Before we discuss the ‘global oil war’, we need to get some basics down- Bear with me on this, ok? I’ve been thinking about this for most of the day…
The US dollar is on the rise. What affect does the increasing US dollar have on oil prices? How does the increasing US dollar value make it easier for the US, aided by Saudi Arabia, to wage a global oil price war?
“Anti-dollar central bank policies have caused America’s currency to be hammered for the past six years, but suddenly everything is coming up roses for the USD.
Where not long ago the dollar couldn’t get a break anywhere in the world, now the world is at its feet, lifting it higher and higher as investors flock to pay homage to it.
Currently measuring 85.5, the U.S. Dollar Index (DXY)comparing the value of the USD versus a basket of over a dozen foreign currencies is the strongest it has been since June of 2010, having soared 7% over the past three months alone”
Bank of Canada daily converter rates– For the curious
US dollar value increasing presently- Yes! So, how does the US dollar value tie in to the oil market?
Oil Price.com– US Oil Prices, Let the Good Times Roll
A bit of history-
The dollar began to devalue against the euro and other major global currencies in 2003, primarily as a result of the Iraq War costs. By year-end 2002, the dollar had weakened by nearly 20 percent and the price of crude had jumped more than 30 percent. Things got no better for the beleaguered dollar from then on. By December 2004, it was trading at $1.35 to the euro and crude oil had risen to over $43 per barrel.
As the US dollar devalued the price of crude jumped.
We are in the opposite situation today. US dollar value increasing and oil decreasing.
The major factors that drive oil prices are (1) the global economy, primarily the U.S., the European Union and China; (2) energy scarcity, including reserve accretion and depletion; and (3) purchasing power, expressed in the respective currencies of those countries, with the heaviest influence from the U.S. dollar.
Because a large majority of global oil is traded in U.S. dollars, the volatility of that currency has tremendous influence on the real price of oil.
Questions?
An increase in the USD value would reduce the purchasing powers of countries not heavily influenced by the US dollar?- Yes.In the case of Canada this would affect the Canadian consumer- but not oil production in Canada, where like Saudi Arabia, all oil is denominated in US dollars
Saudi Arabia has sold all it’s oil in US dollars since it agreed to do so, way back, in 1973
“In 1973, a deal was struck between Saudi Arabia and the United States in which every barrel of oil purchased from the Saudis would be denominated in U.S. dollars. Under this new arrangement, any country that sought to purchase oil from Saudi Arabia would be required to first exchange their own national currency for U.S. dollars
It would seem to me that- Saudi Arabia can take a hit on the barrel price because the US dollar is rising. And, they sell all their oil in US dollars!
It would also seem sensible any claims being made such “Saudi Arabia dumping oil to increase leverage against the US” are incorrect. If that was Saudi Arabia’s real agenda, (forcing the hand of the US) they would NOT continue to sell their oil in US dollars. Of course, that move would guarantee harm to KSA in more ways then one.
Where does all this oil manipulation/ US dollar increase leave other countries?
Russia? China? Iran? The EU?
Seems to me, if I am grasping this whole scenario correctly that the US is waging economic warfare, in a repeat episode, with the assistance of Saudi Arabia against some of these aforementioned countries. Venezuela also gets a mention in one of oped’s below
Thoughts? Will the US be successful? How will this play out in the global economy?
I just don’t know?
Below are two OPEDs from two very different people:
Both of them are sharing their thoughts- I’m muddlin’ through the whole mess! Big sigh…….
Feel free to express your thoughts on this oil war.
Global oil war underway between US-Saudi Arabia and Russia-Iran?-Thomas L Friedman
Is it just my imagination or is there a global oil war underway pitting the United States and Saudi Arabia on one side against Russia and Iran on the other? One can’t say for sure whether the American-Saudi oil alliance is deliberate or a coincidence of interests, but, if it is explicit, then clearly we’re trying to do to President Vladimir Putin of Russia and Iran’s supreme leader, Ayatollah Ali Khamenei, exactly what the Americans and Saudis did to the last leaders of the Soviet Union: Pump t .. bankrupt them by bringing down the price of oil to levels below what both Moscow and Tehran need to finance their budgets.
“The timeline of the collapse of the Soviet Union can be traced to Sept. 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices. … During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed. … The Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive” ..
The price decline is no accident. In an Oct. 3 article in The Times, Stanley Reed noted that the sharp drop in oil prices “was seen as a response to Saudi Arabia’s signaling … to the markets that it was more interested in maintaining market share than in defending prices. Saudi Aramco, the national oil company, stunned markets by announcing that it wascutting prices by about $1 a barrel to Asia, the crucial growth market for the Persian Gulf producers, as well as by 40 cents a barrel to the United States.” The Times also noted that with America now producing so much more oil and gas, “net oil imports to the United States have fallen since 2007 by 8.7 million barrels a day, ‘roughly equivalent to total Saudi and Nigerian exports,’ according to a recent Citigroup report.”
Saudi Arabia doesn’t have to ‘defend prices’ with an increasing US dollar. And maintaining market share is a win/win for both nations.
Bottom line: The trend line for petro-dictators is not so good. America today has a growing advantage in what the former Assistant Energy Secretary Andy Karsner calls “the three big C’s: code, crude and capital.” If only we could do tax reform, and replace payroll and corporate taxes with a carbon tax.
I had to laugh very loudly at the Friedman nonsense about petro dictators referencing Russia and Iran- but not Saudi Arabia, of course. Or the US for that matter.
From Friedman to Pepe Escobar: The Saudi oil war against Russia, Iran and the US
Rosneft Vice President Mikhail Leontyev; “Prices can be manipulative…Saudi Arabia has begun making big discounts on oil. This is political manipulation, and Saudi Arabia is being manipulated, which could end badly.”
A correction is in order; the Saudis are not being manipulated. What the House of Saud is launching is “Tomahawks of spin,” insisting they’re OK with oil at $90 a barrel; also at $80 for the next two years; and even at $50 to $60 for Asian and North American clients.
The fact is Brent crude had already fallen to below $90 a barrel because China – and Asia as a whole – was already slowing down economically, although to a lesser degree compared to the West. Production, though, remained high – especially by Saudi Arabia and Kuwait – even with very little Libyan and Syrian oil on the market and with Iran forced to cut exports by a million barrels a day because of the US economic war, a.k.a. sanctions.
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| image from RT |
The House of Saud is applying a highly predatory pricing strategy, which boils down to reducing market share of its competitors, in the middle- to long-term. At least in theory, this could make life miserable for a lot of players – from the US (energy development, fracking and deepwater drilling become unprofitable) to producers of heavy, sour crude such as Iran and Venezuela. Yet the key target, make no mistake, is Russia.
Reread the quote from the Friedman article
A strategy that simultaneously hurts Iran, Iraq, Venezuela, Ecuador and Russia cannot escape the temptation of being regarded as an “Empire of Chaos” power play, as in Washington cutting a deal with Riyadh. A deal would imply bombing ISIS/ISIL/Daesh leader Caliph Ibrahim is just a prelude to bombing Bashar al-Assad’s forces; in exchange, the Saudis squeeze oil prices to hurt the enemies of the “Empire of Chaos.”
Yet it’s way more complicated than that.
Pepe continues- “Geopolitically, it gets juicier when we see that central to the House of Saud strategy is to stick it to Washington for not fulfilling its “Assad must go” promise, as well as the neo-con obsession in bombing Iran. It gets worse (for the Saudis) because Washington – at least for now – seems more concentrated in toppling Caliph Ibrahim than Bashar al-Assad, and might be on the verge of signing a nuclear deal with Tehran as part of the P5+1 on November 24.”
Washington’s agenda is “Assad must go” and any deal Washington signs with Iran will immediately be reneged on.
Pepe’s conclusion:
“The House of Saud believes it can dump a tsunami of oil in the market and back it up with a tsunami of spin – creating the illusion the Saudis control oil prices. They don’t. As much as this strategy will fail, Beijing is showing the way out; trading in other currencies stabilizes prices. The only losers, in the end, will be those who stick to trade in US dollars”
This time around Russia has China to trade with. Will this make a difference in outcome?
Who the hell knows!?
By Pennyforyourthoughts
http://pennyforyourthoughts2.blogspot.jp/2014/10/oil-wars-ussaudi-arabia-vs-russiairan.html
Russia knew this was coming that is why they have half a trillion in reserve and no budget deficit. More is the diversification towards transportation, telecommunications and thanks to sanctions, agricultural development. This is going to put the nail in the coffin for shale and tar-sands development. Good Riddance! That is the current bubble that is supporting growth in the North American economy. On the other hand the costs of oil energy have been artificially supported by war making the real costs over 400 a barrel. In any case, it is about time North American consumers got a break-maybe manufacturing will pick up after all.
RR