My first reaction on reading of President Barack Obama's Nobel Peace prize,
after just nine months in office, was perplexity, as was my second and third.
But perhaps the prize was awarded not in recognition for what the US president
has done, but what the Norwegian committee is hoping he will do.
Obama faces many great challenges, and three in particular demand his urgent
attention. First, there is the ongoing financial crisis, and the threat to the
supremacy of the US dollar as the global reserve currency; second, there is the
question of an agreement at the United Nations Copenhagen climate change
conference next month aimed at addressing securing agreement on a replacement
replace the Kyoto Protocol; and third, there is the question of how to address
Iran's ambitions for nuclear energy.
Any one of these would have challenged any of his predecessors
in two complete terms: Obama has tasked himself to deal with them all by the
end of his first year in office.
The audacity of hope, indeed: but perhaps there may be a simple but audacious
solution to all three challenges?
Twilight of the dollar
The market reaction to Robert Fisk's recent article in The Independent
newspaper concerning high-level meetings aimed at replacing the dollar as
global reserve currency was such that the market, at least, believed it. In the
morality and ethics-free market zone, it has long been appreciated that the
dollar's position is unsustainable. As and when a successor emerges, the market
will assimilate it seamlessly, without missing a beat.
But if there is one thing that Fisk's article achieved it was to open up once
again a subject that appeared to have been settled, and that is the role and
function of a global reserve currency. Indeed, the debate is raging as to the
nature of money itself, where 100 economists will probably give you 100
different definitions.
As a bear of little economic brain but with market experience approaching 25
years, I prefer to deal with the practical, rather than the theoretical. I
observe that the transaction currency is relatively unimportant, because the
foreign exchange market allows an alternative currency to be used in a
microsecond. What matters is, for a consumer, the capability to make future
payments in the transaction currency; and for a producer, where and in what
currency and asset class the proceeds of sale may be invested.
The dollar fulfills two roles: firstly, it is a unit of measure, or pricing
reference - a "value standard"; secondly, it is a store of value, or unit of
currency - a unit redeemable for value. These dollar IOUs are backed, not by
value such as gold, silver, or even salt (hence the word "salary") but rather
by US taxes and the faith of the world in the US government.
The problem is that US taxes aren't what they used to be. The sheer scale of
the US fiscal deficit and the world's pessimism that anything can be done about
it have made the subject of a successor to the dollar of urgent practical
importance in the global corridors of power.
After the dollar
There are plenty of suggestions for a dollar replacement. Some advocate the
euro or the Chinese yuan as a global reserve currency, but those who understand
the subject appreciate that, where money is created and issued as debt, then to
become the provider of the global reserve currency involves becoming a debtor
to the rest of the world. This is unsustainable in the long run, as the US has
found out - the hard way.
Most proposals follow John Maynard Keynes' suggestion in 1944 at Bretton Woods
of a global issuing authority, such as the International Monetary Fund - which
would issue a new IOU credit object he called a "bancor", which would serve
both as a unit of measure and as a currency store of value that is globally
acceptable in exchange.
Fisk suggests that current high-level discussions envisage backing for such a
currency with a combination of gold, and a basket of conventional currencies.
The monetary expert Bernard Lietaer's proposal is for a "terra" backed by a
basket of commodities. There are many proponents of gold as a backing for
currency and a return to a "gold standard", and there are many other ingenious,
but less credible proposals.
I propose an entirely different approach, and that is to distinguish between
the value standard we use, and the currencies we exchange by reference to the
standard.
Firstly, a fixed amount of energy - for instance the energy value of a liter of
gasoline, or its equivalent in kilowatt hours - would be intuitively obvious as
a pricing reference. Most people could relate to that, and whether the unit is
called a petro, electro, or an energy dollar is irrelevant.
Secondly, there is the need for nationally and globally acceptable units of
currency as a store of value. A unit redeemable in land rental value could
perhaps be a nationally acceptable currency, but for international acceptance
or "fungibility" the obvious candidates are electricity, which is pure energy,
and carbon-based fuels, such as natural gas, gasoline, kerosene, heating oil
and fuel oil.
For the period of transition to an economy based upon renewable energy, I
propose that energy producers should issue units redeemable in payment for such
carbon-based fuels, and perhaps the most globally acceptable of these will be
units redeemable in payment for natural gas, and for gasoline.
Units redeemable in payment for electricity supplied would have a fixed price
by reference to the global energy standard. Carbon-based currencies would
probably have a fairly clear and stable price expressed in energy value. To be
quite clear, these units would not actually be a petro or energy dollar, but
would have a price denominated in petros or energy dollars.
So firstly, we should price dollars, euros, and yuan in energy rather than
energy in dollars, euros and yuan; and secondly, we should unitize energy
through the simple expedient of allowing producers to issue units which they
will accept in payment for energy they supply - within a suitable legal
framework of trust, or energy clearing union.
Copenhagen
The outcomes from recent negotiations in Bangkok are not hopeful for agreement
on climate change in Copenhagen. The ongoing guerilla warfare between developed
and developing nations in relation to who should take the pain is reminiscent
of two cripples fighting over a crutch.
What everyone is missing is that the savings in energy consumption, and hence
carbon emissions, are available to be made not just by consuming nations but
also - massively - by energy producing nations. Anyone who wishes to see the
effects of gasoline at 10 cents US per liter may go to Tehran, where even the
crows are leaving because the air quality is so bad. Nigeria flares sufficient
natural gas in a year to power Brazil. Virtually all energy-producing states
waste energy on a cosmic scale, and the implicit or explicit subsidy runs to
trillions of dollars or equivalent, without even thinking about the effect on
the environment.
Unitizing and valuing energy correctly will solve the problem. Energy producers
could gradually ramp up carbon fuel prices to global market levels and avoid
bloody revolution by distributing units redeemable in energy to their
populations instead. Now consumers have a different calculation - they can use
energy profligately, as usual, and pay by redeeming their units, or they can
exchange their valuable units for accommodation, food, or maybe the Taiwanese
flat-screen satellite TV they've seen next door.
In this way, rather than trying to transition to renewables by attributing
value politically and administratively to intrinsically worthless CO2 we base a
transitional currency upon the intrinsic energy value of carbon.
Energy consuming nations, for their part, would gradually raise carbon fuel
prices through a carbon levy, to maybe $10 per gallon of gasoline or
equivalent, and they too would compensate consumers with units redeemable in
energy. Part of the levy would fund a Carbon Pool, which would be used to
invest directly - through interest-free "energy loans" - in renewable energy
(megawatts), and in energy savings (negawatts). Such a Carbon Pool would soon
be the source of an energy dividend to all.
The beauty about funding renewable energy and energy savings by unitizing them
is that value is received now for a unit which costs nothing to redeem in the
future. It's not Rocket Science.
From Copenhagen to Tehran
It was a subject of much amusement last October in Tehran that the financial
sanctions applied to Iran had the perverse effect of insulating them from the
financial meltdown then unfolding. Another perverse effect of US sanctions in
relation to information technology and communications is that they have held
back the Iranian population from the access to the outside world which most
observers consider would be in everyone's interests.
As for the currently suggested sanctions on gasoline, these would enable the
Iranian government to reduce gasoline consumption, which they urgently wish to
do, and would increase the profits to be made by those with privileged access
to and control over gasoline supplies. Of course, the Great Satan and their
European cohorts would get the blame: playing the nationalist card plays well
politically in most countries, and Iran is no exception.
As a policy, sanctions generally are pretty dumb, and gasoline sanctions for
Iran are extremely dumb, and Obama is not dumb.
The smart policy would be to assist Iran in making the transition from an
industrial economy to a knowledge economy, and from a carbon-based economy to
an economy based upon renewable energy. The key to the former is the pervasive
spread of convergent broadcasting and Internet, and to the latter it is to
unitize energy and make valuable what is currently wasted on a catastrophic
scale.
But note here that while renewable energy and energy savings are financially
viable in energy terms, the same cannot be said for nuclear energy through the
complete life cycle, including mining and extracting the uranium, disposing of
the waste, and safely decommissioning. Iran is currently learning the economic
facts of nuclear energy the hard way. The world should help the country to do
so, in full compliance with global agreements on non-proliferation.
I believe that Obama has a chance, in the next few months, to justify the
Norwegian Nobel Peace Prize committee's confidence in him by beginning to
address the global financial system, global policy on climate change, and
global peace, through one simple unifying theme: energy.
The US should use energy and knowledge diplomacy to lead the development of a
global energy economy, to which the key is the adoption of an Energy Standard.
Chris Cook is a former director of the International Petroleum Exchange.
He is now a strategic market consultant, entrepreneur and commentator.
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