand, around 0.1% of yearly demand and about 1% of one month's oil demand.

I can see this 1% of supply shortage used for a single month impacting prices to the tune of 10% (that's roughly the leverage supply levels have over oil prices, right now). That's a nice return but nowhere near the price doubling and tripling we've seen.

To believe that delivery prices (not futures prices) are mainly speculation driven for a single month and double the price you'd have to believe that speculators can influence world supply by 10%, that's 500 tankers and 500 million barrels of oil.

And that's just a single month - if you want to have that impact for two months it's 1 billion barrels of oil - 1000 super-tankers. You'd have to hide so many tankers somewhere and there's the small problem that there's not that many super-tankers in the world to begin with ...

And we've seen persistent high oil prices double (and more) the price levels of the early 2009 levels, for months and months.

So yes, while I can believe the forward selling speculation angle, with a dozen tankers or so parked off the coast of the UK, but to impact world supply (or even just Brent supply) for an extended period of time looks exceedingly difficult to say the least.


Backspin's picture

Thanks, guys.  Good food for thought.   I'm learning a lot from both sides of this discussion.  Critical T, these guys have some good points but I think a lot of what you say makes sense and I think they're overjunking you.  Good discussion, though.  Glad ZH is here.


tellsometruth's picture

What would the emotional impact on investors if the Dollar were to loose its Reserve status?  virtous circlejerk up in this market? or would there be a nominal change to usd with such an event?

More Critical Thinking Wanted's picture


You mean what would happen to oil markets if oil was suddenly traded in EUR, gold or goats?

Not much, except the inconvenience of migrating thousands of well-established trading flows and customers over to another instrument ... it's not simple.

That 'other instrument' has risks too: EUR's prospects as a reserve currency were shaken in the 2010 debt crisis. What other currency would there be? Rubles? Yuan? Yen? CHF? Each has its own problems.

The effects on the dollar? Not much because the (physical) commodity trading itself is mostly dollar-invariant.

There's certainly some secondary effects: the convenience of the dollar makes it easy to move commodities related funds into treasures and there's a whole ecosystem of dollar denominated instruments: bonds, equities, commodities.

So any commodity that migrates out of that USD system will lose all these 'synergy' benefits. Which may not be much - but if you are a commodity producing country that is competing with other commodities then you certainly do not want to be the first one to risk that move.

But the main problem is, which currency to move to? Dollar strength and weakness is only a problem if it's too fast and 'surprises' participants. If the moves are slow and steady like most of the ones in the past 20 years:


then even the large 40%+ devaluation of the dollar during Bush's terms is not a big problem to commodities markets.


Sophist Economicus's picture

All kidding aside, do you really believe what you just typed or are you playing 'devil's advocate'?   Cause if you do believe this you are really missing the boat here

Lemme ask you - forget oil for the moment.   What happened to the purchase price of computing power in USD over the past forty years in real terms?

Now, what would that price be in real terms, if there wasn't a depreciation in the purchasing power of the dollar?   Easy to quantify?  But you probably know the direction, right?

Now, what is the price of oil in nominal and real terms, over the past 40 years for oil, in USD?   Now, ask yourself the other questions too...


More Critical Thinking Wanted's picture


Not sure what your point is as it's apples to oranges.

"Computing power" is not a commodity with an inflexible (finite) supply.

Firstly, the basic unit of "computing power" is ever expanding by Moore's law. Secondly, whatever demand there is for chips, it's met almost immediately - the market is largely demand controlled. There's a constant over-supply of most types of chips and producers are struggling with a constant churn in quickly-obsoleted stocks of chips.

The oil market is supply controlled: there's more demand for oil on the planet than there is supply. Demand is very inflexible and only relatively large rises in the oil price decrease demand so much that it can meet supply.

So the two markets could not be any more different in nature.

So could you please make a clear point and state it like a man, instead of letting me to guess your intented point? :-)


Bill Bogus's picture

I don't get why you are being junked. I see your points as absolutely valid and I appreciate your explanations.

I'm dedicating my first post on here to applauding you as I'm feeling this discussion is getting a fair bit one-sided.

Thanks for the input, keep it up!

tellsometruth's picture

"There's certainly some secondary effects"...

I know we will agree to disagree on many topics, we can agree to that then.


as the forum would say "blowback bitchez"


Boxed Merlot's picture

So, who pays the sales tax, India when they buy US "dollars", or Russia when they redeem US dollars back to Rubles? 


Hey, get Geitner, I think someone's scamming the treasury!



More Critical Thinking Wanted's picture


None pay any sales taxes - international bank transfers of capital are exempt from most types of taxes.

There's a few pips of FX transaction overhead at most, in the 0.001% range, plus the rollover cost - which is a similar order of magnitude.

You really have absolutely no idea what you are talking about, right?


Bringin It's picture

Here's the hook MCt.  Everybody, in some way or another has to keep an inventory of this shite paper on hand.  Everyone in the world, thru their national treasury and/or business/employer needs an inventory of dollars and will pay a premium to get them to avoid the threat/risk of being cut off from international trade.

Because dollars is the only thing trade-able for the necessity --> oil, all countries, all banks, all multinationals are gorged on dollars.

Let me put it in terms you can understand --> The Reserve Currency status is like steroids for dollar demand.

What's more likely to happen in your Russia/India scenario is a straight barter deal, which are becoming more common as dollar believability wanes.

More Critical Thinking Wanted's picture


In the Russia/India scenario I agree that there will probably be a straight barter deal if the deal is large enough, priced in the Rupees->Rubles FX rate and the price of oil in Rubles.

That underlines my point that there's no USD involvement at all. There is no obligation of producers and consumers to clear through USD markets.

If it's mid-sized then the USD footprint is both temporary (a couple of days) and small (for a big bank who will clear the whole transaction).

Also, I think you are over-stating the dollar inventory pressures.

Global trade is around $75 trillion per year, or about 200 billion per day.

Lets assume all of it is cleared through USD accounts that would roughly require a $200x2 billion inventory for two-day clearing - or just credit lines between the top banks as the transactions would net out shortly later.

And that distributes across dozens of large banks.

The benefit to the US is that the banks are holding this liquidity 'for free' - losing around 2% on it per year. That would be an around $10 billion per year 'free' income for the US from reserve currency status - a large number but chump change compared to the US GDP.

And that assumes that all trade happens via the USD, which is not nearly true and assumes that none of it is netted out via interbank credit lines which is not nearly true either ...


AnAnonymous's picture
  • India converts Rupees to 1 billion dollars

  • Russia converts 1 billion dollars to Rubles
  • And these operations are cost free? What is the use of reserves then if you can convert one currency to another with no cost?

    The real net transaction was rupees to rubles? After describing the money circuit? The short timespan is irrelevant. No matter how long they hold USD, they hold it, therefore pressuring the demand on USD.

    The real net transaction was in USD, without it, there is no transaction possible.

    Both of these countries are limited in their reciprocal trade dealings by their capacity to acquire USD. And that is why the price of a commodity like oil can be rather steady in USD, which is the reference point for all transactions.

    If indeed, the trade relationship were established in rupees and rubles with no intermediation of USD, it would be another story.



    More Critical Thinking Wanted's picture


    And these operations are cost free?

    They are not, there's a few pips spread (in the <0.01% cost range) and there's a few days of nightly financing cost (in the <0.01% cost per day range as well).

    What is the use of reserves then if you can convert one currency to another with no cost?

    Uniform accounting is beneficial and the USD is immediately convertible into any target currency with low spreads.

    That does not mean that the actual denomination of the USD directly matters to commodity pricing: as long as the USD exchange rates move slowly relative to the typical clearing delay of such a transaction (a day or two) it's a largely neutral factor to non-US trade relations.

    Just check the charts and see how the price of gold in Euros is largely independent of USD weakness. So is the price of oil in Euros - or Yens or CHF.

    Commodities have their real global price levels and most trade happens outside of the US, so commodity prices are largely not set by the US and not set by the exchange rate of the USD.

    For example check the price of oil measured in gold:


    You will see it shows few of the weakness/strength patterns of the dollar index:


    And where there's correlation it's typically due to big world events affecting both the strength of the dollar and the real price of a commodity.


    AnAnonymous's picture

    The USD is the reference point.

    The cost is generated by the capacity of every other country to acquire USD.

    More Critical Thinking Wanted's picture


    That may be a transaction cost - but in the 0.01% range.

    Here's a numeric example:


    My point was that dollar weakness is not the main source of commodity price inflation ...


    EscapeKey's picture

    Seriously, don't waste your time. Whenever he realizes he speaks out of his ass (which is often), he attempts to move the goalposts. When people then point this out, or tells him to fuck off, in his world he considers himself triumphant.

    It's intellectual dishonesty of the worst kind, right up there with RedNeck's progressive admission, once he realizes he can't hold a given point of view (only then to recapture this point at the start of the next discussion).

    ColonelCooper's picture

    I think the part that one of you is missing, and one of you is not explaining well is that: hang on....

    Yes, the price oil (in USD) goes up and down relative to the strength of the dollar.  Assuming no big demand change, the value of the oil stays basically the same.  Since the rupee isn't directly pegged to the dollar, then it will take the same number of Rupees to buy more dollars worth of oil, but the number of barrels stays the same. (Holy Yogi Bera, Batman! That could be Abbott and Costello material) I know I butchered that, but it seemed the point that was missing in the debate.

    Muscleman: I would agree that the Fed isn't the only source of the problem, ie. oil price, subsidies using grains for other uses, poor yield/weather conditions, global currency inflation,,,,  but do you really think that the amount of currency the US and other CB's have created in the last ????? has contributed nothing?

    More Critical Thinking Wanted's picture


    Muscleman: I would agree that the Fed isn't the only source of the problem, ie. oil price, subsidies using grains for other uses, poor yield/weather conditions, global currency inflation,,,,  but do you really think that the amount of currency the US and other CB's have created in the last ????? has contributed nothing?

    I don't claim that - there's certainly secondary or tertiary relationships.

    What I tried to counter here was the silly "today's charts show that crude oil got 2% more expensive, so India must be paying 2% more for oil!!" notion and its blame-the-Fed followups.

    The oil price and dollar relationship is complex and there's a lot of caveats:

    • the US itself is an oil consumer and producer as well, and its exchange rate impacts its internal demand - which couples back to global demand. Note that the coupling is negative: a 1% dollar weakness would couple back with a 0.02% real oil price drop. Not much more because oil demand is pretty inelastic.
    • China will try to match up the dollar's strength so that will couple back too. We cannot blame the communist leadership's decade old centrally planned protectionist yuan intervention on the Fed though ...

    The biggest argument against the USD <-> real oil price link is the WTI/Brent spread: why is the US domestic crude trading at a $13 discount to the more expensive to refine Brent crude?

    The main reason: because demand in Europe is higher than in the US.

    This again teaches us that oil prices (physical delivery, not futures) are mainly influenced by supply and demand, and that rising prices are a sign of demand meeting supply and supply not being able to expand any more ...

    Regarding Fed easing: economic growth expectations certainly increases expectations of future demand of oil. So if the Fed is successful at stimulating the US economy then that growth will certainly increase the price of oil.

    That in itself is not a bad thing though - unless you think that the US economy should never grow.

    As far as Fed stimulated dollars flowing out and being used for speculation in oil futures - I'm sure that's happening, but it's irrelevant to physical delivery prices.

    As far as Fed stimulated dollars flowing out and being used for speculation in physical oil - I'm somewhat doubtful but maybe it's happening. It takes a lot of rollover costs though as storing oil is expensive - and the political risk is very high: the moment a 'speculator' is found hoarding a lot of real oil all hell will break loose ... So why do that if there's tens of thousands of much safer instruments to speculate in?

    As an additional data point read the 2007/2008 Wikileaks cables and see the candid admission of various important players in the oil market that it's genuine supply and demand that is moving oil prices up, not speculation. Also note the motivation: oil producing countries would love to point at speculators as that would move the blame away from them. Instead they have to admit that it's their inability to increase supply that is causing the problems.

    I think most of the Fed dollars went into US equities and emerging market currencies, equities and bonds.

    It went into commodities as well, just indirectly: it went into commodities linked equities.

    Moving into physical commodities can be rewarding but it's hard and messy - you have to take physical delivery of the stuff, which is a lot of trouble and does not really scale either. Those Wall Street geniuses do not have nearly as much experience in moving ships around as they have experience in moving funds around.

    So yes I'm sure the likes of Jim Rogers did it and are doing it - but to the tune of tens of billions of dollars? I doubt it. (but I could certainly be wrong, as usual.)


    AnAnonymous's picture

    What I tried to counter here was the silly "today's charts show that crude oil got 2% more expensive, so India must be paying 2% more for oil!!" notion and its blame-the-Fed followups.


    It is a waste of time then because very few people hold this view here. Most people focuse on the part the FED plays in the scheme.

    More Critical Thinking Wanted's picture


    Well, you must be reading a different ZH then, as I see the 100+ replies thread above where almost everyone argues that dollar inflation == global commodities price inflation ... :-)


    AnAnonymous's picture

    Or you might be one of those making an equivalence between the two. Most the others think in terms of impacting.

    More Critical Thinking Wanted's picture


    What correlation are you suggesting by 'impacting'? I made very specific claims.

    Here's a numeric example:



    tmosley's picture

    You talk big, but you don't seem to realize that oil is not just denominated in dollars, but it is TRADED in dollars.  Until recently, it was EXCLUSIVELY traded in dollars.  This means that if India wanted to buy oil from Saudi Arabia, they had to export goods to the US to get dollars.  Easy money policies have made it easier for these countries to get dollars without sending us as many goods.  Can you guess what this means?  

    Since you are incapable of critical thinking, let me spell it out for you.  Da Fed prints da monie, da monie buys less!  Further, since everyone around the world now has a lot more dollars, they are able to bid up the price of oil, the main thing they buy with dollars (since the US doesn't make enough to balance its trade deficit).

    Welcome to real-world economics 101.  You get an F.

    More Critical Thinking Wanted's picture


    This means that if India wanted to buy oil from Saudi Arabia, they had to export goods to the US to get dollars.

    Have you ever heard of this obscure little market called the 'foreign exchange (FX) market', which trades 3+ trillion dollars a day?

    Yes, it allows the changing of Rupees to Dollars, without moving any goods. Wow!

    In short: your argument is an epic fail.

    See this (simplified) example of how India buys oil from Russia, and how the transaction is USD-neutral: