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The Rise Of The Petroyuan And The Slow Erosion Of Dollar Hegemony

Tyler Durden's picture




 

Submitted by Flynt Leverett and Hillary Mann Leverett via The World Financial Review,

For seventy years, one of the critical foundations of American power has been the dollar’s standing as the world’s most important currency. For the last forty years, a pillar of dollar primacy has been the greenback’s dominant role in international energy markets. Today, China is leveraging its rise as an economic power, and as the most important incremental market for hydrocarbon exporters in the Persian Gulf and the former Soviet Union, to circumscribe dollar dominance in global energy - with potentially profound ramifications for America’s strategic position.             

Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency. Economically, dollar primacy extracts “seignorage”—the difference between the cost of printing money and its value—from other countries, and minimises U.S. firms’ exchange rate risk. Its real importance, though, is strategic: dollar primacy lets America cover its chronic current account and fiscal deficits by issuing more of its own currency – precisely how Washington has funded its hard power projection for over half a century.       

Since the 1970s, a pillar of dollar primacy has been the greenback’s role as the dominant currency in which oil and gas are priced, and in which international hydrocarbon sales are invoiced and settled. This helps keep worldwide dollar demand high. It also feeds energy producers’ accumulation of dollar surpluses that reinforce the dollar’s standing as the world’s premier reserve asset, and that can be “recycled” into the U.S. economy to cover American deficits.  

Many assume that the dollar’s prominence in energy markets derives from its wider status as the world’s foremost transactional and reserve currency. But the dollar’s role in these markets is neither natural nor a function of its broader dominance. Rather, it was engineered by U.S. policymakers after the Bretton Woods monetary order collapsed in the early 1970s, ending the initial version of dollar primacy (“dollar hegemony 1.0”). Linking the dollar to international oil trading was key to creating a new version of dollar primacy (“dollar hegemony 2.0”)—and, by extension, in financing another forty years of American hegemony. 

 

Gold and Dollar Hegemony 1.0

Dollar primacy was first enshrined at the 1944 Bretton Woods conference, where America’s non-communist allies acceded to Washington’s blueprint for a postwar international monetary order. Britain’s delegation—headed by Lord Keynes—and virtually every other participating country, save the United States, favoured creating a new multilateral currency through the fledgling International Monetary Fund (IMF) as the chief source of global liquidity. But this would have thwarted American ambitions for a dollar-centered monetary order. Even though almost all participants preferred the multilateral option, America’s overwhelming relative power ensured that, in the end, its preferences prevailed. So, under the Bretton Woods gold exchange standard, the dollar was pegged to gold and other currencies were pegged to the dollar, making it the main form of international liquidity.  

There was, however, a fatal contradiction in Washington’s dollar-based vision. The only way America could diffuse enough dollars to meet worldwide liquidity needs was by running open-ended current account deficits. As Western Europe and Japan recovered and regained competitiveness, these deficits grew. Throw in America’s own burgeoning demand for dollars—to fund rising consumption, welfare state expansion, and global power projection—and the U.S. money supply soon exceeded U.S. gold reserves. From the 1950s, Washington worked to persuade or coerce foreign dollar holders not to exchange greenbacks for gold. But insolvency could be staved off for only so long: in August 1971, President Nixon suspended dollar-gold convertibility, ending the gold exchange standard; by 1973, fixed exchange rates were gone, too.

These events raised fundamental questions about the long-term soundness of a dollar-based monetary order. To preserve its role as chief provider of international liquidity, the U.S. would have to continue running current account deficits. But those deficits were ballooning, for Washington’s abandonment of Bretton Woods intersected with two other watershed developments: America became a net oil importer in the early 1970s; and the assertion of market power by key members of the Organization of Petroleum Exporting Countries (OPEC) in 1973-1974 caused a 500% increase in oil prices, exacerbating the strain on the U.S. balance of payments. With the link between the dollar and gold severed and exchange rates no longer fixed, the prospect of ever-larger U.S. deficits aggravated concerns about the dollar’s long-term value.

These concerns had special resonance for major oil producers. Oil going to international markets has been priced in dollars, at least since the 1920s—but, for decades, sterling was used at least as frequently as dollars in order to settle transnational oil purchases, even after the dollar had replaced sterling as the world’s preeminent trade and reserve currency. As long as sterling was pegged to the dollar and the dollar was “as good as gold,” this was economically viable. But, after Washington abandoned dollar-gold convertibility and the world transitioned from fixed to floating exchange rates, the currency regime for oil trading was up for grabs. With the end of dollar-gold convertibility, America’s major allies in the Persian Gulf—the Shah’s Iran, Kuwait, and Saudi Arabia—came to favour shifting OPEC’s pricing system, from denominating prices in dollars to denominating them in a basket of currencies.

In this environment, several of America’s European allies revived the idea (first broached by Keynes at Bretton Woods) of providing international liquidity in the form of an IMF-issued, multilaterally-governed currency—so-called “Special Drawing Rights” (SDRs). After rising oil prices engorged their current accounts, Saudi Arabia and other Gulf Arab allies of the United States pushed for OPEC to begin invoicing in SDRs. They also endorsed European proposals to recycle petrodollar surpluses through the IMF, in order to encourage its emergence as the main post-Bretton Woods provider of international liquidity. That would have meant Washington could not continue to print as many dollars, as it wanted to support rising consumption, mushrooming welfare expenditures, and sustained global power projection. To avert this, American policymakers had to find new ways to incentivise foreigners to continue holding ever-larger surpluses of what were now fiat dollars.       

 

Oil and Dollar Hegemony 2.0

To this end, U.S. administrations from the mid-1970s devised two strategies. One was to maximise demand for dollars as a transactional currency. The other was to reverse Bretton Woods’ restrictions on transnational capital flows; with financial liberalisation, America could leverage the breadth and depth of its capital markets, and it could cover its chronic current account and fiscal deficits by attracting foreign capital at relatively low cost. Forging strong links between hydrocarbon sales and the dollar proved critical on both fronts.

To forge such links, Washington effectively extorted its Gulf Arab allies, quietly conditioning U.S. guarantees of their security to their willingness to financially help the United States. Reneging on pledges to its European and Japanese partners, the Ford administration clandestinely pushed Saudi Arabia and other Gulf Arab producers to recycle substantial parts of their petrodollar surpluses into the U.S. economy through private (largely U.S.) intermediaries, rather than through the IMF. The Ford administration also elicited Gulf Arab support for Washington’s strained finances, reaching secret deals with Saudi Arabia and the United Arab Emirates for their central banks to buy large volumes of U.S. Treasury securities outside normal auction processes. These commitments helped Washington prevent the IMF from supplanting the United States as the main provider of international liquidity; they also gave a crucial early boost to Washington’s ambitions to finance U.S. deficits by recycling foreign dollar surpluses via private capital markets and purchases of U.S. government securities. 

OPEC’s commitment to the dollar as the invoice currency for international oil sales was key to broader embrace of the dollar as the oil market’s reigning transactional currency.

A few years later, the Carter administration struck another secret deal with the Saudis, whereby Riyadh committed to exert its influence to ensure that OPEC continued pricing oil in dollars. OPEC’s commitment to the dollar as the invoice currency for international oil sales was key to broader embrace of the dollar as the oil market’s reigning transactional currency. As OPEC’s administered price system collapsed in the mid-1980s, the Reagan administration encouraged universalised dollar invoicing for cross-border oil sales on new oil exchanges in London and New York. Nearly universal pricing of oil—and, later on, gas—in dollars has bolstered the likelihood that hydrocarbon sales will not just be denominated in dollars, but settled in them as well, generating ongoing support for worldwide dollar demand.    

In short, these bargains were instrumental in creating “dollar hegemony 2.0.” And they have largely held up, despite periodic Gulf Arab dissatisfaction with America’s Middle East policy, more fundamental U.S. estrangement from other major Gulf producers (Saddam Husseinn’s Iraq and the Islamic Republic of Iran), and a flurry of interest in the “petro–Euro” in the early 2000s. The Saudis, especially, have vigorously defended exclusive pricing of oil in dollars. While Saudi Arabia and other major energy producers now accept payment for their oil exports in other major currencies, the larger share of the world’s hydrocarbon sales continue to be settled in dollars, perpetuating the greenback’s status as the world’s top transactional currency. Saudi Arabia and other Gulf Arab producers have supplemented their support for the oil-dollar nexus with ample purchases of advanced U.S. weapons; most have also pegged their currencies to the dollar—a commitment which senior Saudi officials describe as “strategic.” While the dollar’s share of global reserves has dropped, Gulf Arab petrodollar recycling helps keep it the world’s leading reserve currency.            

 

The China Challenge

Still, history and logic caution that current practices are not set in stone. With the rise of the “petroyuan,” movement towards a less dollar-centric currency regime in international energy markets—with potentially serious implications for the dollar’s broader standing—is already underway.

As China has emerged as a major player on the global energy scene, it has also embarked on an extended campaign to internationalise its currency. A rising share of China’s external trade is being denominated and settled in renminbi; issuance of renminbi-denominated financial instruments is growing. China is pursuing a protracted process of capital account liberalisation essential to full renminbi internationalisation, and is allowing more exchange rate flexibility for the yuan. The People’s Bank of China (PBOC) now has swap arrangements with over thirty other central banks—meaning that renminbi already effectively functions as a reserve currency. 

Looking ahead, use of renminbi to settle international hydrocarbon sales will surely increase, accelerating the decline of American influence in key energy-producing regions.

Chinese policymakers appreciate the “advantages of incumbency” the dollar enjoys; their aim is not for renminbi to replace dollars, but to position the yuan alongside the greenback as a transactional and reserve currency. Besides economic benefits (e.g., lowering Chinese businesses’ foreign exchange costs), Beijing wants—for strategic reasons—to slow further growth of its enormous dollar reserves. China has watched America’s increasing propensity to cut off countries from the U.S. financial system as a foreign policy tool, and worries about Washington trying to leverage it this way; renminbi internationalisation can mitigate such vulnerability. More broadly, Beijing understands the importance of dollar dominance to American power; by chipping away at it, China can contain excessive U.S. unilateralism.      

China has long incorporated financial instruments into its efforts to access foreign hydrocarbons. Now Beijing wants major energy producers to accept renminbi as a transactional currency—including to settle Chinese hydrocarbon purchases—and incorporate renminbi in their central bank reserves. Producers have reason to be receptive. China is, for the vastly foreseeable future, the main incremental market for hydrocarbon producers in the Persian Gulf and former Soviet Union. Widespread expectations of long-term yuan appreciation make accumulating renminbi reserves a “no brainer” in terms of portfolio diversification. And, as America is increasingly viewed as a hegemon in relative decline, China is seen as the preeminent rising power. Even for Gulf Arab states long reliant on Washington as their ultimate security guarantor, this makes closer ties to Beijing an imperative strategic hedge. For Russia, deteriorating relations with the United States impel deeper cooperation with China, against what both Moscow and Beijing consider a declining, yet still dangerously flailing and over-reactive, America.

For several years, China has paid for some of its oil imports from Iran with renminbi; in 2012, the PBOC and the UAE Central Bank set up a $5.5 billion currency swap, setting the stage for settling Chinese oil imports from Abu Dhabi in renminbi—an important expansion of petroyuan use in the Persian Gulf. The $400 billion Sino-Russian gas deal that was concluded this year apparently provides for settling Chinese purchases of Russian gas in renminbi; if fully realised, this would mean an appreciable role for renminbi in transnational gas transactions.

Looking ahead, use of renminbi to settle international hydrocarbon sales will surely increase, accelerating the decline of American influence in key energy-producing regions. It will also make it marginally harder for Washington to finance what China and other rising powers consider overly interventionist foreign policies—a prospect America’s political class has hardly begun to ponder.

 

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Tue, 08/05/2014 - 20:32 | 5051824 Jack Burtan
Jack Burtan's picture

They are closing in. Some one is going to have to kiss the donkey.

 

Tue, 08/05/2014 - 20:40 | 5051857 kliguy38
kliguy38's picture

that would be us..........the sheep

Tue, 08/05/2014 - 20:46 | 5051886 DoChenRollingBearing
DoChenRollingBearing's picture

 

 

Gold will always be convertible to oil, all oil producers will take gold.  Gold will never be worth zero.  Gold is the best insurance in town against .gov malfeasance.

If Bitcoin takes off, like I think it will, BTC would protect an individual vs. a declining $, IMO.

Au > BTC

But, if you have both, that is excellent diversification.

Tue, 08/05/2014 - 20:58 | 5051932 Escrava Isaura
Escrava Isaura's picture

Nothing to worry, DoChen,

“Gold will be the last bubble and shorting the dollar the trade of the century.”

Can’t remember his name now.

Tue, 08/05/2014 - 21:29 | 5052083 zaphod
zaphod's picture

"dollar primacy lets America cover its chronic current account and fiscal deficits by issuing more of its own currency"

This article has it backwards. It was the dollar that created/enabled chronic deficits in the first place. Take the dollar away and so goes the deficits as well.

Tue, 08/05/2014 - 21:52 | 5052152 DoChenRollingBearing
DoChenRollingBearing's picture

That almost sounds "Triffin's Dilemma" like...  Or even "FOFOA" like...

If there is no reserve currency, then there will be no trade deficits, that is trouble.  FOFOA & Co. (and I agree) say Europe is working on this very-long-term problem (with their euro currency and its ECB).  Gold is a part of that solution.

http://en.wikipedia.org/wiki/Triffin%27s_dilemma

Wed, 08/06/2014 - 08:46 | 5053009 Badabing
Badabing's picture

This article never once mentions the oil for gold deal with Arabia in the 70s
The Philly mint made the coin that stopped the gas shortage.
The coin was used in the 40s too just before the Brenton woods deal

By the way, that gas shortage was an embargo!

http://www.nytimes.com/1991/04/14/news/coins.html

Tue, 08/05/2014 - 20:35 | 5051836 kill switch
kill switch's picture

The 1099 is going to be bitch asshole....$494,000.00 for the tax year.....

Tue, 08/05/2014 - 20:40 | 5051847 ekm1
ekm1's picture

I read this one few days ago.

Those are former Bush officials. They actually know what they say.

Tue, 08/05/2014 - 20:53 | 5051912 Escrava Isaura
Escrava Isaura's picture

LMAO!

That was great!

Tue, 08/05/2014 - 20:58 | 5051935 ekm1
ekm1's picture

War coming soon.

 

Tue, 08/05/2014 - 21:50 | 5052157 DoChenRollingBearing
DoChenRollingBearing's picture

Which is not so great, I hope you are wrong.

But, + 1

Wed, 08/06/2014 - 00:28 | 5052679 Wild Theories
Wild Theories's picture

War is already here, it's just going to be in financial/economic form so people won't see it for what it is.

 

Consider it a blessing from nuclear MAD and the codependence of trade that ties Europe/Russia and US/China to each other, physcial wars are going to be nothing more than staged theatre to be fought on a proxy stage in some unlucky 3rd party nation between nuclear-armed states. Finance is where nations will attempt to destroy each other. 

Wed, 08/06/2014 - 00:45 | 5052747 Ides of November
Ides of November's picture

So you're saying Russian troops aren't going to march into Ukraine in the next few months? I have to say to that contention - you're wrong mate.

The Russians will be in Ukraine before the mid-terms. For better or worse.

Wed, 08/06/2014 - 00:58 | 5052773 LostandFound
LostandFound's picture

Dont be nieve enough to think that physical aggression wont be a result of financial aggression

If someone kept stealing from me on the street, then i would eventually kick his head in.

Wed, 08/06/2014 - 06:49 | 5053051 oudinot
oudinot's picture

It's 'naive', not,' nieve'.

Wed, 08/06/2014 - 01:58 | 5052850 Raging Debate
Raging Debate's picture

Wild Theories - I agree with you. However, think there are risks of betrayals. That said, the risks are geopolitical. I agree with the article the Yuan is a good diversification vehicle. But I don't like the language "no-brainer" as it implies short-term to me. Would say it is a buy and hold for several years especially while the dollar is strong right now.

Real-estate for low-income rentals too in my opinion is good buy and hold but a bunch of that has been gobbled up, at least here where I am in SW Florida. Down to cherry-picking.

If it all goes bad and we get WW3 that hedge is beyond gold so I merely speaking of investment, for disclosure do own a little PM's too. I don't worry about "boating accidents".

Wed, 08/06/2014 - 03:30 | 5052920 dag
dag's picture

Why are India, China, Japan, South Korea, Australia, Vietnam, the US, Russia, France, Germany, all increasing their military budgets? For a "stage theatre"?  

Wake up!!   War is coming.

Tue, 08/05/2014 - 20:39 | 5051852 q99x2
q99x2's picture

Maybe the retarded inbred globalists should have thought of this before they sent all the jobs overseas.

Tue, 08/05/2014 - 21:42 | 5052123 RaceToTheBottom
RaceToTheBottom's picture

Hey they got money on the way out and will probably get money on the way back.......  They get their money.... always

Tue, 08/05/2014 - 20:42 | 5051865 alexcojones
alexcojones's picture

Lost My Shirt?

Lost my shorts, is what AG and Au Bears will say one day.

Tue, 08/05/2014 - 20:51 | 5051895 Ides of November
Ides of November's picture

.

Tue, 08/05/2014 - 21:01 | 5051946 holmes
holmes's picture

"It will also make it marginally harder for Washington to finance what China and other rising powers consider overly interventionist foreign policies—a prospect America’s political class has hardly begun to ponder."

What a better Country America will be if that ever comes to pass.

Tue, 08/05/2014 - 21:03 | 5051952 RaceToTheBottom
RaceToTheBottom's picture

Interesting article, except you should have given Kissinger etal more credit.  Presidents are not smart enough for this level of manipulation.....

Tue, 08/05/2014 - 21:30 | 5052076 813kml
813kml's picture

I don't know, the article says it was all masterminded by brainiac Gerald Ford.  Is it wise for mere mortals to question his genius?

Tue, 08/05/2014 - 23:18 | 5052537 RaceToTheBottom
RaceToTheBottom's picture

President Ford's skills did not extend beyond two features:

1)  Being a likable president to contrast Nixon.

2)  Having a malicious golf game that allows him to aim at his enemies at will.

 

Kissinger and the some FED like Bankster have their fingerprints all over this.  Presidents just do as they are told.

Wed, 08/06/2014 - 08:39 | 5053259 Iwanttoknow
Iwanttoknow's picture

Ford also elevated evry neocon .Ofcourse they were brought in by the boeing senator,Scoop jackson.Ford also played a significant role in warren commison coverup.

Tue, 08/05/2014 - 21:12 | 5052000 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

One would figure that the largest energy producer in the world would get the third law of thermodynamics sooner or later. The USA and the petro-dollar have a date with entropy, and that is not going to look

too attractive when you wake up in the morning, America.

Tue, 08/05/2014 - 21:14 | 5052008 Joe Tierney
Joe Tierney's picture

I'm not signing onto the 'slow decline of dollar hegemony' view of things. The transition from the petrodollar to the petro??? is not going to remain a gradual process. Once it reaches the tipping point, it's going to go into a downward spiral and result in a monumental crash.

 

This is guaranteed by the nature of human psychology today. Once recognition of the dollar's retrenchment becomes clear, and widespread, and once the ability of Russia-China et al to proffer an alternative becomes likewise clear and widespread, all but the most sycophant powers will begin to abandon the dollar - smart money is already making preps for the exit.

 

These things happen slowly, gradually at first, and then the panic begins - and undoubtedly geopolitical factors will play a very potent catalyst role, since the U.S. is becoming ever more desperate to reconsolidate its position on the global stage. That effort will increasingly backfire and lead to ever faster, wider abandonment of the dollar as the key to casting U.S. hegemony into the trashbin.

 

Authors such as the one here in this thread lack the balls to call it like it is and will be - they don't want to be branded as calamity howlers, and they want to be 'respectable'.

 

Phooey!

Tue, 08/05/2014 - 21:59 | 5052183 angel_of_joy
angel_of_joy's picture

It will follow the typical law of Complex Systems Collapse: gradually, then suddenly.

Tue, 08/05/2014 - 21:59 | 5052193 Tinky
Tinky's picture

That law having been written by Ernest Hemingway.

Tue, 08/05/2014 - 22:56 | 5052450 Implied Violins
Implied Violins's picture

"The world breaks everyone and afterward many are strong in the broken places. But those that will not break it kills. It kills the very good and the very gentle and the very brave impartially. If you are none of these you can be sure it will kill you too but there will be no special hurry."

Ernest Hemingway, A Farewell to Arms, 1929

Wed, 08/06/2014 - 02:16 | 5052860 Raging Debate
Raging Debate's picture

Joe Tierney - I think you made a couple of good points but the article did mention how Great Britain went from gold to silver as reserve currency peg passed from GB to USA. I am speaking positioning not literal metal.

Did GB instantly break down in 1932? Please. Are you all here in the West rushing to convert all your holdings to Yuan now that you know? I'm not and I have been discussing Yuan becoming reserve currency here since 2011. Timing and diversification matters. China isn't exactly the same culture either and that matters to investors. The connected, large money already invested there so just who exactly is going to stampede?

The USA and China should have had a period of detente in 2004 or so, the real trade imbalance damage was for this reason and part of greedfest by global leadership. So yes, structural damage was done to the USA. Papering it over with debt was selfish and unwise.

Wed, 08/06/2014 - 05:08 | 5052964 AnAnonymous
AnAnonymous's picture

I'm not signing onto the 'slow decline of dollar hegemony' view of things.
________________

At the current rate, the petro dollar is going to collapse due to the lack of oil to back it up rather than the efforts of some third party to collapse it.

Tue, 08/05/2014 - 22:25 | 5052324 kill switch
kill switch's picture

...WRONG POST POSITION

Tue, 08/05/2014 - 22:30 | 5052339 cornflakesdisease
cornflakesdisease's picture

Are they chipping at the dollar?  Yes.  But Dollar, Inc. has spent a century building their brand and won't give it up on a whim.

 

Yuan as a trade currency:  less then 3%

The ruble as a trade currency:  less the .8%

The Dollar as a trade currency: 93%

 

Other currencies will rule as soon as they set up all the infrastructure, clearing houses, and control of all world central banks all around the world like the FED / BIS system has.

Woo hoo, the brics wants a bank of their own.  $50 billion dollars.  Woo hoo.  Isn't that how much money Zuckerman has?

How many times has Brazil, India, Russia, and China's currency collapsed in the last 150 years?

Woo hoo, Russia just settled it's bond defualt from 1917 with France for .12 cents on the dollar.

Now how many times has the dollar collapsed or the USA defualted on their bonds?

The dollar is a medium of exchange, not a store of value.

Tue, 08/05/2014 - 22:46 | 5052412 earleflorida
earleflorida's picture

" The Need for Middle Eastern Oil "       quote:   pgs 248-53

"the domestic economy of the US is not dependant on ME oil. more political pressure, indeed, has been generated to keep it out than to bring it in. in 1958 imports from the ME amounted to 20.3% of all petroleum imports and equalled about 5% of domestic oil production. it can be argued that the use of imported oil conserves our own resources against early depletion, but the US Gov't has excepted as a moar compelling argument on grounds of Nat'l Security the thesis, put forward chiefly by the independent producing companies, that unless domestic producers have a sufficient share of the domestic market they will not undertake the necessary exploration for new resources needed in tyme of a crisis. the president (Ike), acting under legislative authority, first called for voluntary limitation of oil imports in 1957, and then when they continued to rise he imposed mandatory controls in 1959 which placed under a licencing system an oil imports except from Canada.

 whether one interprets such measures as reflecting the requirments of nat'l sec. or domestic political pressures, they illustrate the american economy's independence, for as far ahead as we need look, of ME oil. it may be that sharply rising costs of exploration and developments at home will bring demands for increased imports of much cheaper oil of the ME, but not as a measure of nat'l necessity.  should supplies from the ME be cut off altogether, the US would still have access to ample alternatives supplies, in proved reserves and predictable new discoveries, in the western hemisphere.

on the use of the oil of the ME in the event of war we can do little moar than spectulate. in a limited war it could be tremendously useful if the installations were held more or less intact. in a general war of any duration it is at least open to grave doubt whether the oil would be available to anybody. even if the westerncould hold the ME for an extended period, the oil installations and pipelines would be primary targets for missles, bombing and sabotage. if it be assumed that that soviet forces could overrun the ME, the chances that they would find the installations intact would be minimal, and even if they did they could not get the oil back over the mountains into the soviet union. the great danger is not the loss of the oil in the hypothetical case of war, but its loss in tyme of peace if the countries which produce it, or thriugh which it moves to western markets should pass under soviet control or should themselves decide to cut off the supplies. control of ME oil, which the soviets do not need for vtheir own economy (they export oil now and apparently have plentiful reserves), would give them an inestimable advantage in the cold war [cwii?*], fopr through the US can get along without ME oil. western europe cannot. a few figures will illustrate the extent of its dependence, and thus of its vulnerability. requirements by1959 were over3.3 million bpd, over 20% of the total energy used. between 70-80% of european imports of crude oil came from the ME.

the crisis of 1956, when the suez canal was blocked and pipelines from iraq to the mediterranean were cut, showed how vulnerable the western european economy was to the disruption or sharp diminuition of these supplies. thery were entirely cut off: some 200k bpd still moved to europe daily by pipeline from saudi arabia, and some tankers which had previously gone through the suez del;ivered oil by the longer route around the cape. with the increase of supplies from the western hemisphere to meet the emergency, western europe was able to maintain total oil consumption at about 80% of normal, with a higher figure for basic transportation and the most urgent industrial requirements. the immediate crisis was surmounted without causing a disastrous drop in industrial production although the impact on trade balances and on gold and dollar reserves of some western european countries was severe, and the fact of vulnerability was brought home to every citizen deprived of gasoline for his automobile or fuel oil for his home.

the crisis was surmounted because the loss of ME oil was not total, was not lasting (the canal was open in may/1957 and the pipelines from ira were in partial operation by march of that year), and was almost matched by added supplies from the western hemisphere. suppose that the soviet rulers had it under their control, to turn the faucet on or off at their whim. some adjustments could be made, including rationing on both sides of the atlantic. still, it is doubtful if europe could stand the financial strain of meeting its requirements indefinitely from americas. as a matter of fact, we cannot be sure that sources in the US and Venezuela could stand the strain of indefinitely meeting europe's requirements as well as this hemisphere (** fuck the EU?). " end quote

to be cont.   "Defense of the Middle East" (problems of american policy)  c.1958    by John C. Campbell

Note:  this book is ~57 years young (Iran and Iraq) have been stagnant for a quarter century, whereas Kuwait, UAE, Bahrein and Saudi Arabia, etel., have been depleting their fields fior a century!?!

jmo

Ps. alot of holes in post thesis...

Tue, 08/05/2014 - 23:04 | 5052481 disabledvet
disabledvet's picture

Why does a US oilman care what currency his millions of barrels a day are denominated in? Let alone the natural gas tycoons?

Or the Coal Barons, or the Wheat Lords, or the Soybean Succubi, or the Corn Kings, or the Steel Arachnids, or the Shipping Magnetos...did I miss any?

Wed, 08/06/2014 - 01:20 | 5052804 Nexus789
Nexus789's picture

They won't as they will still make money. Corporate America ended its ties to the US a long time ago. All citizens in the US are now as expendable as anyone else in the world - lowered wages, collapsing standards of living, etc. Unless of course you serve the government and/or the plutocrats.

Wed, 08/06/2014 - 08:49 | 5053298 d edwards
d edwards's picture

What about the Drag Queens??

Wed, 08/06/2014 - 00:06 | 5052675 earleflorida
earleflorida's picture

cont: from pevious comment...

but, before i finnish i'd like to emphasis a hypothesis? in 1956 m. king hubbert (     http://en.wikipedia.org/wiki/Peak_oil    ) proposed a theory that US oil (domestic) production would peak between 1965-71! j.p. morgan and big oil were behind this grandiose propaganda research. it was all fabricated. america has not had an energy program for twenty plus years, and refuses to research alternatives such as EV's or Hy-brids etel.! this is only my opinion.

forward...  "the dependence of the western european economy on oil, moreover, is increasing. as coal productionwill have no spectacular rise, oil is expected by 1965 to account for moar than 25% of the total supply of energy. projected import requirements for 1965 come to some 4.3 million bpd, well above the present level. production of nuclear energy, even if rushed at top speed, cannot be eexpected to do more than reduce the rate of increase of the need for oil. over the next decade western europe will need moar oil, and unless heavy supplies come in from algeria it caqn only be ME oil.

so long as western europe's strength and stability is important to the US, the latter must except the oil problem on its own. if ME oil; does not flow westward, if europes economy is placed at the mercy of the soviet union or of local potentates willing to cut off europe's lifeblood for whatever purpose, the whole structure of western security on which american policy has been based will be threatened with collaspse. we may set it down as a vital american interest, then, that ME oil supplies continue to be available to europe.

yet merely to state the proposition is not enough. much depends on what shape the threat takes and what means of defense can be used. the main danger is not a soviet attempt to seize the oil resources by force, presenting the US with a clear choice of using counterforce at its request of a ME country. it is that a ME country may gradually under soviet influence to the point that it excercises its "sovereignty" over producing or transit facillities in the service soviet interests; or that its relations with the western powers may so be deteriorate that it chooses to seize installations or interrupt transit as an act of pique or reprisal; or that the oil companies may become the natural target for virulent nationalism, leading to their expropriation. to be faced only with alternatives of losing access to the oil or of using force against a ME state to maintain it is to lose out no matter which choice is made, for the use of force cannot provide a permanent answer and would destroy the prospects for even that minimum of respect and good will without which the ME cannot be held in the free world.

the main task, then, is to forstall the incipient crises, to prevent matters from coming to such a pass that nationalization or the cutting of pipelines seem to ME gov't and peoples to be necessary measures of defense or of national self-expression. as for the means, the building up of bargaining power provided a partial answer; for the rest, it is a matter of creating favorable political and economic relationships among the western governments and people of the Middle (Mid`Eastern) East."      end quote

"Defense of the ME" c.1958  john c. campbell

(*/** jmo's etc)   'Read between the lines what's been happening for the last forty years and how the USSA made europe its beggard neighbor, and Putin's Russia today the 'Bad Guy"?!?

thankyou Tyler  

 

Wed, 08/06/2014 - 01:10 | 5052794 starman
starman's picture

IMF will push for a electronic currency drawn by non ither then IMF! Just wait and see! No yuan no dollar crap, electronic draw that can be traced and monitored!

Wed, 08/06/2014 - 08:29 | 5053232 marathonman
marathonman's picture

Uh oh.  End times.

Wed, 08/06/2014 - 08:47 | 5053295 d edwards
d edwards's picture

Yup, if you know Bible prophecy you can "see" it coming.

Wed, 08/06/2014 - 10:09 | 5053652 Rikky
Rikky's picture

it'll be interesting to see what the "mark" ends up being on the hand or forehead that signifies the mark of the beast as described in the book of revelation.  one thing is for sure the technology today exists to embed a microchip or some other storage device on the body which would have all your info including financials.  what's not there yet is the acceptance of people to accept such a "mark" but dying of hunger can quickly change that.  in addition the unilateralism necessary to embark on such an approach isn't  there yet but we're getting closer.

Wed, 08/06/2014 - 04:57 | 5052960 hedgiex
hedgiex's picture

Good article. China's Challenge can be muted. It is tottering towards a hard landing and they cannot afford people unrest at this low point of its Party's legitimacy. With the still not dead US$ supremacy, you either muscle to bring up the RMB to cause inflation in China or you stop them from exporting deflation by going easy on the other emerging countries particularly in Asia.

In the longer term, China needs the technologies for its next phase of growth. You prevent easy access by opening it up to ALL and at the same time drains its talents. (Diversity in talents is what China cannot grow in this and next generation).

Using tired practices of propping up crony puppets do not work in China and with its neighbors. Using "china bashing" by MSM also do not work. It plays into their counter internal propaganda not to buy bankster dominated (not free) market systems or consumerism and other Western dominated taboos.

However, if US Foreign Policy reforms are to take place either by "kissing the dragon" at the expense of old friends OR "kissing the old friends" in a more focused preventive containment. WE the little global people will still be TOASTS.

Wed, 08/06/2014 - 10:39 | 5053833 Livermore Legend
Livermore Legend's picture

China will NOT have Reserve Currency status in the Lifetime of anyone on this Site, or any of your Kids lives.

China is the Biggest Bubble of all. 

They don't have the Strategic or Economic Power to back up that status even if they could get.

King Dollar and Prince D Mark.........with Trillions in "Claims" that fail Worldwide = Bottom Line:

http://www.talentseekscapital.com/uploads/3/2/6/9/3269986/america.pdf

 

Wed, 08/06/2014 - 13:47 | 5054832 NeverForgetSilver
NeverForgetSilver's picture

There should not be a fiat reserve currency. The reserve currency MUST be honest. Since no country in the world is honest, this status will always be abused. Gold is the best for international trade. Whether to use it for individual transactions is another issue.

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