By Bob Shapiro
Oil prices are falling. Since last summer, when crude oil was selling for $106 a barrel, black gold has fallen almost 40% to $66 and change. Is this good or bad, and what (who) is causing it?
I’ve been reading reports that the Saudis and OPEC have been ramping up production for several months, and they most recently refused to cut production to support the price. The reason being suggested is that they want to kill off competition from the oil sands industry and allow for future monstrous profits.
While there is a certain pizzazz that goes with this reasoning, it defies all economic logic. The Saudi oil costs next to nothing (yes, literally) to produce. If the are forcing the price down, then they and OPEC are foregoing Billions of Dollars of profits now.
Their hope would be that the competition would be utterly destroyed. However, if oil sands production stops, what would keep it from restarting once price recovers? Nothing! Yes, the ownership of the wells might change hands due to bankruptcy of some companies, but the new owners already would have functioning wells that would need the figurative switch to be turned back to “ON.”
The Greens and their democratic vassals may be anti-energy, but how would making already cheap fossil fuels (compared to Wind and Solar) even cheaper be good for the Greens. As we’ve seen, when the price goes back up, so does oil sands production.
There are reports that Russia is being devastated by the low oil prices, since they rely so heavily on resource exports, chiefly oil and gas, to earn hard currency to pay for their imports. Again, it sounds plausible.
But, several facts show this is more nonsense. Recently, the Russian Ruble has fallen 35+% since last summer, so in Ruble terms, the Russians are getting the same price for their oil.
The Russians don’t need the “Hard” Dollars anyway; they have $165 Billion in treasuries sitting in their foreign reserves, which they’d like to get rid of. (They tried, and maybe that’s the real reason for US sanctions against Russia, and not Ukraine, which they used to own.)
And again, they don’t need the Dollars because they have been running massive trade surpluses in recent years. Maybe their balance of payments will shift closer to neutral, but things are much different than they were when the Soviet Union was run into bankruptcy over oil.
Russia recently inked a deal with Europe mostly for natural gas to keep the people in the Eurozone from freezing to death this winter, even though Europe is participating in the US declared sanctions. And Russia also inked a deal to send China the oil that they need.
Much of these exports either are being priced in Gold, or the Dollars paid are going for immediate purchase of Gold. Again, Russia hates the Dollar.
China definitely benefits from lower oil prices, since it imports most of the oil it needs. Aside from the Russian oil pact, China has been active making deals for natural resources all over the globe. It’s not unreasonable to think that an agreement with the Saudis included an incentive for them to allow oil prices to fall, damaging the United States.
The Chinese have been buying Gold with both hands for a decade, and various estimates put their holdings at perhaps 10,000 tons, which is 2,000 tons more than the (unaudited since 1954) US stash of Gold. Their recent bilateral agreements on trade specifically have avoided the use of the US Dollar.
The time may be here when the Chinese are ready, willing and able for the Renminbi (yuan) to replace the US Dollar as the world’s premier reserve currency. Explicit Gold backing for their money would improve their credibility, and probably will happen within 5 years.
When US Dollars cease being the reserve currency, and world trade starts to be denominated in Renminbi, Gold, or local currencies, then the $3+ Trillion of US Dollars held as foreign reserves by foreign Central Banks becomes much less (completely?) unnecessary.
A rush to sell Dollars around the world would herald a very difficult situation for the US Dollar and for the domestic US Economy. This appears to be inevitable, and we need to put our country’s economic house in order now, to moderate the bad effects as much as possible. Chief among what the US needs to do is:
- Bring federal spending into balance (or surplus) with revenues
- Allow the Free Market to set interest rates so that the real Price of Money can be used in business decisions
- Stop shooting ourselves in the foot with stupid anti-energy policies and other over-regulation, which hinder US economic growth.