Gold, Blood and Petrodollar Defectors
Kevin DeMeritt
You can almost hear it-the geopolitical negotiations for oil.
There's China landing long-term oil contracts with Saudi Arabia, Venezuela, and Nigeria after its own oil production couldn't keep up with domestic demand for the first time in the nation's 5,000-year history.
There's India looking for a dependable oil pipeline of its own. That's literally and figuratively speaking: Talks are underway for the creation of an historic Iran/India oil pipeline.
There's an emerging Arab/South American geopolitical axis. In it, Saudi Arabia, Kuwait, Iraq, the United Arab Emirates, Algeria, Egypt, Qatar, Libya, Oman, Syria, Yemen, Venezuela, Ecuador, Argentina and Brazil pump about 32.5% of global oil production each day. Needless to say, this is an axis not overly friendly to the U.S.
Nations all over the world, in fact, are jockeying for position in the increasingly dramatic oil derby, made all the more suspenseful by the burgeoning Asian consumer nations, the question of whether oil has peaked or not, the ready-to-detonate Middle East, and the direction U.S. military leaders are now looking.
Conspicuously underlying all of this jockeying is the question of the petrodollar. Namely, how can nervous nations, anxious over the dollar's weakened condition, convert with relative impunity from petrodollars to petroeuros? Or petrodinars?
Or to a petro-anything-but-the-dollar system?
There's that much concern about our good, old American greenback.
America Defending its Petrodollar Dominance
It's not a hatred for the U.S., as disturbingly strong as it now is worldwide, that's fueling this petrodollar discontent. Many nations simply agree with Jean-Philippe Cotis from The Organisation for Economic Co-operation and Development (OECD) who recently warned:
"Were not saying there will be doomsday tomorrow morning ... but because the adjustments (to global imbalances) are relatively slow, we are running the risk an accident will happen. That's where we are. Time is running out-the numbers are getting big, big, big."
He's referring to America's record twin deficits and the fact that a cheaper dollar has had no effect whatsoever on reducing these deficits. Predicting U.S. balance of payment deficits may climb to nearly $900 billion in 2006, the OCED warned that a debt this size would need an inflow of more than $2.5 billion per day from the rest of the world (up from an estimated $2 billion per day).
Signs are arising that the rest of the world is getting tired of cooperating. Dollar defection, a once unthinkable subject, is now on the lips of oil producers. Iraq (before the war), Iran, Russia, Indonesia and many other Islamic nations, for instance, have either started pricing oil in an alternative currency or else are seriously considering doing so.
Which, many analysts believe, has effectively put America on the defensive. And may well have greased the skids for our involvement in Iraq. Not that other, more pressing reasons haven't been hammered home to us. But tucked amid the highly publicized WMD worries and the several War on Terror issues was this little story left entirely alone by the media: Two months after the start of the war, on June 5th of 2003, Iraqi oil was switched back to being dollar-denominated (after Hussein had switched to petroeuros in 2001).
Could Hussein's in-your-face challenge to the petrodollar supremacy have been among the reasons we went to war? Was it important for the U.S. to make an example of this petrodollar defector before others chose defection, too?
Probably the more important question is, could Iran's plans to start an independent oil bourse in 2006 "encourage" a brand new round of military action?
Oil Hitting the Fan: Iran's Coming Petroeuro Oil Bourse
What is an oil bourse? It's like a stock exchange for oil. There's two major ones in the world already: London's International Petroleum Exchange (IPE) and the New York Mercantile Exchange (NYMEX).
Along with Iranian plans to start a third oil bourse in early 2006, what may be most disturbing to the petrodollar establishment is the likely intention of Iran to also, according to William Clark, "usher in a fourth crude oil marker - denominated in the euro currency. From a purely economic and monetary perspective, a petroeuro system is a logical development given that the European Union imports more oil from OPEC producers than does the U.S."
Clark, who has an upcoming book on the subject, Petrodollar Warfare, went on to say…
"One of the Federal Reserves' nightmares may begin to unfold in 2005 or 2006, when it appears international buyers will have a choice of buying a barrel of oil for $50 dollars on the NYMEX and IPR… or purchase a barrel of oil for E37 - E40 (37 to 40 euros) via the Iranian Bourse.
"A successful Iranian Bourse would solidify the petroeuro as an alternative oil-transaction currency, and thereby end the petrodollar's status as the monopoly currency."
Does that mean Iran will be made an example, too? Is war with Iran inevitable, notwithstanding the euros recent weakness? Seymour Hersh and Scott Ritter, at least, believe it's right around the corner. Both the veteran investigative journalist (in the January 24th New Yorker) and the former weapons inspector (in a February 18th talk) maintain that the decision has already been made and the planning already begun.
Pegging the New Gulf Currency-and Your Portfolio-to Gold
Further evidence of petrodollar defection is found in the Middle East. Within five years, the six Gulf Cooperation Council (GCC) countries are expected to issue their own currency.
This Gulf dinar or riyal, as it is expected to be called, will rank right up there with the dollar and euro in global significance according to one study…even as it manages to dilute both.
The Arab News recently reported, "Once established, the GCC leadership may decide to invoice their hydrocarbon sales in the new common currency, moving away from the current dollar pricing system. It could also become the reserve currency of choice for Islamic and Arab central banks for a combination of religious and political reasons."
Perhaps anticipating the new currency would be born amid petrodollar chaos, the Gulf Research Center and GCC recently sponsored a lecture by Dr. Ferdinand Lips titled, "Oil for gold or oil for paper?" Lips, the author of "Gold wars: The battle against sound money as seen from a Swiss perspective," was making a case for the GCC's new currency to be pegged to gold and not to currencies.
"The lecture, attended by prominent members of the banking and finance industry, dealt with how currencies, investments and every crucial economic factor in the GCC countries are dependent on the US dollar, which shows increasing signs of structural weakness," the Arab News reported.
Gold, the "King of Money"
Dr. Lips was quoted as saying, "Being in the midst of a global currency devaluation scenario, it is worth noting that while oil is the king of commodities, gold is the king of money." He said the GCC banks should set aside a certain percentage of their reserves in gold, along the lines of the European Central Bank's mandatory 15 percent gold reserves rule.
Lips added, "Gold is the insurance policy…when the rest of the world will go down on the paper money system..."
This is one insurance policy we should all have. Especially in light of what appears to be directly down the road. With deficits eager to set more records, a declining dollar, a growing list of petrodollar defectors, and more desperate petrodollar conflicts seemingly ahead, the time looks right to peg your investment strategy on what Dr. Lips accurately calls "The king of money."
Kevin DeMeritt
www.goldcentral.com
June 6, 2005
Email this Article to a Friend 
Printer Friendly Version