US$ Health Warning! Will devaluation help energy transition?
VHeadline.com oil industry commentarist Andrew McKillop writes: No doubt the 53 million US voters who chose G. W. Bush thought they voted for firm rulership, War on Terror and ... who knows? ... economic prosperity.
In any case, under any scenario they surely voted for 'benign neglect' of the US$ in its unequal struggle against the Euro, ¥en and the Yuan.
How far down the US$ goes ... and how fast the slide happens ... are questions for crystal ball gazing, but several bottom lines come out of all this.
For a start ... whatever happens in the 'planned devaluation' of the US$ ... US trade deficits continue to grow. This is called the J-curve by analysts, meaning that Americans go on buying things from abroad (like oil and Chinese, Japanese or Indian goods to fill their supermarkets) despite those imports costing more in devalued dollars, so increasing the trade deficit for some while.
After that "while," New Economy gurus claim, the curve goes down and an awful lot of Americans lose their jobs. The gurus keep their jobs, and a Happy Few of the new jobless will get work producing goods to fill the empty spaces foreign goods used to occupy on supermarket shelves.
This is the theory ... and it was tried out after the so-called 'Plaza devaluation' in Reagan's second term, leading to the J-curve giving the previous record high for US trade deficits. At the time, the US was only a modest oil importer, just a few million barrels per day, and not dependent on today's flood of imported oil, now costing the US at least $120 billion per year, at a price of around US$45-50 a barrel ... at $60/bbl oil imports to the US would cost near to $150 billion in a full year.
And one thing is sure: if the US$ falls fast and far against the Euro, ¥en and likely not the Yuan ... then oil exporters will have little or no choice but to fully switch to Euro pricing.
While the US$ still dominates world trade (about 52% of all trade is transacted in dollars), the Euro has come from nowhere to take about 22% of all trade transactions.
The Euro certainly does have the coverage now and volume to handle the world's oil trade, unlike the ¥en or Yuan.
Even better for oil exporters, a switch to the Euro -- an intrinsically stronger money than the US$ -- will, by the magic irony of world markets, lead to a higher oil price in dollar terms!
Switching to EUR against US$ would in theory mean that a barrel of light crude costing $50 should trade at 38.46 EUR with $1.30 for 1 EUR ... but it will almost surely be rounded to 39 EUR.
Also, remaining users of the US$ for oil transactions ... perhaps those Saudi princely friends of the Bush family ... will find that the dollar buys ever less, and so they have to increase their prices to maintain purchasing power. This ratchets up the oil price in dollars, before being rounded up again when it is priced and traded in Euro.
The big threat however is not oil prices, in any money or currency, but the physical supply of oil. World oil import demand is growing at over 3 million barrels a day each year.
World oil supply is growing at nothing like that rate.
This can be linked to the US$'s slide...
Too much benign neglect of the US$ by John Snow's team at the US Treasury Dept., will turn malign very fast. As in China right now, people are finding better, local ways to use their stacks of accumulated US$ rather than 'recycle' them to the USA.
Since US$ devaluation will bring inflation to the USA, it is better not to send those weakened dollars back home, as well as demand Euros when exporting anything at all.
This will be very bad news to the US economy ... but could be good news for the rest of the world's economy, especially on the front of Peak Oil and structural undersupply of world oil markets.
Devaluation shock will surely slow the US economy, cutting US oil imports.
This is important, because the big secret is that structural undersupply is already here! Bets could be made on the oil price exceeding US$60 barrel by January or February. Other bets could run on US$75/bbl, and even more exotic price levels (say 55 EUR/bbl) can take punters.
Earthquake damage here, civil unrest, strikes or war elsewhere, and world oil markets are in physical undersupply.
But if the USA even cut its oil imports by 20% or 1.3 million barrels/day, then this threat diminishes, and will only come back in autumn 2005. A 20% cut in US oil imports would free up about two year's oil import growth of the Chinese economy ... equivalent to only 4 months growth of world oil imports including the USA.
And we need to buy time, enabling some reason and sanity to slip through the censorship of the world media ... the CNN and BBC shows where the paid Talking Head opines that we have "Forty years of oil supply remaining."
US$ devaluation may be a salutary shock to the USA, and an opportunity for making energy transition a real world imperative, not a freaky slogan.
An unlikely route to USA energy transition is maybe already starting ... through US$ devaluation ... since it is the USA that wants devaluation
They depreciated their money ... so obviously they don't have any confidence in it ... despite printing the slogan "In God We Trust" on every bill.
Andrew McKillop is an energy economist and consultant who recently edited a book for Pluto Books, ISBN 0745320929, title 'The Final Energy Crisis' including articles by Colin Campbell and Edward R D Goldsmith. He has held posts in national, international and supranational (Euro Commission) energy, and energy policy divisions and agencies. These missions have for example included role of Energy policy coordinator, Dept Minerals & Energy, Govt of Papua NG, advisory and management at the AREC technology transfer subsidiary of OAPEC, Kuwait, study missions at the ILO and UNDP, in-house consulting to the Hydro & Power Authority of British Columbia, Canada, seminar presentations at the Administrative Staff College of India, Hyderabad, study and technology review at the Canada Science Council, and elsewhere. Andrew is a regular contributor to VHeadline.com; he was first energy editor of the journal 'The Ecologist' and has co-authored published works with other analysts, e.g. 'Oil Crisis and Economic Adjustment.' Pinter Publishing, with Dr Salah al-Shaikhly, currently the Interim Iraqi government's Ambassador to London. He is actively seeking research, consulting or writing missions at this time. You may contact Mr. McKillop by email at [email protected] -- telephone London UK +44/ (208) 348 8914
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