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SPEAKING
FREELY
Oil for dollars, and dollars for US
deficit
By Richard Benson
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here if you are
interested in contributing.
The
Asians remain shocked and in disbelief. Just when
Japan, China, Taiwan and Hong Kong had accumulated
enough dollars to buy oil to keep them warm for
many winters, it's all over. In broad daylight,
the Americans and the Organization of Petroleum
Exporting Countries (OPEC) cheered as the price of
oil popped up from US$30 a barrel to more than
$50.
Indeed, this jump in the price of oil
increases the world's daily oil consumption bill
of 84 million barrels a day to $4.2 billion, from
$2.5 billion (or $1.5 trillion a year from $900
billion). The world now has to shell out an
additional $600 billion a year of "lucky bucks" to
oil-producing countries just to stay in motion.
The bigger shock, however, is in the
devaluation of dollar holdings of US Treasury
debt. The rise in oil prices guarantees that the
value of the US dollar will be pushed down even
further, and stay down. Now that China is the No 2
oil importer and Japan is No 3 - with the rest of
Asia very thirsty for oil as well - you can
understand why the Asians must find a way to
protect themselves.
The US strategy for
using oil to finance its deficit is, of course,
brilliant. America's elected officials knew that
at some point those independent foreign central
banks would start getting edgy about buying more
dollars to pay for the United States' war and
deficits. The $650 billion trade deficit is
breathing down the dollar's neck. So which central
banks can the US continue to use as the fall guys
to buy the dollar? Why not the Persian Gulf oil
states - but where would they get the dollars to
buy US Treasuries? Well, with the Chinese piling
up dollars and growing like crazy, at some point
the oil market had to tighten. It was only a
matter of time before the Chinese would start
bidding up the price of oil. The Asians,
therefore, are hung out to dry when the price of
oil rises because they have to spend more of their
dollars on oil.
As the price of oil goes
up, extra money floods into the Gulf kingdoms.
With the US secretary of defense putting troops
all over the ground in the Middle East, and those
nimble aircraft carriers nearby and ready to
deliver the "shock and awe of sudden democracy" to
the Gulf monarchs, it's a sure bet that America's
OPEC buddies will stash their newly found Asian
lucky bucks into good old American Treasury notes.
With such a simple policy to fund its
deficit for another year, it's no wonder the
United States can get by without any brain power
at the Treasury Department. In effect, the US and
its Gulf Arab allies just pulled off the biggest
central-bank heist in the history of the world.
The price of oil just went up 60% or more, which
really cuts down to size that $3.4 trillion of net
foreign holdings of US financial assets. As a
loyal American, one would like to cheer one's
government's deft move to pick the pockets of our
trading and financing partners. Moreover, the US
gets the Arabs to fund a large share of our
deficit, subsidize our interest rates, and help
keep our taxes low for another year. Surely I can
afford to buy another gas-guzzling sport-ute, get
a rifle, and wave a flag.
The United
States is extracting tribute on oil from the
world. If the world wants Middle Eastern oil, it
can pay for it through the Saudi branch of the US
Treasury. Why do the heads of Saudi Arabia,
Kuwait, Abu Dhabi, Bahrain, Qatar, etc, hold
dollars? Because they want to keep the money and
the power. The ruling family of Saudi Arabia
controls 25% of the world oil reserves and is
completely dependent on oil revenues for its
survival. Tens of thousands of Saudi princes live
off lavish royal stipends. Think of Arabia as a
family firm. If the dollar goes down in value, the
Saudi royal family still gets to keep hundreds of
billions of dollars. But, if they don't buy
dollars, why would the US keep them in power? It
would simply not be in our interests to do so.
Remember when Saddam Hussein talked about pricing
Iraq's oil in euros? "Shock and awe" quietly
followed.
This program of oil for dollars
and dollars for the US Treasury deficit is the
simple tribute that we, as the superpower, can
expect. The United States is well paid for keeping
the world's supply of black gold safe and
available to all. Unlike the Vietnam era - when
the US was trying to finance guns and butter -
getting others to pay now for our guns allows us
to milk the oil out of the sand and turn it into
butter.
The next question will be how the
Asians respond to a 60% hike in the price of oil.
Please stay tuned.
Notice in the chart
below there are some big, smart, anonymous dollar
holders (such as hedge funds) located in the
Caribbean. No one knows who they really are.
Major foreign holders of US
Treasury securities (in billions of
dollars)
| Japan |
702 |
| Mainland China |
194 |
| England |
163 |
| Caribbean |
93 |
| Korea |
68 |
| Taiwan |
59 |
| Hong
Kong |
59 |
| Total (including other countries with
fewer holdings) |
1,960 |
Richard
Benson is founder of Specialty Finance Group.
He can be reached at AssetBond@aol.com.
This article is republished with permission
from Benson's Economic and Market Trends.
(Copyright 2005 Richard Benson.)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here if you are
interested in contributing.
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