Translated to English (PDF): German Federal Defense Forces’ study on Peak Oil and its implications (economic and geopolitical shifts and instability)
December 3, 2012 Leave a comment
Financial markets, monetary policy, geopolitics, precious metals, frauds, news and other delusions
November 30, 2012 Leave a comment
Certainly the folks at Gazprom are having a good snicker, reveling in the mockery that has been made of what should have been a landmark Ukraine-Spain gas deal that would have loosened Russia’s gas grip on Kiev.
Everyone wondered how Russia would respond to Ukraine’s attempt at gas independence. But this is what happens when you mess with Gazprom.
It was a horrible moment for Ukraine on Monday—all the more horrible because the whole event was televised—when the historical $1.1 billion deal it was about to sign with Spain’s Gas Natural Fenosa turned out to be fake.
Why was the deal historical? It would have secured $1.1 billion in investment for the construction of Ukraine’s first liquid natural gas (LNG) terminal on the Black Sea and a pipeline connecting the country’s vast gas network to the terminal.
More to the point, this would enable Ukraine to import by tanker up to 10 billion cubic meters of European gas at a price 20% cheaper than Gazprom. Even more to the point, it would be a major first step toward reducing Ukraine’s dependence on Russia.
Related Article: Europe Hot for Algerian Shale Gas
The deal was that investors had apparently signed agreements through a newly formed consortium for the construction of the $1.1 billion LNG terminal.
Here’s how the ill-fated signing ceremony went down:
While Ukrainian Prime Minister Mykola Azarov and Energy Minister Yuriy Boyko were cutting the ribbon on the construction of the terminal in a live televised ceremony, the country’s investment chief, Vladislav Kaskiv, was attending the official investment signing ceremony elsewhere, also via live video feed. This is where walls caved in very suddenly.
Signing on behalf of Fenosa was one Jordi Sarda Bonvehi. At the 11th hour, Fenosa let it be known that they have no idea who Bonvehi is and that he certainly does not represent the company in any way. Fenosa apparently had no idea it was signing a landmark agreement with Ukraine.
October 17, 2012 Leave a comment
US export to Iran jumps by third
Despite increased sanctions against Iran this year, US exports to the Islamic Republic have increased by about a third, bringing earnings nearly $50 million higher in the first eight months of this year than in all of 2011.
The US Census Bureau found that from January through August, exports to Iran totaled $199.5 million, an increase of about one third from last year’s $150.8 during the same period. Most of the exports came from the sale of wheat and other grains, which were valued at $89.2 million and comprised 45 percent of all US exports to Iran, Reuters reports.
Dairy products and medical equipment have also continued to enter Iran, with sales of milk products more than doubling since last year. The sale of such goods is permitted with a Treasury Department export license.
But had the US stopped exporting wheat to Iran, exports would have declined overall.
American companies have also complained that it is difficult for them to get paid for their sales, since many of Iran’s largest banks have been blacklisted by the US for involvement in terrorism or the country’s nuclear program. Some Americans, especially religiously affiliated or non-profit groups, have argued that banking sanctions could prevent humanitarian trade.
October 13, 2012 Leave a comment
The case is being heard at the Hague Civil Court in the Netherlands, with four villagers and the environmentalist group Friends of the Earth calling attention to the case.
Villagers say oil spills, dating back to 2005, from Shell’s pipelines have ruined fish ponds and farmlands in the Niger Delta, making it difficult for them to provide for their families.
“If you are drinking water you are drinking crude, if you are eating fish, you are eating crude, if you are breathing, you are breathing crude,” one of the farmers, Eric Dooh, said.
August 12, 2012 Leave a comment
(Reuters) – Asia’s major crude buyers are finding ways around tough U.S. and EU sanctions to maintain imports from Iran, suggesting that, for now, the worst may be over for the OPEC producer that is losing more than $100 million a day in oil export revenues.
China, India, Japan and South Korea buy most of the one million barrels per day of crude Iran is able to export despite financial, shipping and insurance sanctions aimed at curbing funds for its controversial nuclear program.
After a lull in imports in the middle of the year caused by Asian refineries reducing purchases as sanctions kicked in, analysts expect shipments to rise in August and September.
But on average, imports are likely to remain steady until the end of the year, unless the United States and the European Union come up with fresh sanctions to curb Iran’s earnings.
“The drop in Iranian oil exports has leveled out over the past couple months at roughly 1 million barrels per day below 2011 levels,” said Trevor Houser, a partner at the New York-based Rhodium Group and a former State Department adviser.
July 27, 2012 Leave a comment
Royal Dutch Shell Plc (RDSA), operator of Nigeria’s largest oil fields, agreed to invest about $4 billion with its partners in two oil and gas projects in the country.
The Shell Petroleum Development Co. of Nigeria, which Shell operates as a venture with Eni SpA (ENI), Total SA (FP) and the government, will develop the Forcados-Yokri project and the Southern Swamp associated gas gathering project, the company said today in a statement. The projects are expected to pump 100,000 barrels and 85,000 barrels of oil equivalent a day at peak, respectively.
Southern Swamp will “collect gas, reduce flaring, while there is associated oil production and it will produce gas for domestic use for power,” Chief Financial Officer Simon Henry told reporters today in London. Both of the projects “are very strategic” for Nigeria. The Forcados-Yokri fields are located in shallow waters in the west of the country.
Shell, based in The Hague, last month said it planned to invest about $3.5 billion in a natural-gas project in Imo state in the southeast. It is working on 17 gas projects in Nigeria, set to cost a total of $6 billion, according to the company.
July 19, 2012 Leave a comment
Is the petrodollar dead? Well, not yet, but the nails are being hammered into the coffin even as you read this. For decades, most of the nations of the world have used the U.S. dollar to buy oil and to trade with each other. In essence, the U.S. dollar has been acting as a true global currency. Virtually every country on the face of the earth has needed big piles of U.S. dollars for international trade. This has ensured a huge demand for U.S. dollars and U.S. government debt. This demand for dollars has kept prices and interest rates low, and it has given the U.S. government an incredible amount of power and leverage around the globe. Right now, U.S. dollars make up more than 60 percent of all foreign currency reserves in the world. But times are changing. Over the past couple of years there has been a whole bunch of international agreements that have made the U.S. dollar less important in international trade. The mainstream media in the United States has been strangely quiet about all of these agreements, but the truth is that they are setting the stage for a fundamental shift in the way that trade is conducted around the globe. When the petrodollar dies, it is going to have an absolutely devastating impact on the U.S. economy. Sadly, most Americans are totally clueless regarding what is about to happen to the dollar.
One of the reasons the Federal Reserve has been able to get away with flooding the financial system with U.S. dollars is because the rest of the world has been soaking a lot of those dollars up. The rest of the world has needed giant piles of dollars to trade with, but what is going to happen when they don’t need dollars anymore?
Could we see a tsunami of inflation as demand for the dollar plummets like a rock?
The power of the U.S. dollar has been one of the few things holding up our economy. Once that leg gets kicked out from under us we are going to be in a whole lot of trouble.
The following are 11 international agreements that are nails in the coffin of the petrodollar….
#1 China And Russia
China and Russia have decided to start using their own currencies when trading with each other. The following is from aChina Daily article about this important agreement….
China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.
Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.
“About trade settlement, we have decided to use our own currencies,” Putin said at a joint news conference with Wen in St. Petersburg.
The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.
July 16, 2012 Leave a comment
By William Engdahl Since around October last year, the price of crude oil on world futures markets has exploded. Different people have different explanations. The most common one is the belief in financial markets that a war between either Israel and Iran or the USA and Iran or all three is imminent. Another camp argues that the price is rising unavoidably because the world has passed what they call “Peak Oil”—the point on an imaginary Gaussian Bell Curve at which half of all world known oil reserves have been depleted and the remaining oil will decline in quantity at an accelerating pace with rising price.
Both the war danger and peak oil explanations are off base. As in the astronomic price run-up in the Summer of 2008 when oil in futures markets briefly hit $147 a barrel, oil today is rising because of the speculative pressure on oil futures markets from hedge funds and major banks such as Citigroup, JP Morgan Chase and most notably, Goldman Sachs, the bank always present when there are big bucks to be won for little effort betting on a sure thing. They’re getting a generous assist from the US Government agency entrusted with regulating financial derivatives, the Commodity Futures Trading Corporation (CFTC).
Since the beginning of October 2011, some six months ago, the price of Brent Crude Oil Futures on the ICE Futures exchange has risen from just below $100 a barrel to over $126 per barrel, a rise of more than 25%. Back in 2009 oil was $30.
Yet demand for crude oil worldwide is not rising, but rather is declining in the same period. The International Energy Agency (IEA) reports that the world oil supply rose by 1.3 million barrels a day in the last three months of 2011 while world demand increased by just over half that during that same time period.Gasoline usage is down in the US by 8%, Europe by 22% and even in China. Recession across much of the European Union, a deepening recession/depression in the United States and slowdown in Japan have reduced global oil demand while new discoveries are coming online daily and countries like Iraq are increasing supply after years of war. A brief spike in China’s oil purchases in January and February had to do with a decision last December to build their Strategic Petroleum Reserve and is expected to return to more normal import levels by the end of this month.
Why then the huge spike in oil prices?
July 16, 2012 Leave a comment
Brent crude gained 55 cents to USD 123.15 a barrel on Friday, after falling USD 2 in the previous session. The US crude also rose 49 cents to USD 105.60, Reuters reported.
Oil prices dropped on Thursday following a report that Britain and the United States were preparing to release their strategic oil reserves this year.
The report said that Britain had agreed to cooperate with the United States in tapping into its stockpiles in an effort to bring down oil prices, but volumes and exact timelines have yet to be determined.
Meanwhile, in the wake of the oil price hikes, gasoline prices shot up in both the United Kingdom and the United States, fueling anger among consumers.
Iran’s Oil Ministry announced on February 19 that it had cut oil sales to British and French firms. Tehran also announced it may also stop oil exports to more European countries.
The decision by Iran came in response to the EU’s oil embargo against the country.
European Union foreign ministers approved sanctions against Iran on January 23, including a ban on Iranian oil imports, a freeze on the assets of the country’s Central Bank within EU states and a ban on selling diamonds, gold, and other precious metals to Tehran.
July 13, 2012 Leave a comment
The US real trade balance has been bouncing around current level for the last two years –being neither a significant contribution nor a significant drag on growth. This is a significantly different picture than the nominal trade balance shows where the trade deficit is still widening.
Much of the apparent stability in the real trade balance has been oil as the real non-oil trade balance
has continue to widen and dampen economic growth.
On a net basis — imports less exports– oil imports have collapsed over the past few years. Net real petroleum imports are now only about half of their peak level in 2005..
Moreover, oil exports — both crude and refined products — are now equal to about one third of imports
as refiners are taking advantage of the lower price of West Texas Intermediate to take foreign markets away from foreign refiners that use the more expensive Brent crude. This data also demonstrates that all the wild claims about the need to open a new pipeline from Canada is just political posturing.
July 13, 2012 Leave a comment
India’s state-run insurance firms have agreed to provide each Indian ship owners carrying Iranian oil $50 million in cover. The state-run General Insurance Corp. will reinsure the cargoes.
The offer is much lower than the up-to-one billion dollar bids that European insurers would normally give per ship to cover third-party claims in the event of an oil spill or other accident.
“Our exposure would run into billions of dollars, but since there haven’t been many insurance claims in the last several years, we have taken a pragmatic view,” said Sabyasachi Hajara, the chairman and managing director of the state-owned Shipping Corp. of India, the country’s biggest shipper of crude from Iran.
On July 1, the European Union’s sanctions against Iran’s oil and financial sectors entered into effect.
The sanctions prevent all the EU member states from purchasing Iran’s oil or extending insurance coverage for tankers carrying Iranian crude.
July 11, 2012 Leave a comment
As the sanctions against Iran came into force on July 1, many European refineries rushed for Russian Ural crude to fill their stocks, pushing the oil prices up to $100 per barrel.
Urals is a high sulphur mix of heavy, high-oil of the Urals and the Volga region with light oil from Western Siberia. It has the same quality as Iranian crude, which makes it suitable replacement, experts say.
Many European importers have already replaced Iranian crude with that of Saudi Arabia, Iraq or Kuwait, but those who failed to do it beforehand are buying Urals as it is widely available in the spot market, the Financial Times reports. In January when the sanctions against Iran were discussed, France’s Total and Repsol of Spain also rushed to buy Urals to cut dependency on Iran.
“Russian crude supplies are more secure as they come through a pipeline. Russian exporters provide guarantees,”said Vyacheslav Bunkov, chief analyst at Aton Investment. “Meanwhile the situation in the Gulf could lead to supply disruptions, if military action begins. That’s why Urals became more attractive than Brent”.
Due to the rush Urals is trading 52 cents per barrel over Brent, while it used to trade $1.60 cheaper per barrel in mid-June. Brent prices also rallied supported by seasonal high demand and reduced supply because of Norway’s strike and recent disruption in Libya.
July 10, 2012 Leave a comment
Iran’s central bank and Oil Ministry have signed an agreement with the Iranian Oil, Gas & Petrochemical Products Exporters’ Association to secure delivery of 500,000 barrels per day to Europe, bypassing the EU sanctions.
The Iranian consortium is going to sell up to 20% of its average volumes to privately-owned European refineries, according to the Iranian Mehr agency. But the report disclosed few details and didn’t name the refiners involved.
“It is likely that because of international restrictions, we will give minor privileges or discounts to some of the buyers of our oil,” Hassan Khosrojerdi, the head of the union of exporters said.
As EU sanctions, banning member states purchasing Iranian oil or providing insurance for the shipments came in force July 1, Iran has seen its exports fall sharply. Last month Iran admitted for the first time that its oil exports have dropped 20-30% but denied exports were hit by sanctions. European countries used to import about 18% of Iranian exports.
“European oil companies were affected by sanctions, that’s why they agreed on delivery through a private consortium,”said Grigory Birg, chief analyst at Investcafe. “Meanwhile the EU authorities are concerned with Iranian nuclear strength, so they are likely to oppose the deal”.
Birg added that Europe and the US could impose further sanctions against Iran to stop its oil exports. “As the situation remains unclear, all news on Iran would significantly affect oil prices,” the analyst warned.
July 10, 2012 Leave a comment
TEHRAN - The in-situ reserves of crude oil in Iran’s Sardar Jangal gas field, located under Caspian Sea, are worth over $50 billion, the National Iranian Oil Company managing director announced on Monday.
July 6, 2012 Leave a comment
Kenya has cancelled plans to import crude oil from Iran following threats of sanctions, an official at the Kenyan energy ministry has said.
The outline deal signed last month was to import about 4m tonnes of oil from the Iranian National Oil Company.
But the US embassy in Nairobi had warned it was important to cut revenue to the Iranian government.
The US and the European Union have just tightened sanctions on Iran over concerns about its nuclear programme.
“Because of international pressure, we have withdrawn that understanding,” AFP news agency quotes Patrick Nyoik, the energy ministry’s permanent secretary, as saying.
On Sunday, a complete European Union oil embargo on Iran came into effect – in response to US legislation, which sanctions any entity that deals with Iran’s Central Bank.
July 3, 2012 Leave a comment
One of the most famous oil price forecasters BP Capital’s T. Boone Pickens talks about the prices for natural gas and oil. He speaks with Trish Regan on Bloomberg Television’s ‘Street Smart.’
For Mr Pickens sub-$100 oil prices for Brent Crude marked the bottom of the sell-off and the only way is up, though he sees the US president manipulating the WTI price with the release of strategic reserves this autumn. Brent Crude is broadly the price the Middle East earns from exports…
July 2, 2012 Leave a comment
Oil prices jumped sharply on Friday, breaking a bear market lock on the market as the European Union and Australian ban on buying oil from Iran came into effect today, a ban that Iran has always said would result in the closure of the Strait of Hormuz. Nymex crude surged nine per cent to $85-a-barrel on Friday, almost halving its decline this year.
The vital oil supply bottleneck in the Gulf of Arabia remained open today, although violence escalated in Syria with the attack on a funeral by the Syrian army leaving 85 dead.
Saudi up supplies
Saudi Arabia has raised oil supplies in recent months filling up stock piles around the world and has also re-opened old oil pipelines to the Red Sea bypassing the Strait of Hormuz for up to 20 per cent of its huge daily output.
The UAE for its part will open up a pipeline taking almost all its oil to Fujairah next month, bypassing the Arabian Gulf entirely. That said hydrocarbon exports from Kuwait, Qatar and Bahrain would be vulnerable to any Iranian action.
In recent months the oil price has fallen sharply due in part to increased supply to offset the Iranian threat but also because of demand destruction by the slowdown in China and the recessionary conditions in Europe. The US economy has also grown less than expected.
Some commentators have even called this the start of a new, prolonged bear market for black gold with $100 oil having proven a turning point for alternatives like the development of shale gas in the US, although that has mainly acted to polaxe natural gas prices in North America not the price of gasoline for cars.
June 30, 2012 Leave a comment
Following a 3-sigma fall yesterday, WTI crude has rebounded exuberantly amid the European ecstacy and the Iran Oil Embargo. Up almost 9% from late yesterday’s lows (a 6-sigma jump), it appears yet another squeeze is in play (perhaps from demand-pull on the back of Hillary’s unyielding national policy – oh yeah apart from China and Singapore). While the WSJ notes: “There’s no material price premium from the Iran issue”, it seems the potential for an epic short-squeeze – as Iran’s largest importer of Oil (cough China cough) is now exempt (and continuing to hoard) leaving refiners potentially tight on supply – as macro tail-risk is seemingly removed from the downside by the ‘nothing’ summit we just experienced.
WTI swings of outrageous fortune…
June 13, 2012 Leave a comment
WASHINGTON, June 11 (Xinhua) — The United States will exempt seven economies including India, South Korea and Turkey from the Iran oil sanctions, as a result of their significant reduction of oil purchase from Tehran, Secretary of State Hillary Clinton announced on Monday.
In a statement released by the State Department, Clinton said the seven economies are India, Malaysia, Republic of Korea, South Africa, Sri Lanka, Turkey and Taiwan, adding the decision was made because they “have all significantly reduced their volume of crude oil purchases from Iran.”
These economies will join the 11 countries, including Japan and some European countries, that were put on the exemption list in March.
U.S. President Barack Obama signed a bill at the end of last year, expanding U.S. sanctions against Iran to cover its central bank and financial sector, a move that allows penalties on foreign banks that settle oil imports with the Iranian central bank.
Clinton said the sanctions seek to prevent Tehran from acquiring a nuclear weapon and to force it to comply with its international obligations.
The law, however, offers waivers to firms from countries that significantly reduce their crude imports from Iran.
“Today’s announcement underscores the success of our sanctions implementation,” said Clinton.
“By reducing Iran’s oil sales, we are sending a decisive message to Iran’s leaders: until they take concrete actions to satisfy the concerns of the international community, they will continue to face increasing isolation and pressure,” said the U.S. diplomat.
June 13, 2012 Leave a comment
Washington has granted waivers to sanctions on Iranian oil imports to several countries, leaving China the only major oil importer subject to US penalties. Chinese oil giant Sinopec announced it will not raise imports in an effort to allay sanctions.
The US government added India, South Korea and four more nations to the list of countries exempt from the sanctions on Monday.
Ten EU nations and Japan were granted waivers in March to US financial penalties.
The US considers that these countries have made a considerable effort to lower imports of Iranian crude with a view to stifling the Islamic Republic’s lucrative oil industry and curtailing its nuclear program.
US supporters of the sanctions against Iran say China has been receiving clandestine cargoes of Iranian oil which have had their tracking signals disabled.
Iran maintains that its nuclear research program is purely for civilian purposes, but the US and Israel insist the country is in the process of developing atomic weapons.
A new set of heavy sanctions may be introduced on June 28 by the US aimed at putting further pressure on Iran.
“By reducing Iran’s oil sales, we are sending a decisive message to Iran’s leaders: until they take concrete actions to satisfy the concerns of the international community, they will continue to face increasing isolation and pressure,” said US state secretary Hilary Clinton in a press release on Monday.
June 12, 2012 Leave a comment
TEHRAN, June 11 (UPI) — The Iranian government said it introduced former Petroleum Minister Gholam Hosain Nozari as its candidate for the top position at OPEC.
The Organization of Petroleum Exporting Countries meets Thursday in Vienna for a regular meeting. Iran said it would nominate Nozari to replace outgoing OPEC Secretary-General Abdallah el-Badri, whose term expires at the end of the year, reports the Iranian Oil Ministry’s official Web site.
Iran, a price hawk and top OPEC producer, is facing an embargo on crude oil imports from members of the European community.
Tehran has said it favors an oil price of around $100 per barrel. Oil prices, however, are on a four-week decline and closer to $80 per barrel.
April 14, 2012 Leave a comment
Chinese shipyards are to deliver 12 supertankers to Iran, with the final vessel ready by the end of 2013. These could help alleviate logistical difficulties caused by US and European sanctions against Iranian oil exports.
The first of the very large crude carriers (VLCCs) built for Iranian oil shipping operator NITC is expected to arrive in May, reports Reuters, citing industry executives. Seven more are to be delivered over the year, with the remaining four to be commissioned by the end of 2013. Two shipyards are building the supertankers under contracts worth $1.2 billion.
The supertankers will significantly expand NITC’s shipping capabilities, cushioning the impact of sanctions.
Starting from July, the EU will prohibit European insurers and reinsurers from indemnifying tankers carrying Iranian crude oil anywhere in the world, which will discourage maritime firms from dealing with Iran.
Buyers of Iranian oil in China, India, Japan and South Korea hope their governments will step in and provide sovereign guarantees to allow Asian insurers to replace lost European coverage. Another option would be for Iran itself to provide maritime insurance for foreign shipping companies.
But the addition of 12 VLCCs capable of carrying 24 million barrels of crude to NITC’s current fleet of 39 ships with a total capacity of 61.5 million barrels of crude will at least partially dampen the expected cut.
The tankers however will not allow Iran to rely solely on its own fleet to cover its entire export of 2.6 million barrels per day. Roughly 17 such ships would be needed for this, Reuters estimates.
The 12 supertankers were commissioned at Waigaoqiao Shipbuilding and Dalian Shipbuilding Industry, with each shipbuilder taking an order for six ships. NITC, the National Iranian Tanker Company, was privatized in 2000 and is now owned by three Iranian pension funds.
The US and EU are trying to cut the Islamic Republic’s oil export through a ban on the import of its crude and financial sanctions against Iran’s trade partners. Their stated goal is to force Tehran to freeze its controversial nuclear program.
April 5, 2012 Leave a comment
Unlike Turkey and Japan, who have played ball just enough to still be able to buy Iranian oil but avoid U.S. sanctions, India is pretty much moving ahead unilaterally, and publicly, flouting the American’s desire to isolate Iran.
Clearing the way for oil refiners to pay Iran in Indian rupee, the Union Budget has exempted the payments made for crude oil purchased from the Persian Gulf nation, from any local tax.Iran had in January agreed to accept 45 percent of the value of its oil exports to India in Indian rupees but the scheme could not be implemented due to taxation issues.It was feared that the money paid to National Iranian Oil Co (NIOC) may be considered as income generated by Iranian firm in the country and liable to be taxed. The withholding tax was up to 40 percent, which neither NIOC nor the Indian refiners wanted to pay.
Turkey continues to play both sides in this moving billions of dollars for the Indians to Iran as an intermediary. For how long though, apparently is up to the U.S. State Department as Turkey has made it clear that once the pressure gets too high, they will cut India off.
Talks between the U.S. and India began on Monday with this issue front and center in the negotiations. Given the current climate after the BRICS Summit and this latest move to allow refiners the tax exemption its pretty obvious that India’s stance is quite resolute, a stance the Americans do not generally tolerate from their allies.
March 23, 2012 Leave a comment
The largest oil exporter in the Middle East has teamed up with the second largest consumer of oil in the world (China) to build a gigantic new oil refinery and the mainstream media in the United States has barely even noticed it. This mammoth new refinery is scheduled to be fully operational in the Red Sea port city of Yanbu by 2014. Over the past several years, China has sought to aggressively expand trade with Saudi Arabia, and China now actually imports more oil from Saudi Arabia than the United States does. In February, China imported1.39 million barrels of oil per day from Saudi Arabia. That was 39 percent higher than last February. So why is this important? Well, back in 1973 the United States and Saudi Arabia agreed that all oil sold by Saudi Arabia would be denominated in U.S. dollars. This petrodollar system was adopted by almost the entire world and it has had great benefits for the U.S. economy. But if China becomes Saudi Arabia’s most important trading partner, then why should Saudi Arabia continue to only sell oil in U.S. dollars? And if the petrodollar system collapses, what is that going to mean for the U.S. economy?
Those are very important questions, and they will be addressed later on in this article. First of all, let’s take a closer look at the agreement reached between Saudi Arabia and China recently.
The following is how the deal was described in a recent China Daily article….
In what Riyadh calls “the largest expansion by any oil company in the world”, Sinopec’s deal on Saturday with Saudi oil giant Aramco will allow a major oil refinery to become operational in the Red Sea port of Yanbu by 2014.
The $8.5 billion joint venture, which covers an area of about 5.2 million square meters, is already under construction. It will process 400,000 barrels of heavy crude oil per day. Aramco will hold a 62.5 percent stake in the plant while Sinopec will own the remaining 37.5 percent.
At a time when the U.S. is actually losing refining capacity, this is a stunning development.
Yet the U.S. press has been largely silent about this.
But China is not just doing deals with Saudi Arabia. China has also been striking deals with several other important oil producing nations. The following comes from a recent article by Gregg Laskoski….
China’s investment in oil infrastructure and refining capacity is unparalleled. And more importantly, it executes a consistent strategy of developing world-class refining facilities in partnership with OPEC suppliers. Such relationships mean economic leverage that could soon subordinate U.S. relations with the same countries.
Egypt is building its largest refinery ever with investment from China.
Shortly after the partnership with Egypt was announced, China signed a $23 billion agreement with Nigeria to construct three gasoline refineries and a fuel complex in Nigeria.
Essentially, China is running circles around the United States when it comes to locking up strategic oil supplies worldwide.
And all of these developments could have tremendous implications for the future of the petrodollar system.
If you are not familiar with the petrodollar system, it really is not that complicated. Basically, almost all of the oil in the world is traded in U.S. dollars. The origin of the petrodollar system was detailed in a recent article by Jerry Robinson….
In 1973, a deal was struck between Saudi Arabia and the United States in which every barrel of oil purchased from the Saudis would be denominated in U.S. dollars. Under this new arrangement, any country that sought to purchase oil from Saudi Arabia would be required to first exchange their own national currency for U.S. dollars. In exchange for Saudi Arabia’s willingness to denominate their oil sales exclusively in U.S. dollars, the United States offered weapons and protection of their oil fields from neighboring nations, including Israel.
By 1975, all of the OPEC nations had agreed to price their own oil supplies exclusively in U.S. dollars in exchange for weapons and military protection.
This petrodollar system, or more simply known as an “oil for dollars” system, created an immediate artificial demand for U.S. dollars around the globe. And of course, as global oil demand increased, so did the demand for U.S. dollars.
Once you understand the petrodollar system, it becomes much easier to understand why our politicians treat Saudi leaders with kid gloves. The U.S. government does not want to see anything happen that would jeopardize the status quo.