Monday, October 20, 2014

The Oil Weapon Can Backfire

The oil weapon has a long history. It pre-dates the 1973 oil embargo. The oil weapon was first used when the US placed an oil embargo on Japan in 1940. This set the ball in motion for war in the east as Japan had two years worth of oil stored. A Pacific with different European powers, America and Japan all having interests was replaced with an American dominated Pacific. The oil weapon is making a comeback now in a weird repeat of an urban legend from the '80s. Geopolitical battles involve many different types of weapons, and in the age of American military dominance, will force others into other competitive realms. Per recent reports, the Saudis are pumping oil with no regard for how low the price goes in hopes of punishing both Iran and Russia. This has the chance for major blowback and unintentionally wrecking the petrodollar system.

The price of oil is dropping like a rock, which is partly due to supply and partly due to trader manipulation. With the full force of the printing press backing trades, the FED can fiddle with the price of oil if it wants. Besides that, economic activity is clearly stalled or looking shakier than official statistics show. Supply of oil is still going strong, so we have more oil than demand. The Saudis do not want to cut back, which ahem, makes no sense given their repeated claims before that the world should get used to $100/barrel oil. With a drop in the price of oil, it ruins the balance sheets of Russian, Iranian and every single other nation that depends on oil revenues for government expenditures. Russia and Iran need high oil for their governments, but Russia's debt to GDP ratio is incredibly low, so a temporary deficit situation could be easier to weather. This looks like a poorly planned and public version of the '80s Reagan administration-House of Saud deal to pump up supply while the US reduced consumption to flood the world with oil and destroy Soviet balance sheets, bankrupting and ruining the USSR.

This is poorly planned because history is not a perfect repeat cycle. Right now, the US is far more leveraged in all regards. The US Dollar system itself is in a weaker position. The Saudis also have to maintain a high price of oil for their own peasant pacification programs, and a Saudi prince has expressed his displeasure with this. Other petro-states are in a similar bind. No entity is a monolith, and the Saudis are no exception. The Saudis also needed the US more in the '80s. There is another quirk at play. As I wrote before, the US petrodollar system has been boosted recently by the massive jump in oil production through the shale plays. The stabilization in our oil import bill gave our global financial efforts some credibility. If oil drops from $100 to $70, how many shale rigs shut down? How much production goes away? How many shale firms running on massive cheap debt go under? If they go under and production drops, our import bill will rise even if the price drops because how many companies will restart or re-drill since well depletion is so quick? It might not happen if the knock on effect of shutting down shale production creates a problem for the dollar and interest rates.

That is the core of the problem. The US elite may be getting to clever by half by resorting to this old weapon. The move will hurt Russia and Iran. The move will hurt Saudi Arabia in return. The move may hurt the US balance of payment issue and cause further concern by others that the dollar is not secure. Interest rates are tanking again, so maybe the lords of the universe have a bit more time to hoodwink the world out of more loot and maintain control indefinitely. It is an oddball coalition for Team America both domestic and foreign. America has interests, not allies or enemies, and the American regime's interests is maintaining control. That is also the interest of different ruling cadres for our allies, so how far are the Saudis willing to go before they have to roll the tanks out again on their people? The tools are the same, but the environment is different now. All things come to an end. All regimes fall. This one is no different.

4 comments:

Jamie NZ said...

Currency war...
Trade war...
Then things get hot right...

Anonymous said...

he oil war is foolish because the world economy is on shaky footing. yet, america's elites are lulled into complacency because they've confused the fed QE manipulation with a healthy economy. So, we undertake lots of counterproductive steps, like sanctions on russia. (but not west africa, because that would harm the economy. Dur...) basically - we're riding high on the hog, and much like a drunken sailor on shore leave, every bad idea sounds like a good one right now.

Toddy Cat said...

It's typical of Obama that the best that he can do with regard to Russia is a half-assed retread of a conservative policy that more or less worked under totally different circumstances thirty years ago.

Has there ever been a presidency, liberal or conservative, more intellectually bankrupt than this one?

nikcrit said...

O.T.,
Sorry, but I couldn' t resist passing this along; I'm thinking this is the kidn of proof the Manosphere points to when claiming we're in the midst of Western Civilization's End Times.

(note: the tolerant-but-strained expression of the matronly white lady during the performance).

http://www.youtube.com/watch?v=_fE3-PxWihk