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Why the Dollar Bubble is about to Burst

Steve Masterson, UK Indymedia
The Voice (issue 264 – 11th May) ran an article beginning, “Iran has really gone and done it now. No, they haven’t sent their first nuclear sub in to the Persian Gulf. They are about to launch something much more deadly — next week the Iran Bourse will open to trade oil, not in dollars but in euros.” This apparently insignificant event has consequences far greater for the US people, indeed all for us all, than is imaginable.

[ This article is a recap of the Iranian Oil Bourse implications for the US dollar story which regular readers of Energy Bulletin should be familiar with. It is followed by the following comments from former director of the International Petroleum Exchange Chris Cook: -AF ]

Dollars and Oil
Perhaps it might be helpful if I clarified a few misconceptions re the “Iran Oil Bourse” by updating and reiterating the following Asia Times article I wrote

Firstly, the reason for the project in the first place was nothing to do with Euro’s and everything to do with the domination and manipulation of the global market in energy by intermediaries. A problem which has got worse not better.

Secondly, neither NYMEX nor ICE Futures (formerly known as IPE) have much to do with buying and selling physical oil or products. Their purpose is to allow buying and selling of oil price RISK by allowing producers and consumers to “hedge” the risks of falling or rising oil prices respectively. Unfortunately the derivatives tail has in recent years been wagging the oil market dog to the serious detriment of producers and consumers.

As for progress of the IOB, there really has not been any for well over a year. Yes, a building in Kish island has been bought and legal entities created, but no other elements of market infrastructure have yet even been specified, never mind begun..

Assuming our consortium is put in funds (which we are told is imminent) then probably simple electronic exchange infrastructure could be completed within 6 months and something like bitumen or heavy fuel oil made available to be traded on it domestically.

I doubt whether crude oil will be traded (in ANY currency) on the IOB within 2 years: there are immense practical difficulties not least political.

As for trading oil in euro’s most commentators tend to forget how limited the supply of Euro’s is, and I don’t think that will change much soon either bearing in mind how conservative the European Central Bank is.

Having said all that I do tend to agree that the dollar’s collapse is both inevitable and overdue, and that it MIGHT be precipitated in the next year or so by a “melt-down” in the energy markets caused by rampant speculation by hedge funds.

A bit like the Long Term Capital Management fiasco, the difference being that the Federal Reserve Bank cannot print oil to bail market particpants out…

Best Regards

Chris Cook
(14 June 2006)

The Greater Depression

Doug Casey, Casey Research via HoweStreet
It’s been said that if you spend 15 minutes a year thinking about the economy, you’re wasting 13 minutes. That’s generally true. But as an amateur historian, I can’t help myself. And I’m forced to believe that this is a time when the subject is worth some real thought.

My view is that the longest, and certainly most important, trend in history is the ascent of man. I have little doubt that it will not only continue but accelerate. But that doesn’t mean there won’t be nasty setbacks along the way. As I have said before, possibly the best definition of a depression is a period when most people’s standard of living drops significantly. You can also define it as a period when distortions in the economy and misallocations of capital are liquidated. The distortions are almost always the result of government intervention in the economy, through things like taxes, regulation and currency inflation.

Those are the factors that caused the unpleasantness that began in 1929. Since the government is exponentially more powerful and invasive today than it was in either the 1920s or the 1970s, I expect the consequences will be much worse this time around. Things could have come unglued, and almost did, back in the 1970s. I don’t see how we’ll dodge the bullet this time. Although that’s not really a good analogy, in that, for reasons we don’t have time to explore in depth, a depression is probably inevitable this time.

The only serious question in my mind is whether it will be essentially deflationary in nature, as it was the case in the U.S. in the 1930s, or inflationary like in Germany in the 1920s. My guess is the latter because the government is so much more powerful today. Or it could actually be both at once, in different sectors of the economy.


Inflation could drive interest rates to 20%. This would collapse the bond and real estate markets, wiping out trillions of dollars of purchasing power—which is deflationary. Meanwhile, that same inflation doubles the cost of food and fuel. In other words, the opposite of what we’ve mostly had for the last generation, when we had “good” inflation in stocks, bonds and property, but stable or dropping prices in “cost of living” items. This time the pattern could reverse, which would be a nightmare for most people.

And as people become more focused on speculation in a generally futile attempt to stay ahead of financial chaos, they inevitably divert effort from economic production. Which will decrease the general standard of living even more.

The situation isn’t made easier by the possibility that we’re facing Peak Oil—the start of a secular decline in world oil production. Or the fact that Americans, both individually and collectively, are deeply in debt and living on the kindness of strangers. The problem with debt is that it artificially increases our standard of living. But when we pay it off, especially with interest, it reduces our standard of living in a very real way.
(13 June 2006)

Discrepancies in US accounts hide black hole

Daniel Gros, Financial Times via A-List
The global financial system seems to have a black hole at its centre. Over the last two decades, US residents have sold a total of about $5,500bn worth of IOUs to foreigners, yet the officially recorded net investment position of the US has deteriorated only by a little more than half of this amount ($2,800bn). The US capital market seems to have acted like a black hole for investors from the rest of world in which $2,700bn vanished from sight – or at least from the official statistics.

How can $2,700bn disappear?

It is often argued that the US can simply make large capital gains on its gross positions because its assets are denominated in foreign currency and its liabilities in dollars. However, the available data indicate that over the last two decades this factor has netted the US at most $300bn-$400bn. This still leaves a loss of well over $2,000bn to be explained.

The explanation comes in two tranches of about $1,000bn each…

If the current account figures constitute a more reliable source (except for “reinvested earnings”), it is likely that the true US net external debtor position is around $4,000bn (about 40 per cent of GDP) rather than the $2,500bn reported officially for end-2004. Taking into account the current account deficit of about $800bn for 2005 would bring the net current US debtor position to more than $4,500bn.
(15 June 2006)

UK: Soaring energy costs bust inflation target

Larry Elliott, Guardian Business
The biggest increases in domestic fuel bills in a quarter of a century sent inflation above the government’s target last month – and hard-pressed families can expect more to come over the coming months, it was revealed on Tuesday.

With households counting the cost of annual increases in gas and electricity charges of more than 25%, the Office for National Statistics (ONS) said Gordon Brown’s preferred measure of the cost of living – the consumer price index (CPI) – rose by 2.2% in the year to May.

The ONS said further increases in energy bills, which are already rising more than 10 times as quickly as inflation overall, were a likely prospect over the coming months as energy companies ratcheted up their tariffs but the chancellor warned that he would take a tough line if public-sector workers sought compensation for the blow to their living standards through higher pay.
(13 June 2006)

GAO warns U.S. vulnerable to oil cutoff

Venezuelan embargo would cause oil prices to jump, report says

Tight oil markets and little spare production capacity worldwide make the United States more vulnerable today to a cutoff of Venezuelan oil than three years ago when a strike curtailed Venezuelan supplies, a congressional study warns.

The report by the Government Accountability Office says a Venezuelan oil embargo against the United States would cause oil prices immediately to jump by $4 to $6 a barrel and increase gasoline prices at the pump by 11 to 15 cents a gallon.

A six-month loss of 2.2 million barrels a day of Venezuelan production — about what was lost during the strike by Venezuelan oil workers during the winter of 2002-03 — could cause a price spike of $11 a barrel and cut U.S. economic output by $23 billion, the report said, citing an Energy Department computer model analysis.
(14 June 2006)

High cost of oil could put many jobs at risk

Barbara Hagenbaugh, USA TODAY
Gazing out at the thousands of bales of fluffy, white polyester filling Wellman’s factory, it’s hard to imagine that the man-made fiber has the same origins as a gallon of gasoline.

But it does.

Of the 2.3 billion pounds of materials Wellman produces at its several factories around the world each year, 2 billion are derived from oil or natural gas. The company’s polyester is used to make numerous products, including sports apparel, diapers and pillows.

The rising cost of oil has put a squeeze on the companies that use oil as an ingredient for their products. Although they are down from the records seen recently, oil prices are up more than 20% from a year ago and are more than 150% higher than they were five years ago. Natural gas prices have also risen.

Chemicals made from oil are used by companies to manufacture many products consumers rely on every day, such as plastic bottles, aspirin, lipstick and deodorant.

“It’s used in pretty much everything,” Wachovia economist Jason Schenker says. “I cannot look at my desk and see things that are not petroleum-based.”

Even though oil-based products are so pervasive, the direct impact of the rise in the cost of making such goods on consumers has been — and likely will continue to be — minimal. That’s because manufacturers, faced with strong global competition, are unable to pass along all of the added costs to customers. That means prices for most oil-derived products will likely barely budge as a result of higher energy costs.

But the impact on manufacturers and other companies that use oil-based ingredients could be significant, causing a ripple effect throughout the economy. As firms are faced with rising prices and see their margins cut, they may have to cut back on production, reduce pay increases or maybe even cut jobs or shut down.

“There’s a squeeze going on,” Wellman CEO Tom Duff says. High oil prices are “an issue that extends beyond just the gas pump. But that’s all anybody really pays any attention to.”

Says John Hodgson, chief marketing and sales officer at DuPont, “This is about jobs.”

At some companies, job losses are already hitting.
(8 June 2006)