Like the illusion of Wall Street, with its vast and powerful investment banks, now shuttered, China too is an illusion perpetuated by the Globalists that gave us the 15,000 mile Caesar salad, poisoned cat food and lead based paint on babies' pacifiers. Like the illusion that money would come from thin air to always push housing prices higher, China has spent a generation pursuing its illusion. Pursuing an unattainable dream to be like the West, while 6000 years of its carefully shepherded top soil blows into the sea.
Posted: Thu Feb 02, 2006 2:20 pm Post subject: Exactly how does the PetroDollar boost the US$
I understand that companies buy oil in US dollars to avoid a 5% exchange premium.
However when a company earns money by selling oil products, that money is in the currency of the host country. So when this money is used to buy US dollars (or transfer the money to a US bank account) the company will still have to pay the 5% exchange, and defeat the purpose of using US$
I suspect I'm missing something. Can someone explain (or provide a link) _________________ Angry yet?
Posted: Thu Feb 02, 2006 4:27 pm Post subject: Re: Exactly how does the PetroDollar boost the US$
IMO, the most authoritative source on petrodollar recycling is David Spiro's book, The Hidden Hand of American Hegemony: Petrdollar Recycling and International Markets, Cornell University Press, 1999.
Dr. Spiro used primary source verification (FOIAs, including some de-classified documents, etc.) and interviews with some of the actual participants at the US Treasury to describe how it was set-up and how it works, although the system is now breaking down due the dollar's declines from 2001 to present day, and the critical issue may revolve around the success or failure of a euro-denominated Persian Gulf crude oil marker (via the IOB). Here's the basic description of petrodollar recycling as provided by Dr. Spiro (pp 121-122):
Quote:
So long as OPEC oil was priced in US dollars, and so long as OPEC invested the dollars in US government instruments, the US government enjoyed a double loan. The first part of the loan was for oil. The government could print dollars to pay for oil, and the American economy did not have to produce goods and services in exchange for the oil until OPEC used the dollars for goods and services. Obviously, the strategy could not work if dollars were not a means of exchange for oil.
The second part of the loan was from all other economies that had to pay dollars for oil but could not print currency. Those economies had to trade their goods and services for dollars in order to pay OPEC. Again, so long as OPEC held the dollars rather than spending them, the US received a loan. It was therefore important to keep OPEC oil priced in dollars at the same time that the government officials continued to recruit Arab funds.
Here's another snippet of Spiro's fascinating book (page 123).
Quote:
U.S. officials responded to threatening rumbles in OPEC meetings and, more important, to the diversification of investments by holders of large OPEC surpluses. In late 1978 SAMA began what the CIA called "a modest diversification program, converting small amounts of dollars into other currencies."49 Two investment managers in SAMA recalled that the program was more than modest. SAMA, according to them, was preparing to engage in a massive shift to Deutsche marks and yen. 50 Kuwait, which had always diversified it reserves, intensified the shift from the dollar.
On 7 March 1978, Kuwait minister of finance Atiqi visited Saudi Arabia, and (accoriding to a Treasury Department briefing paper) he suggested not only a move to a basket (of currencies for oil sales) but a price hike as well. The position of the Treasury Department was that "confidence in the dollar remains fragile. Recent are more frequent news reports regarding OPEC's growing disenchantment with use of [the] dollar for oil pricing further disturb the market. If OPEC changed the unit of accounting for oil pricing it could precipitate a major market reaction which would be in the interest neither of the Saudis, other OPEC members, nor the US.51."
Example of footnotes for those 2 paragraphs:
49. Office of International Banking and Portfolio Investment, no title, mimeo 51, 21 November 1978. This memo was drafted nad reviewed by men who are listed on other documents as Treasury officials, but the memo was classified by the CIA, citing "sensitive intelligence sources and methods involved," and was never declassified. It is therefore unclear what agency in the executive branch it was written for.
50. Interviews with three investment advisors to SAMA, Riyadh, Nov. 1984.
51. Bergsten to Blumenthal, pp. 1-2
About the Author
An international business consultant, David E. Spiro has taught political economy at Brandeis, Columbia, and Harvard Universiites....
Well, t seems like deja vu all over circa 2004-2006, except the basket of currencies is now limited to the dollar and the euro. Since the mid-1970s the CIA has been warning US policy-makers about the danger that shifts in the petrodollar recycling system would have to the US economy. If you are somewhat versed in economic theory, including currency risk, and really want to understand this issue at a detailed level, I highly recommend Dr. Spiro's landmark book. Hope that info helped.
Last edited by Petrodollar on Fri Feb 03, 2006 7:35 am; edited 2 times in total
Posted: Thu Feb 02, 2006 10:37 pm Post subject: Re: Exactly how does the PetroDollar boost the US$
ok, let me get this straight.
Am I to understand that when they talk about US dollars in buying oil, there has not actually been any exchange from a foreign currency to a US dollar.
That the dollars they talk about in foreign banks are just those that have been deposited by companies that have recieved payment for goods from the US, and that foreign currency was never involved.
I always thought that the US$ reserves that countries held were from them Physically buying the US dollars with their own money (and not just the proceeds of an exchange of goods for paper) _________________ Angry yet?
Posted: Thu Feb 02, 2006 11:29 pm Post subject: Re: Exactly how does the PetroDollar boost the US$
This doesn't make sense to me... As a US citizen when I go to mexico I can use my us credit card to buy tacos in mexico. I recieve a debit in dollars for an ammount that corresponds to the same amount of Pesos I spend in mexico (conversion made based on the exchange rate). Money was sent from my account to a mexican bank, with the conversion from dollars to pesos happening seemlessly. I didn't have to "hold pesos" to be able to buy tacos, and I didnt have to buy pesos in anticipation of buying tacos in the future. Even if I decided to buy Tacos from Japan, and their tacos were priced in "pesos" I imagine the interaction would be the same... dollars paid by me converted to Yen of equivalent value to the "pesos" that the tacos cost. The price is set in Pesos, but the conversion among currencies is automatic, silent and never converted to actual pesos. Pesos aren't held in Japan to facilitate the trade, they are "imaginary," a marker of value. Am I missing something?
Yes the government can print money, but the consumer/corporations buys the oil, not the government. Real consumer dollars are used in the purchase. The government can affect the money supply/dollar availability by "printing dollars," but all governments do this, and the value of their currency (and therefore the price of oil) is adjusted accordingly... This is a problem (inflationary), but it is not really relavent to which currency oil is priced in. Anytime any nation buys something from the other side of the world there is the possible benefit of those monies not returning in exhange for actual goods and services from that country... The downside is a trade imbalance and devaluation of currency, but it shouldnt matter what the product was priced in. The US has benefitted (increased stock prices and domestic investment) from return of money it prints as investment in stocks... It risks losing this if the US market is seen as irresponsible and unstable due to debt, but again I dont see how the currency oil is priced affects investment decisions of foreigners (who can just as easily convert their oil dollars to yen or gold if they choose).
A switch away from dollar pricing of oil may send a "message" about the center role the dollar plays currently, resulting in discussion of domestic debt and an emotional or rational reduction in the value of the dollar, but I dont see how selling dollars in another currency would directly affect US dollar holdings overseas...
From reading these two articles I get the impression that oil transactions must be settled in dollars.
Using the Taco analogy if the a Mexican company wanted to sell a US company Tacos the contract would have to be settled in dollars if it was done through a trading exchange.
Now perhaps if you are in Mexico you could buy a peso denominated taco at a retail Taco stand but from both articles it appears that trade through large commercial exchanges is denominated in dollars. So ironically if you want to use an exchange you have to buy and sell your tacos in dollars!
Also there are some very practical reasons for keeping oil in one currency. If oil was priced in multiple currencies chaos could insue as oil traders attempt to make money by exploiting differences in oil pricing via currency fluctuations. It would make th market much more volatile and possibly the multiple currencies themselves more volatile as traders attempt to use money in order to exploit prices differences , it would get messy fast. I think the markets would work but major pricing volatility would insue.
In fact even non dollar denominated contracts are effectively dollar priced and settled:
Note that there is a very interesting stipulation to this contract even though it is supposedly priced in Australian Dollars:
Quote:
Over the life of the warrant, the price will rise and fall based on two specific underlyings.
The price fluctuations of a specific oil futures contract in US dollars.
The change in value between the Australian dollar and the US dollar.
These two interesting stipulations to me imply that the contract itself must be settled in dollars because why would the value of the contract vary with the value of the US dollar? Its probably converted back into Australian dollars upon completion but the contract itself is obviously denominated and therefore settled in dollars.
I think governments and multinationals push around enough money and probably get a significant disvount versus a private citizen.
Last edited by mefistofeles on Fri Feb 03, 2006 2:12 am; edited 1 time in total
Posted: Fri Feb 03, 2006 1:54 am Post subject: Re: Exactly how does the PetroDollar boost the US$
ChicknLittle wrote:
This doesn't make sense to me... As a US citizen when I go to mexico I can use my us credit card to buy tacos in mexico. I recieve a debit in dollars for an ammount that corresponds to the same amount of Pesos I spend in mexico (conversion made based on the exchange rate). Money was sent from my account to a mexican bank, with the conversion from dollars to pesos happening seemlessly. I didn't have to "hold pesos" to be able to buy tacos, and I didnt have to buy pesos in anticipation of buying tacos in the future. Even if I decided to buy Tacos from Japan, and their tacos were priced in "pesos" I imagine the interaction would be the same... dollars paid by me converted to Yen of equivalent value to the "pesos" that the tacos cost. The price is set in Pesos, but the conversion among currencies is automatic, silent and never converted to actual pesos. Pesos aren't held in Japan to facilitate the trade, they are "imaginary," a marker of value. Am I missing something?
Yes the government can print money, but the consumer/corporations buys the oil, not the government. Real consumer dollars are used in the purchase. The government can affect the money supply/dollar availability by "printing dollars," but all governments do this, and the value of their currency (and therefore the price of oil) is adjusted accordingly... This is a problem (inflationary), but it is not really relavent to which currency oil is priced in. Anytime any nation buys something from the other side of the world there is the possible benefit of those monies not returning in exhange for actual goods and services from that country... The downside is a trade imbalance and devaluation of currency, but it shouldnt matter what the product was priced in. The US has benefitted (increased stock prices and domestic investment) from return of money it prints as investment in stocks... It risks losing this if the US market is seen as irresponsible and unstable due to debt, but again I dont see how the currency oil is priced affects investment decisions of foreigners (who can just as easily convert their oil dollars to yen or gold if they choose).
A switch away from dollar pricing of oil may send a "message" about the center role the dollar plays currently, resulting in discussion of domestic debt and an emotional or rational reduction in the value of the dollar, but I dont see how selling dollars in another currency would directly affect US dollar holdings overseas...
What am I missing? Thanks for any help...
You're not missing anything. Everything you said is true. Good analysis. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Fri Feb 03, 2006 2:19 am Post subject: Re: Exactly how does the PetroDollar boost the US$
Quote:
Now perhaps if you are in Mexico you could buy a peso denominated taco at a retail Taco stand but from both articles it appears that trade through large commercial exchanges is denominated in dollars. So ironically if you want to use an exchange you have to buy and sell your tacos in dollars!
Also there are some very practical reasons for keeping oil in one currency. If oil was priced in multiple currencies chaos could insue as oil traders attempt to make money by exploiting differences in oil pricing via currency fluctuations. It would make th market much more volatile and possibly the multiple currencies themselves more volatile as traders attempt to use money in order to exploit prices differences , it would get messy fast. I think the markets would work but major pricing volatility would insue.
Price discovery is via a futures & options exchange like the ICE/NYMEX/CBOT/CME/LSE etc., but physical contracts are denominated in whatever currency two counterparts wish. Very few transactions on the exchange actually result in physical delivery. Most physical delivery is done point to point without ever being priced on any exchange.
Or more accurately, the futures price is used as a benchmark. That is to say, Japan Oil buys crude oil for delivery in the first week of February from Dubai FOB (free on board) and the price is determined as March Brent futures, less the spread for Dubai FOB, plus the cost of shipping and insurance (CIF) to get a delivered price to Tokyo. So price might be for example, $63.00 - $4.58 + $5.00 = $63.42*, but the physical crude will never be delivered to the ICE and may even be a completely different grade than Brent.
*Just assuming for example tha FOB Dubai is trading at $58.42 vs. March Brent futures at $63.00 and I just used $5.00 for CIF because I have no idea right now what wet frieght is right now from Dubai to Japan? So it is a plug.
It is very convenient for everyone involved if the transaction currency is in dollars as then either counterpart can hege themselves via futures or options and not run any foreign exchange risk. However, oil is produced around the world in as many local currencies as there are oil producers including Canada, Norway, Russia, China and others who use dollars, kronors, rubles and remnimbis, etc.
Therefore every oil importer and exporter runs currency risk if they have to either buy foreign currency to pay for imports or sell foreign currency for exports to pay for their costs of production in local currency. But it is no big deal because foreign exchange markets are very large and very liquid and even big transactions can be accomodated instantly. In interbank trading, bid/offer spreads are 0.00002 for $5-10 million (at least in the majors) and believe me large oil companies get choice pricing from arbing banks off against one another.
However, there are economic risks to be considered if for example a country does not produce anything of value to pay for imports. But in this case it would not matter if they had to buy dollars or euros or yen. They still could not afford the imports without sufficient economic activity to pay for the foreign currency.
You can price oil in as many currencies as you want without any chaos occuring. There are thousands of securities priced in a hundred currencies traded around the world and in general it is all fairly orderly. An Excel spreadsheet with live data from Reuters or Bloomberg is all the computing power you need to manage a multitude of positions simultaneously. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Last edited by MrBill on Fri Feb 03, 2006 2:58 am; edited 2 times in total
Posted: Fri Feb 03, 2006 2:37 am Post subject: Re: Exactly how does the PetroDollar boost the US$
Quote:
Price discovery is via a futures & options exchange like the ICE/NYMEX/CBOT/CME/LSE etc., but physical contracts are denominated in whatever currency two counterparts wish. Very few transactions on the exchange actually result in physical delivery. Most physical delivery is done point to point without ever being priced on any exchange.
I would argue that as far as pricing is concerned that although physical delivery can be priced or denominated in whatever currency and amount the two parties agree to that its very much affected by what happens in the futures markets. The real question is this do the futures markets set pricing for physical deliveries or vice versa? I'm inclined to think that the futures markets set the price for physical delivery.
From a temporal point of view the futures markets are dealing with oil pricing on the order of years and months versus the "right now" price of spot markets. This would imply that the futures markets push around far more money than the spot market since they deal with far larger spans of time.
To be a player in this market it implies having dollars, ALOT of them. No dollars no play. So anyone who wants to play the oil game if you will in the futures market better have a nice supply of dollars or be willing to accept them.
This in my opinion would be the crux of the petrodollar theory. That most of the major producers and players in the futures markets must have dollars. It would create a huge demand for dollars just for account settlement. Never mind players that want to keep their winnings or save up for a rainy day.
If the currency du jour of oil settlement changed the reserve preferences for all the major oil producers and users in the futures markets would also have to change. This would invariably add volatility to pricing, at least in my theory since I assume that the futures markets set the price for the spot market.
I suppose this is the real perversion of the late 20th and early 21st centuries. The futures and financial markets have become so large that the real market is almost a sidenote to the paperpushers in the futures markets.
Last edited by mefistofeles on Fri Feb 03, 2006 4:49 am; edited 1 time in total
Posted: Fri Feb 03, 2006 2:57 am Post subject: Re: Exactly how does the PetroDollar boost the US$
MrBill wrote:
It is very convenient for everyone involved if the transaction currency is in dollars as then either counterpart can hege themselves via futures or options and not run any foreign exchange risk.
I don't quite understand this. If Germany is trading with Saudi Arabia, both countries have to change to dollars, so why wouldn't they run foreign exchange risk? And what is special about dollars and futures or options?
Posted: Fri Feb 03, 2006 3:50 am Post subject: Re: Exactly how does the PetroDollar boost the US$
Doly wrote:
MrBill wrote:
It is very convenient for everyone involved if the transaction currency is in dollars as then either counterpart can hege themselves via futures or options and not run any foreign exchange risk.
I don't quite understand this. If Germany is trading with Saudi Arabia, both countries have to change to dollars, so why wouldn't they run foreign exchange risk? And what is special about dollars and futures or options?
First of all, Germany does not buy oil from Saudi Arabia. DEA or Aral for example may buy crude oil from Saudi Aramco via Rotterdam, refine it into benzine and diesel and then sell it via their retail outlets.
In this case, DEA/Aral would contract with Aramco for forward delivery, say March, based on April futures. The April Brent contact is trading at the moment at $63.90. Saudi Arab light is quoted at the moment at around $60.77 based on OPEC crude basket, although I do not know for example if Saudi Arab light trades at a premium or discount to the basket? I will have to ask someone who trades cash markets. That implies a freight spread of $3.13 if we are comparing likes, but there is likely a difference in grade between Saudi Arab light and Brent. I just don't know what it is?
DEA/Aral would sell euros and buy dollars at $1.2078 (spot) + $0.000235 (forward points) = $1.208035 (forward outright) for March. In otherwords their crude would cost them $63.90/$1.208035 = 52.8958 euros if the cash price was the same as the futures price.
If the freight spread really is $3.13 then Saudi Aramco would receive $60.77 for their oil FOB the Gulf. As the Saudi Riyal is fixed to the dollar at 3.7499-3.7504 they would be able to convert $60.77 into SAR16.036 or sell those dollars and buy euros at $1.208041 which is $1.2078 + $0.000241 and receive 50.3046 euros. They may use part of their funds in SAR to pay wages and other costs, part of their euros to buy German made autos or equipment, and part of their remittances to invest in US securities or hold on hand in their bank account.
So, DEA/Aral have EUR/USD FX spot risk to buy oil in dollars which will then be sold in euros. Saudi Aramco has economic FX risk from selling oil in dollars if those dollars buy fewer euros to pay for German autos/equipment or if their costs of production in SAR go up relative to the dollar through domestic inflation. Both have to manage their FX risks. However, at least they do not run translation FX risks as if DEA/Aral hedge future purchases and Saudi Aramco hedge future sales by using futures & options traded on an exchange then both the cash (the crude oil) and the hedge (futures & options) are both denominated in dollars.
When DEA/Aral buy the cash crude from Saudi Aramco, they sell their futures position. When Saudi Aramco sells their cash crude to DEA/Aral they buy back their futures position, if in fact they bothered to hedge it in the first place? The net effect on the futures exchange is nil. It was simply used as a method of price discovery. DEA/Aral used it to hedge forward purchases, but closed out the position before the delivery month. And if Saudi Aramco used futures to hedge forward oil sales they also then sold those futures before the delivery month. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Fri Feb 03, 2006 4:46 am Post subject: Re: Exactly how does the PetroDollar boost the US$
What on earth do you do for a living Mr. Bill you seem to know ALOT about oil trading? Lol you probably had quite a jump on peak oil versus most of us here.
Me I'm just a guy who sells insurance and some mutual funds on the side.
Although I'm quite impressed with your explanation I think it will probably blow most of the people on this board of out the water so here's a simpler version.
Buyers and sellers use futures contracts to buy or sell something tommorrow at today's prices.
A good example of this would be Southwest Airlines. Southwest has good cash flow so they can buy jet fuel at a set price in future. Let's use the figure $64.00 for delivery in January 2009. So if he price is higher on January 2009 (Let's say $120) then Southwest has bought its fuel at a steep discount buy using the futures market to pay for it today but take delivery tommorow.
Conversely as an energy producer if you've just read the latest CERA report talking about lower oil prices and are panicking at the thought of lower energy prices in 2009($40.00) maybe selling to Southwest at $64.00 for January 2009 looks like a pretty good deal instead of selling for $40 tommorrow.
Both parties are able to contend with potential risk.
Since the futures markets deal with times frames ranging from months to years the number of dollars in play would be enormous.
Of course since every major energy producer and buyer will be probably be quite active in this market that means that the players in the futures markets must be willing to accept as well as accumulate large dollar reserves.
However as the author of Petrodollar Warfare rightly pointed out if the price of oil increases (i.e. tripple 2001 values) but the volume remains the same or even expands you need ALOT more dollars to play the same game. This makes the dollar valuable and gives all the major energy players an incentive to hold and acquire dollars.
However if it was possible to trade oil futures directly in Euros (something that Europeans have a strong incentive to do) then the demand for dollars would decrease. Resulting in losses to whoever is holding dollars. If this adjustment takes places slowly then it would simply be a gradual but unpleasant process for the US.
However if this adjustment takes place quickly then all hell would break loose as major players holding dollars try to cut their losses and dump their dollars as quickly as possible.
As an economist I don't know if either scenario would play out with opening of the Iranian oil bourse but I do know this: OPEC and Russia trade more with Europe than they do with the United States. Some of the largest players in the energy market really do have an incentive to use the Euro for trading oil versus the dollar.
From an intuitive commercial standpoint its better for those buyers and sellers to move to use Euros to hedge oil futures. Of course that's bad for the United States.
I sincerely believe that's why we stand closer to the precipace of war than anyone would care to admit.
Posted: Fri Feb 03, 2006 5:21 am Post subject: Re: Exactly how does the PetroDollar boost the US$
I heard they are having trouble selling bonds now for the first time, no one wants the dollars as much as expected
Inflation is how republicans tax you without taxing you, you have less money and you don't know it.
Taxes is how theDemocrats tax you at least they are simple minded about it. "Gimme your dough"
Democrats do this, they are strict economists, and they just take the money right out of your bank and you right the check or go to prison. (They can do this cause they ahve the lawyers on their side.
The best scenario for the poor middle class is when we go from a democratic government to republican switch cause they CUT taxes and inflation hasnt caught up with you yet.
the worst is when we go from republican to democratic cause the inflation is catching up and making everything more expensive, now your going to get direct taxes raised right and left. Both to GET back the taxes the REpubs cut and to get MORE tax money cause INFLATION makes it necessary.
double whammy.
This republican to democratic switch is perfectly bad timing for 90 dollar a barrel oil.
I believe it is going to become very hard for a lot of people in 06 and 07 in many ways to just survive.
NOW the REPUBS KNEW THIS WAS COMING, the republican cycle is almost over, and the democratic cycle is starting, the repubs will hunkjer down, let the people get ticked as the economy fails and the Dems will have to do what they hate, TAKE LOANS or go bankrupt, usually 1 4 year term sometimes two if they are good weasels, and the Repubs are back for another cycle, whereupon the promptl;y cut taxes and print money setting up the next cycle.
the easy bankruptcy is removed.
Now with bankruptcies you have to pay back the debts incurred.
They are expecting a lot of them. And you will be stuck paying for a long time. as more and more housing loans fail and the banks collect their homes they will get rich in land about the only thing of value any more.
If you were suckered into mortgaging your home to consolidate debt, you are probably not going to be able to pay your loan as jobs get scarce, I would sell the house now and get one that is payed off,
do it quick even if it turns out toe be a mobile as long as it is yours.
Last edited by grabby on Fri Feb 03, 2006 7:32 am; edited 1 time in total
Posted: Fri Feb 03, 2006 6:42 am Post subject: Re: Exactly how does the PetroDollar boost the US$
Quote:
What on earth do you do for a living Mr. Bill you seem to know ALOT about oil trading? Lol you probably had quite a jump on peak oil versus most of us here.
I manage assets for a large Russian oil company, including trading/hedging their shares with oil & gas futures & options. However, I used to be a foreign exchange trader. Over the past twenty years I have traded FX, money markets, fixed income, equity, derivatives and commodities, mostly focussing on emerging markets. At one point I was probably one of the worst floor traders on the Winnipeg Commodity Exchange. Not nearly large or loud enough.
I am in the process of launching some private funds in BVI. One will be a commodity/energy fund and another a private equity fund focussed on the energy related businesses. Eventually I would like to grow it into a family of funds including emerging markets and FX as well as energy and commodities.
As for peak oil, no. I just stumbled across it last year while looking for energy related topics on the internet. Have learned a lot here and dispelled my firm belief that technology alone would save us. I used to be in the ethanol/hydrogen will replace oil camp. But it strengthened my belief that energy & commodities are the place to be right now and in the future, so the timing is fortuitous. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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