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flexibeastMany people feel that US policy in the Middle East is about oil, despite claims by the current US administration and its boosters that it's about removing dictators and installing democracy. It's difficult to believe that the latter is the case given that there's no shortage of dictatorships elsewhere in the world, but the US generally only takes military action against a dictatorship that's left-wing and/or in control of oil reserves. And when one looks at a graph comparing daily US oil consumption with other major industrial nations, it seems reasonable to conclude that the intense demand for the product is the primary motivating force behind US foreign policy. There is, however, another reason for US interest in oil.
In 1971, Nixon detached the US dollar from the gold standard, which had been established in 1944 as part of the Bretton Woods system. Since 1971, therefore, the dollar has had no formal backing. Informally, however, the dollar has been supported by the fact that the oil trade has generally been conducted with US dollars.
The US economy is running on credit. Credit is critical in a system dominated by the twin ideologies of "economic growth through reckless spending" and "conspicuous consumption is next to Godliness"1, as it supports the creation of demand by allowing people to purchase things they otherwise couldn't afford to. But of course, not all recipients of that credit are equal: some debtors are much more likely to be able to pay back their debt than others. It's clear, for example, that recipients of subprime mortgages2, who by definition have a poor credit history, are in general more likely to default on their higher-than-average-interest-rate loans than recipients of regular mortgages.
So what sort of a debtor is the US government? Standard & Poor's currently rates the US as a 'AAA' debtor - the best rating possible. But the ability of the US government to repay its loans is affected by the value of the US dollar: any substantial devaluation of the dollar would significantly affect the ability of the government to meet its financial obligations, as more dollars become required to pay the same amount of debt. And the current US government debt is rather large: at the end of 2006, it totalled $4.9 trillion.
It's therefore important that the dollar not lose its value against other currencies - particularly given that it's not backed by gold reserves - and this, in turn, relies on the dollar continuing to be in demand. The use of US dollars to trade oil, a critical resource for the world's economy, is an important factor in creating such demand.
The problem for the US is that a large proportion of the world's oil reserves aren't under their direct control. Indeed, the US government has an openly hostile relationship with two countries, Iran and Venezuela, which together control ~16.5% of the world's proven oil reserves; has a deteriorating relationship with Russia, which controls ~4.5% of proven oil reserves, and which has just withdrawn from a European arms limitation treaty; and is currently embroiled in a civil war in the country with ~9% of proven oil reserves, Iraq (source). What if these countries decided that they were no longer willing to accept payment for their oil in US dollars?
Well, we might soon be able to begin to form an answer to that question: Iran has just asked Japan to pay for its oil in Yen instead of US dollars. As a consequence, as the article notes, "[c]entral bankers in Venezuela, Indonesia and the United Arab Emirates [which controls ~7.5% of proven oil reserves] have said they will invest less of their reserves in dollar assets because of the weakening currency." Further, "Iran isn't alone in wanting to drop the dollar for pricing oil. Russia has been examining plans to price the Urals oil export blend in rubles to curb currency risks. The nation plans to open the Energy Stock Exchange in St. Petersburg in the first half of next year to trade oil in rubles, UBS AG reported June 14."
Interesting times for the US dollar.
1. The 'freecycle' movement, in which people give away items no longer useful to them but potentially still usable by someone else, instead of simply sending them to landfill, has been derided by some people in the US as (perhaps inevitably) "communist" and "unAmerican". :-P
2. i mention subprime mortgages, rather than other forms of credit, due to the recent tremors in the US subprime mortgage market.
In 1971, Nixon detached the US dollar from the gold standard, which had been established in 1944 as part of the Bretton Woods system. Since 1971, therefore, the dollar has had no formal backing. Informally, however, the dollar has been supported by the fact that the oil trade has generally been conducted with US dollars.
The US economy is running on credit. Credit is critical in a system dominated by the twin ideologies of "economic growth through reckless spending" and "conspicuous consumption is next to Godliness"1, as it supports the creation of demand by allowing people to purchase things they otherwise couldn't afford to. But of course, not all recipients of that credit are equal: some debtors are much more likely to be able to pay back their debt than others. It's clear, for example, that recipients of subprime mortgages2, who by definition have a poor credit history, are in general more likely to default on their higher-than-average-interest-rate loans than recipients of regular mortgages.
So what sort of a debtor is the US government? Standard & Poor's currently rates the US as a 'AAA' debtor - the best rating possible. But the ability of the US government to repay its loans is affected by the value of the US dollar: any substantial devaluation of the dollar would significantly affect the ability of the government to meet its financial obligations, as more dollars become required to pay the same amount of debt. And the current US government debt is rather large: at the end of 2006, it totalled $4.9 trillion.
It's therefore important that the dollar not lose its value against other currencies - particularly given that it's not backed by gold reserves - and this, in turn, relies on the dollar continuing to be in demand. The use of US dollars to trade oil, a critical resource for the world's economy, is an important factor in creating such demand.
The problem for the US is that a large proportion of the world's oil reserves aren't under their direct control. Indeed, the US government has an openly hostile relationship with two countries, Iran and Venezuela, which together control ~16.5% of the world's proven oil reserves; has a deteriorating relationship with Russia, which controls ~4.5% of proven oil reserves, and which has just withdrawn from a European arms limitation treaty; and is currently embroiled in a civil war in the country with ~9% of proven oil reserves, Iraq (source). What if these countries decided that they were no longer willing to accept payment for their oil in US dollars?
Well, we might soon be able to begin to form an answer to that question: Iran has just asked Japan to pay for its oil in Yen instead of US dollars. As a consequence, as the article notes, "[c]entral bankers in Venezuela, Indonesia and the United Arab Emirates [which controls ~7.5% of proven oil reserves] have said they will invest less of their reserves in dollar assets because of the weakening currency." Further, "Iran isn't alone in wanting to drop the dollar for pricing oil. Russia has been examining plans to price the Urals oil export blend in rubles to curb currency risks. The nation plans to open the Energy Stock Exchange in St. Petersburg in the first half of next year to trade oil in rubles, UBS AG reported June 14."
Interesting times for the US dollar.
1. The 'freecycle' movement, in which people give away items no longer useful to them but potentially still usable by someone else, instead of simply sending them to landfill, has been derided by some people in the US as (perhaps inevitably) "communist" and "unAmerican". :-P
2. i mention subprime mortgages, rather than other forms of credit, due to the recent tremors in the US subprime mortgage market.
no subject
Date: 2007-07-14 20:09 (UTC)I must be so unAmerican...yeah.
no subject
Date: 2007-07-15 07:12 (UTC)no subject
Date: 2007-07-16 13:55 (UTC)