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45 comments on Who will save us from a 2005 peak?

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Luis de Sousa on November 28, 2005 - 4:31am Permalink | Subthread | Comments top
Thanks again for your analysis Stuart.
A 2005 peak is more and more plausible. Considering the previous post in this tribune let me just point out this:

  1. We have passed the logistic peak (the theoretical or technical peak, you name it)

  2. New projects cannot offset the decline rates of 8% for the giant fields.

All in all, the only question left is the decline rate of the smaller fields. If they are of the same magnitude of those for the bigger fields, that's it.
Also let me remind you of another major uncertainty, the Iranian Oil Burse (IOB). I do not believe that the present US administration will let the IOB to open, taking soon action in that direction. What will that mean in terms of oil output in Iran is very uncertain.
Stuart can I ask you to keep the folk up to date with that OGJ data? It would be nice if you post their data every month from now on, so we could follow the trend.
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Jack on November 28, 2005 - 6:32am Permalink | Subthread | Parent | Comments top
The idea of an Iranian bourse as a major threat to the US seems to be a perennial conspiracy theory thrown around on this site. So far it has never been supported by documentation or analysis beyond links to a few radical websites, which merely repeat the claim. If anyone has any evidence that US policy makers are concerned about the bourse, please provide it.

The U.S. does derive some small benefit from the conversion of currency to purchase oil if it is priced in dollars. However this would only last for a day or so during the transaction period. The significant benefit of the dollar as a reserve currency is assets held in dollars. It is far more important what is done with the dollars after the transaction.

The reality is that most oil producing countries are holding a huge quantity of dollars, every day, 365 days a year. The choice to hold dollar denominated assets is based on perceptions of risk, return and exchange rate management by the investing country.

It would make almost no difference to the US if oil was priced in another currency. It would make a huge difference if the funds the oil producing countries hold were invested in non-dollar assets. However, it appears to be the case that petrodollars are currently being invested in the US in large quantities.

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Luis de Sousa on November 28, 2005 - 9:45am Permalink | Subthread | Parent | Comments top
Let me just ask you this, what would happend if 10% of the current petro-dollars worldwide where dumped in the market?
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Jack on November 28, 2005 - 11:19am Permalink | Subthread | Parent | Comments top
The fear, from an American standpoint, would be that the oil producing countries decided not to hold US denominated assets. In other words, they took back their Petrodollars and invested them elsewhere (I would guess a combination of European, Asian, and Middleastern assets would be most likely).

This would have the same impact that would occur if the Chinese did the same thing. The dollar would fall, US interest rates would go up, and our economy would suffer. I am not claiming that this would be a good thing, but it is entirely unrelated to the Iranian bourse or dollar pricing of oil. It is allocation of assets, which I noted in my original post was a realistic concern.

However, both Asian economies and oil producers do continue to invest in the US for a reason and won't divest unless that reason changes. In either case, their currency and exports would get more expensive and their best trading partner's economy would be damaged.

I recognize that the US benefits from having the global currency and that our current fiscal position makes us vulnerable to changes in the flow of capital. However, this has little to do with the recurrent claim that plans to change the currency in which oil is priced is a major economic issue or the cause of wars.

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joule on November 28, 2005 - 12:20pm Permalink | Subthread | Parent | Comments top
International currency exchange dynamics is not something I know  a whole lot about, so maybe some of these  question are off base.

But it would seem to  me that if I were a Middle Eastern oil producer and I sell you a barrel of oil on the Iranian bourse and receive euros instead of dollars, would I not be far more inclined to park those euros in euro-denominated assets rather than have to exchange my euros for dollars, possibly at an unfavorable exchange rate?

 Looking at the flip side of this, if you, as a US oil purchaser, have to convert your dollars into euros to buy my barrrel of oil, might that not put you in a less favorable position, again due to possibly unfavorable exchange rates?

And lastly, for those Middle Eastern (and other countries) that are becoming increasingly squeamish about having so much money in US assets, doesn't trading on an Iranian bourse make it all that much easier to avoid US assets?

While I'm not sure this is a big enough issue for the US to start a war over, I don't see how an Iranian bourse can have anything but a negative impact on the US.  

Again, I have an open mind about this, and if I am wrong I would welcome being shown where so.

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Luis de Sousa on November 28, 2005 - 12:47pm Permalink | Subthread | Parent | Comments top
Joule has somewhat touched the point. The main reason for a country like Iran to put petrodollars away is that they don't have trade with the US, their major partners are EU and Japan. By negotiating with EU in euros, for instance, they would eliminate the risks of currency fluctuations.
Now you have to understand that there are many other countries in the same situation. One of them being the big bear, Russia.
Another consideration is that by looking to the current US economic situation (growing deficits and so on) one wouldn't think owning US assets a good idea, unless of course you'd have to purchase oil.
Also you have to consider the psychological effects of such an event. If you're a central banker with 70% of your reserves in petrodollars, and you get suspicious of a coming dollar fall what would you do? That kind of fears can really drive the market, like in 2004 as more the dollar fell, more dollars where dumped in the open; until of course Greenspan made up is mind. Now imagine Trichet following his steps.
Finally I'd like to point out that a dollar fall won't be good to anybody (at least I don't see how). Besides the obvious consequences for the US, let's suppose that a major shift is made to the euro, that would lead to European unemployment rates which I prefer not to foresee.
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LevinK on November 28, 2005 - 5:18pm Permalink | Subthread | Parent | Comments top
I think you are totally off base here.
If oil starts trading in euros:
  1. There will be no reason for the oil producing countries to lose millions from the conversion to USD.
  2. What is thousand times more important - there will be much less incentitive for every other country to accept USD and to invest in USD assets. If I were a buyer and oil traded in euros, I would hold euros on my account to hedge against exchange rate risk and to avoid conversion charges. And if I knew oil would become scarce I would hold even more euros to have an insurance against future price shocks. Don't be fooled by the price; the real value of oil is not equal to half a GSM, and everyone knows it.
  3. Just to mention here that the whole Breton-Woods system imposing freely tradable currencies is tied with the petrodollar system to force the countries to hold huge reserves of USD for two purposes:
   - to protect their domestic currencies from currency runnups (predicated by the Breton-Woods system)
   - to buy oil
Reason 1 weakened with the appearance of the euro; can you imagine what will happen if reason 2 also disappears? The resulting shift could be devastating; the world is soaked with 4 trillion of the greenbacks and there is absolutely nothing to cover for them here at home.
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Bigelow on November 28, 2005 - 4:08pm Permalink | Subthread | Parent | Comments top
Jack-

You used to post on GNN?

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BalticMan on November 28, 2005 - 5:14pm Permalink | Subthread | Parent | Comments top
In response to Jack's assertion that it appears that petro-dollars are being invested in large quantities in the U.S.:

Take a look at the latest Global Economic Forum commentary from Steve Roach of Morgan Stanley, for November 28, at:

http://www.morganstanley.com/GEFdata/digests/latest-digest.html

His commentary is the first listed. If you read this after November 28, you will have to go to the Archives link and click on November 28.

His commentary suggests that in fact, large quantities of petro-dollars are not being re-invested, at least not to the same degree that they were in the '70s.

This is not your father's petro-dollar recycling...

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Charles Mackay on November 28, 2005 - 8:20pm Permalink | Subthread | Parent | Comments top
The US derives great benefits from what some others and I call the Bretton Woods II dollar regime, informal yet real heir to the first BW system.  

Among the greatest benefits of having your fiat money universally accepted is that trade deficits are no obstacle - and all the energy needed is available by outbidding other countries who do not have the luxary of just printing as much money as they need to main their standard of living.  Essentially the country to hold the keys to the world's printing press will maintain its standard of living better and longer as the rest of te world slowly gets darker.

Roubini Global Economics (http://www.rgemonitor.com/), an excellent economic service, says that oil producers are indeed recycling much of their petrodollars back into US denominated assets.  What would happen if they didn't?  William Clark explores this in his book Petrodollar Warfare (http://www.petrodollarwarfare.com/).  An update on what he thinks is available at Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse (http://wallstreetexaminer.com/?itemid=1342).

Even slight moves away from the dollar as thee reserve asset will probably have negative consequences for the US economy.

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flankp on November 28, 2005 - 10:23pm Permalink | Subthread | Parent | Comments top
http://english.aljazeera.net/NR/exeres/C1C0C9B3-DDA9-42E2-AE9C-B7CDBA08A6E9.htm

Aljazeera had an opinion peice on the IOB.

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Liz on November 29, 2005 - 12:14am Permalink | Subthread | Parent | Comments top
The link timed out for me.  Can you give us the gist?
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Donal on November 29, 2005 - 10:00am Permalink | Subthread | Parent | Comments top
It is primarily the US which stands to lose out from any move away from the petrodollar status quo, it is the world's largest importer of oil and a move away from invoicing oil in dollars to euros will undoubtedly have a negative effect on its economy.
Fewer nations would be willing to hold the dollar in reserve which would cause a significant devaluation and result in the loss seigniorage revenues. In addition, US energy-related companies stand to lose out as they will be unable to participate in the bourse due to the longstanding American trade embargo on Iran.
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