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Thread: weekend commentary - 'Axis of Oil'

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    Default weekend commentary - 'Axis of Oil'

    in a nutshell, the 'value' of the US dollar is under attack from without ...



    (snip)" “Axis of Oil” Chipping away at US Dollar’s Base of Support

    The “Axis of Oil” led by Russia, Iran, and Venezuela, is slowly chipping away at the US dollar’s status as the world’s “reserve currency.” Russia, the world’s second largest oil exporter demands rubles in exchange for its Urals crude oil, and Iran, the world’s fourth largest oil exporter is earning most of its revenues in the Euro. Venezuela’s central bank began shifting its FX reserves to Euros in 2005.

    The “Axis of Oil” seeks to draw China into its sphere, exploiting China’s huge thirst for oil. Iran became China’s top oil supplier in January, providing 2.14 million tons of crude, up 13% over the same month last year, and tripling that of December’s supply of 740,000 tons. China aims to establish 625 million barrels of strategic petroleum reserves to be able to cover 90 days of net oil imports by 2015.

    China’s state-run Zhuhai Zhenrong, the biggest buyer of Iranian crude worldwide, began paying for its oil in Euros late last year. Japanese refiners who buy 500,000 bpd of Iranian crude, or a fifth of Iran’s 2.4 million-bpd shipments, continue to pay in dollars but are willing to shift to yen if asked.

    A major share of global trade in commodities belongs to crude oil, which is widely transacted in US dollars. That forces oil importers and central banks to buy US dollars, regardless of the direction of US interest rates. Last month, world-wide oil consumption rose to 85.5 million bpd. By 2030, crude oil demand is expected to reach 118 million bpd, so the dollar-crude oil link is vital to maintain the dollar’s “reserve currency” status, and allowing America to live beyond its means.

    Right now, the only serious threat to the US dollar’s international dominance is the Euro. The gross domestic product of the Euro zone is roughly the same as that of the US, and its population is 60% bigger. Europe is the Middle East’s biggest trading partner, is a major oil importer, has a comparable share of global trade as the US, but its external accounts are much better balanced. The Euro zone ran a current account deficit of only 3.2 billion euros ($4.2 billion) over the past 12-months.

    But the “Axis of Oil” could topple the US dollar, if it demands payment for oil sales in Euros. In November 2000, Saddam Hussein insisted that Iraq’s oil be paid for in Euros. When the value of the Euro rose, Iraq’s oil revenues increased accordingly. The economic threat this represented to the US dollar might have been one of the reasons why the Bush administration was so anxious to topple Saddam. "(snip)

    (snip)"But a greater threat to the US dollar’s hegemony is the “Axis of Oil.” Russia is the #1 producer of natural gas and the #2 producer of crude oil and much of its vast energy assets are still under exploration. Each up-tick in the oil price pumps billions of additional dollars into the Kremlin’s coffers. One year ago, on May 10th, Russian kingpin Vladimir Putin declared that Russian Urals blend crude oil would be traded for Russian rubles, instead of US dollars, and made the ruble fully convertible.

    One month later, on June 8th, 2006, the Russian central bank said it had cut the share of US dollars in its reserves by 5% to 50% and boosted the Euro’s share to 40%, with the rest in sterling and yen. Due to soaring oil revenues and an appreciating Euro, Russia’s foreign exchange reserves have mushroomed to $361 billion today, the third largest in the world, behind China and Japan. "(snip)

    (snip)"Blessed with the second largest oil reserves in the world, Iran’s oil production has averaged about 3.9 million for the past three years. However, as a result of surging domestic demand, growing 10% per year and depleting oil fields, Iranian oil and gas revenues are expected to fall from $54 billion in 2006 to $49 billion this year. In ten years, Iran’s 2.4 million bpd of oil exports could dry up, unless new oil fields are developed with the help of Chinese, Russian, or European oil companies.

    But the US State Department is strongly urging its trading partners not to invest in Iran. The US Congress is pushing a broad spectrum of legislation against Iran this year, with “veto proof” bipartisan support. The most recent proposal is sponsored by Senator Chris Dodd and Rep Tom Lantos, which brings China and Russia into the fray, threatening economic sanctions on any country that aids Iran’s oil industry.

    But Tehran is well aware of its commercial links with other nations, and buys one third of its imports from the European Union, led by Germany, France, and Italy. This all means that Iran is actually in a far stronger position than its size. Consider the year of debating, cajoling, threatening, and blackmailing that went into two UN Security Council resolutions aimed at Iran’s nuclear program. In the end, China and Russia stripped the guts outs of the resolutions."(snip)

    (snip)" Adding Venezuela’s mercurial Hugo Chavez to the “Axis of Oil”, makes matters much tougher for Washington. Venezuela is the fourth-largest supplier of oil to the United States, accounting for more than 10% of American oil imports, and ships 1.3 million barrels of crude oil north every day. Chavez has promised to cut off oil shipments to the US, if Iran is attacked by the US military. Chavez has already reduced oil shipments to the US by 200,000 bpd from a year ago.

    On May 1st, Chavez declared that Venezuela will strip the world’s biggest oil companies of operational control over the Orinoco Belt crude projects that can convert about 600,000 bpd of heavy, tar like crude into valuable synthetic oil. Oil Minister Rafael Ramirez has said that Venezuela will only consider agreements on the booked value of the projects rather than their much larger current net worth.

    Venezuela says there are around 235 billion barrels of crude reserves in the vast Orinoco Belt, and if correct, would give Chavez the planet’s largest oil supply. Venezuela currently has 80 billion barrels of proven reserves. Petroleos de Venezuela PDVSA is working with oil companies from China, India, Iran and Brazil to certify the Orinoco reserves, while Chavez seeks to reduce his reliance on the United States.

    The implications are potentially stark for the United States, which imports 62% of its oil supply. Chavez says PDVSA is ready to become the sole energy supplier to Cuba, Bolivia, Nicaragua and Haiti, and would finance up to 50% of the total oil bill. Chavez is also giving away at least 100,000 bpd to Cuba, which the Castro brothers sell on the open market at their own profit, draining Venezuela’s finances further. "(snip)

    (snip)"During the last several decades, control of global oil reserves has steadily passed from private companies to national oil companies like Rosneft and Petróleos de Venezuela. Roughly 77% of the world’s 1.15 trillion barrels of proven reserves is in the hands of the national companies, and 14 of the top-20 oil companies are state-controlled. Together, the “Axis of Oil” pumps one-fifth of global oil output.

    Maintaining the US dollar monopoly on the sale of oil is critical to the Fed’s ability to print money, without sending the greenback into a tailspin. However, if the ”Axis of Oil” and /or the Chinese dragon decide to shift more of their trade surpluses towards the Euro or gold, it could seriously undermine the US dollar, increasing the cost of US imports, and corral the US economy into the “Stagflation” trap.

    Such a scenario is more likely in the event of a US military strike on Iran. But the Group of Seven central banks have worked together for a long time, dealing with many market crises, usually by coordinated inflation of their money supplies, to keep currencies in stable target zones. Still, a shift by the “Axis of Oil” and especially China, away from the US dollar could override the G-7’s manipulative antics.

    On May 1st, Fed chief Ben Bernanke warned Congress against imposing tariffs on Chinese imports into the US, which could spark Beijing’s flight from the dollar. “If trade both destroys and creates jobs, what is its overall effect on employment? The answer is, essentially, none,” Bernanke said in Butte, Montana. The Fed’s ability to print unlimited amounts of US dollars and inflate assets, might hang in the balance. "(snip)

    ~
    Last edited by Melonie; 05-05-2007 at 09:35 AM.

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