As we teeter off the tipping point of a non-negotiable way of life, we collectively suffer from multiple illusions, these still shored up by past observations logged by our inductive social brains. We're like Bertrand Russell's examplary thought-chickens, so convinced of our keepers' benevolence by continued feedings that we say, "See, these humans ain't so bad, look how good they been to us lot! Worth trading a few eggs for, I'd say. Hey what's that sharp metal thing Farmer John's carryin'?" The past lulls us into thinking it's always prologue. It's not, and having been outside this box, my thinking is unorthodox.
I say Farmer John is bent on murder. To wit, the diverging lines in the graph above. The blue and red lines ascending skywards on Jacob's ladder represent the Dollars and Euros required to buy a barrel of oil. The purple line snailing its flat path across the chart is the number of barrels of oil an ounce of gold will buy. Oil and gold are commodities, so they have intrinsic value; dollars and euros are pieces of paper, so they do not. The price relationship between oil and gold has been remarkably stable for the past 70 years. Therefore it's not so much the price of oil which is going up; it's the value of currencies which is going down. That's the key to understanding what is happening to the US place in the world economy, and its likely implications, and whether or not the Eagle is become as paper, as the Bear once was.
Most analysts would probably point to Peak Oil as the cause of oil's price increases, but US demand for oil fell year-on-year by 4% this January, world oil production went up by 2.5%, and world consumption increased by only 2% over the same period. Refiners such as Valero have cut production, called off expansion, and laid off workers because of low margins, yet gasoline reserves are at the highest level in the past 16 years. In this case, Peak Oil or the gas and oil "shortage" touted by the US President and his Secretary of Energy are illusions, and ungloving their hidden hands is easy.
Investment in speculation probably accounts for more than 50% of oil's price increase. Not surprising, since price volatility attracts speculation, and sustained price movements build their own momentum to create price bubbles. The total market in oil futures was worth $9 billion in 2001. It's now worth $250 billion. As the speculation extends, the more it attracts new entrants, and there's little reason to think oil speculation is in a late stage.
But there's something deeper going on than extraordinary oomph in one commodity. Across the board, commodities are up by more than double their year-prior price. Copper, rice, bauxite, silver, chicken feed, flour, you name it. Wheat futures went up by 70% on one Friday a couple of months back. Such broad-based sustained buying is consistent with a flight from currency into alternative values, and it's never happened to this extent in my lifetime. Granted, oil is a special case due to heightened global political risk and to clear domestic policy intentions to work up price--with both POTUS and VPOTUS being influential oil men, they've rewarded their own.
But two causal roots are anchored still further in the earth, and both are tolling knells to continued American leadership in the world. Each is a clear signal of lost fiscal confidence, at least in US tender. Primo, foreign banks want to unload gigantic dollar holdings, and they've been doing so. China alone has a $1.5 trillion reserve and has been hoarding commodities for years now. Secondo, the dollar monopoly on oil exchange is now broken, and it's why current US leadership is still considering an attack on Iran.
Suffocating Iran's anti-dollar initiative is critical to maintaining dollar hegemony. If that cannot be done, a day will come when the US government can't print up paper and buy all-you-can-eat energy with it. That means no operational military might, no further capacity to borrow. Government actions would have to be earned by building foreign exchange reserves. I'll turn to Brother Tim (who runs the always-principled, oft-provocative Blog of Revelation) and surface his comment on a previous post (What's That Got To Do With The Price Of Rice?):
The Iranians have now opened up their oil bourse, accepting mainly petro-euros and yen, and a few lesser hard currencies. Absolutely no petro-dollars accepted.Every barrel bought with yen, euro, or renminbi is a barrel lost to the dollar. Because it weaken's the dollar's liquidity. The economic conflict is broken down the old capitalist/communist fault line, except now the capitalists owe the communists huge sums of money. That chart above explains much about how the war is going, and nearly everything about the United States' choice of enemies. Tim, you seem to have an excellent grasp here, and I'd appreciate it if you could expand as you see fit.
Last September Iran started accepting only yen from the Japanese. The Japanese and the Chinese account for a large part of Iranian oil exports, around 20% each.
Iranian production is capable of 6 million barrels/day, as witnessed in the 70s and 80s. Iranian consumption is just over 1 million barrels/day. They're now producing around 4 million barrels/day, exporting 3. So, roughly 3 million barrels/day has been pulled off the open market (NYMEX & IPE).
Add to that 'Private Oil'. This is backroom dealing between producers and consumers, effectively eliminating the middle-man (NYMEX & IPE). An example of this is the Chinese deal with Sudan to get 200,000 barrels/day @ $60.00/barrel for 10 years, in exchange for investment capital for infrastructure and exploration. Russia and Venezuela have made similar deals with China. Every barrel that is sold or traded in this way is one more barrel taken off the open market. THIS is a big part of the rising oil prices, and will surely get worse as time goes by.
Many think the New York Mercantile Exchange and London's International Petroleum Exchange are invincible. They believe that since the two largest Exchanges are basing oil on the dollar, that the dollar cannot fail. However, when those two Exchanges collapse (and they will) the dollar will go belly-up with them. Every barrel bought with yen, euro, or renminbi, is a barrel lost to the dollar.