OIL FOR GOLD!
Alex Wallenwein
On January 18, 2004, Reuters reported that former Malaysian Prime
Minister, Mahatir Mohamed, advised Saudi Arabia to demand gold for its
oil. For a couple of days, the Internet was all abuzz about the
statement, but nothing was written to analyze in depth the possible
ramifications of the Saudis actually making that move.
That's probably because nobody thinks for a second that the Saudis
might actually do such a thing. But just imagine for a moment that
Saudi Islamists stage a coup and gain control of the Saudi's oil empire.
Demanding that the US pay gold for oil could indeed be their
much-desired "weapon of mass destruction." It would be the
economic equivalent to setting off a neutron bomb in downtown
Manhattan.
In simple, straightforward economic terms, not even taking into
account the financial and political ripple-effect of such an action, it
would eventually force the world into either a quasi gold-standard, or a
situation where only specie is accepted in international trade.
It is, of course, no secret that Mahatir wants exactly that for his gold
dinar. The impact on the United States alone would be nothing short of
devastating - and that is without doubt is his intended result.
So, what's the immediate effect if OPEC "goes gold"?
The Effect:
For simplicity's sake, let's for the moment disregard the enormous
upward-pressure on gold prices such an action would set off. Let's take
a look at the situation in terms of how long US gold supplies would last
if neither the gold nor oil prices were to change over the period in
question.
According to the New York Fed, the US national gold stock is nearly
262 million ounces (overlooking for the moment the possibility that the
US no longer owns much of its former gold). At the current market price
near $405/oz, these ounces represent slightly over $106 billion worth of
gold buying-power.
It is hard to conceive a situation where, if the world's largest oil
exporter and holder of proven oil reserves should start demanding gold
for its oil, the other OPEC countries will not immediately follow suit.
Other members would not sit idly by and watch Saudi Arabia alone drain
the world central banks' gold reserves. They would most certainly want
in on the action (and so would Russia, Canada, and Mexico, as a matter
of fact). We therefore look at the total US import figures from all of
OPEC together (but excluding the other major producers) in figuring out
the immediate effect.
In 2003, daily US oil imports from OPEC countries averaged slightly in
excess of 5 million barrels a day, which amounts to 1.8 billion barrels
per year. At current market prices for crude oil (near $31/bbl at the
time of this writing), OPEC imports cost the US about $56 billion per
year.
If the US had to pay for its OPEC oil in gold, it would have to ship about
138 million ounces of gold per year at current prices ($405 gold, and
$31 per barrel of oil). Since there are only 262 million ounces of gold (at
best), that means the entire US gold stock would be gone in a little
under two years!
(As an aside, it is worth noting that the EU could outlast the US almost
ten times in that situation. EU imports just under one million barrels a
day from OPEC [one-fifth of US imports], and it roughly has a
cumulative 384 million ounces of gold reserves compared to the US' 262
million. That would give it about twelve years of OPEC oil imports.)
Another US Invasion?
This kind of scenario will almost certainly cause the US to use its conveniently positioned military to "intervene"
in additional countries of the Middle East, most likely Saudi Arabia and Iran, the number one and number three
countries in terms of proven reserves. (We’ve already got number two.)
But then again, the political capital may not be there to be spent on another invasion. What would be the
official excuse? "Just shut up, we need the oil?" I don’t think so.
If the need for immediate action is felt, however, just imagine that a small suitcase nuke may go off in
downtown LA, for example, and that such could be publicly blamed on Iranian or Saudi terrorists. US public
support for s full-scale invasion of either country would be there in seconds.
If for whatever reason an invasion was not forthcoming, OPEC leaders will have to do some really hard thinking
on how to set the most effective price levels of oil in terms of gold.
At current market prices, one ounce of gold (at $405 an ounce) buys 11.57 barrels of crude oil (at $35 per
barrel), or 0.086 ounces of gold per barrel of oil. Let’s just say its close to a tenth of an ounce per barrel. In
order to make the transition a bit more palatable to the US and thereby avoid another outright invasion, OPEC
might set the gold price of crude at far lower levels, say at 0.01 ounces per barrel. That way, the US could
"live" on its gold stock for almost 15 years or so. If OPEC were to single-mindedly and inflexibly pursued an
oil-for-gold policy, it would on the one hand certainly end up with all of US gold stock in a very short time while,
on the other hand, it would lose its biggest customer. After the US spent all of its gold, there would be no one
left to fill the void.
At current market prices, one ounce of gold (at $405 an ounce) buys 11.57 barrels of crude oil (at $35 per barrel), or 0.086 ounces of gold per barrel of oil. Let's just say its close to a tenth of an ounce per barrel. In order to make the transition a bit more palatable to the US and thereby avoid another outright invasion, OPEC might set the gold price of crude at far lower levels, say at 0.01 ounces per barrel. That way, the US could "live" on its gold stock for almost 15 years or so. If OPEC were to single-mindedly and inflexibly pursued an oil-for-gold policy, it would on the one hand certainly end up with all of US gold stock in a very short time while, on the other hand, it would lose its biggest customer. After the US spent all of its gold, there would be no one left to fill the void.
Claiming Iraqi Oil
The US, of course, doesn't have to go the invasion route. It currently
occupies Iraq, which has the world's second largest proven oil reserves.
If OPEC made this policy change, the US could easily reverse its
present course of turning over government authority to the Iraqis, and
could actually start behaving like a full-fledged conqueror.
Iraq has 115 billion barrels of proven reserves. At a rate of 1.8 billion
barrels per year of oil imports from OPEC, the US can satisfy its entire
current OPEC import demand from Iraq alone for more than 50 years -
once it brings sufficient production capacity online. There are of course
terrorist attacks on pipelines, facilities, etc. to take into account.
Nevertheless, it's better than having to spend all of its gold on oil.
For the US, this would constitute the least expensive solution from a
purely economic cost/benefit standpoint. But this is where we need to
consider the inevitability of a gold price explosion that will result from
the enormous added demand from OPEC demanding gold for its oil. That
price explosion alone would immediately doom the dollar, and therefore
the entire US economic machinery.
So, even if the US can avoid paying for oil with gold, which is not
entirely certain, (consider the political fallout from totally claiming Iraq)
gold would shoot so high that the dollar, due to existing trade
deficit/debt load problems, would be pulverized - ahead of all the other
fiats. Think, "US of A" as in "United States of Argentina"
Universal Gold-Settlement?
Whatever the complexities and strategic contingencies of such a move
by OPEC, one thing is immediately clear: If the oil consuming countries
of the world don't want to end up with dwindling buying power and
disappearing public stocks of gold, they'll be forced to demand gold
settlement for all of their exports to OPEC countries. That, in turn
would eventually cause the entire world economy to get back to gold
settlement, at the very least for international trade purposes.
The question arises: once most international trade is settled in gold
(and maybe silver, especially after its imminent price-adjustment) can
individual transactions within countries remain far behind?
What is "trade" between countries, really? Trade is not primarily
something the governments of different countries do with each other.
Trade is mostly conducted between different countries' private
corporations and individuals.
So, if corporation "A" sells a shipment of Mercedes to a wholesaler in
Saudi Arabia, it can demand gold in payment. What will "A" do with that
gold in its home country? It may sell it for cash and use the cash to
pay expenses, save, invest, or buy whatever it needs. But in an
economic environment where gold is demanded by OPEC for oil
payments, all paper currencies will rapidly depreciate against gold due
to an unbelievable increase in gold demand world wide.
Under that scenario, "A" would be worse than stupid to sell its ultimate
value-retainer - gold - for an ultimate value-loser - cash. So it will keep
its gold. Corporation B, which does business with "A" at home, sees its
own "stash of cash" losing purchasing power by the minute, so it wants
gold, too. It will demand payment in gold from "A" for its services.
In turn, A's and B's employees (at least upper management with enough
clout) may demand their pay in gold as well ... and so on, and so on.
Maybe in the US, legal tender laws and the abrogation of gold clauses
will prevent such a scenario, but there is probably little in other
countries that would prevent this from happening.
The more instances of this process take place, the more fiat would lose
value, in turn accelerating the entire process. Very soon, nobody will
take cash for anything except at tremendously discounted values, and
everyone and their brother will demand gold for literally everything. We
will have a pure-specie currency system in no time.
And that, dear reader, is Mahatir's plan. Could this actually happen?
Just ask yourself if the Wahabis could overthrow the Saudi dynasty,
and you have the answer staring you right in the face..
The "seeds" have been planted in the minds of OPEC leaders. If they
grow, their harvest will be in gold - and cash will be trash.
Got gold?
Alex Wallenwein
Editor, Publisher
The EURO VS DOLLAR CURRENCY WAR MONITOR
Helping investors prepare for, survive, and prosper during the ongoing
dollar-collapse.
26 January 2004
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