Two odd things appear to be happening in tandem at the moment: the $US is rising, and the price of oil is falling.
I say odd, but there are plenty of available explanations for these parallel events. Forbes, for example, says there is a growing feeling among US monetarists that a cheapened Dollar increases the likelihood of its decline in power as both a reserve and oil-based transaction (‘petrodollar’) currency. MBN suggests that investors’ expectations that the Fed will raise interest rates are driving the desire to be early on the bandwagon. They also add that ‘wobbly growth data coming out of China, Japanese consumer demand that has dried up since its sales tax hike in April, and a Eurozone GDP standstill’ are other key factors in its rising value. The FT (as the Pinkun would) says it’s all down to US growth, and the coming recovery there. And one or two pundits think the Hong Kong democracy riots have caused a move out of the Yuan.
I’m unconvinced. First, monetarist academics never moved a single currency market in the entire history of such things. Second, the US debt is growing, and its deficit is far from under control. Third, there are events lying ahead in the not-too-distant future (the petrorouble for one) that do not inspire confidence in the Buck’s long-term viability. Third, wobbly or not, the Chinese growth rate remains at around 7%….and following its energy deal with Moscow, in a near-to-pole position. Fourth, the euro has been a basket case for four years, but it didn’t push the Dollar up before. Fifth, US ‘growth’ is a mirage that includes QE, drugs, hookers, and very probably State bankruptcies as evidence of ‘growth’….along with payroll data that, for those with half a brain, has been discredited for some considerable time. Sixth, there has never, ever been a US recovery without firm data supporting a rising property market: for once, S&P, the Economist and Business Week are all firmly of the view that recent climbs in US house values have fizzled out and gone into reverse.
As for the price of oil, here too at first sight the two reasons being offered look sound. We are in a global slump, and so demand has fallen off. Second, there’s a glut of the stuff: although the Saudi production cuts to stop price falls went through, more oil from Iran, Iraq, and Nigeria has come onstream plus record increases in U.S. oil production via the shale boom.
But once again I’m unconvinced. The smart money knows that, in real terms – and minus neoliberal spin-bollocks – we’ve been in a global depression for at least two years…and heading for one during the preceding three years. But the oil price collapse is a very recent phenomenon: crude prices have declined almost $21 (18%) from the 2014 peak of $115/barrel on June 19.
What’s more, than are many examples of volatile oil dips and highs unrelated to supply. Here’s one:
Obviously, the plunge of 2008/9 is directly linked to Bank Bailout on Wall Street. But from 2008-10 it zooms back up again, and blips down again in 2012. Production remains remarkable steady throughout the saga.
And as for the ‘shale boom’….well, oilcos are backing away from shale in the US: diminishing returns per well are forcing them to.
Let’s go back to earlier this year, and events either side of the month of June.
On 27th February, pro-Kremlin armed men seized government buildings in the Crimean province of Ukraine. Five days later, a convoy of Russian troops made for the regional capital of Crimea. By March 6th, Crimea’s parliament voted unanimously in favour of joining Russia – and the city council of Sevastopol in Crimea announced it was to become Russian immediately. On March 18th, President Putin signed a treaty absorbing Crimea into Russia – the first expansion by the Kremlin since World War II.
On May 21st, US Vice President Joe Biden ominously remarked that the US “must be resolute in imposing costs on Russia for its actions in Ukraine.
Then, on June 16, the Kremlin halted all gas deliveries to the Ukraine. And on June 19th, NATO claimed to have evidence of a renewed Russian military build up along the border with Ukraine.
Also on June 19th, the oil-price begins its tumble. Eleven days later, the euro starts its rapid decline versus the $US:
1. In any deal involving oil anywhere in the World, the recipients must pay in Dollars under the ‘petrodollar’ system. If the Dollar is gaining value rapidly, then that makes oil more expensive….less attractive to the punter – but with no additional margin for the Kremlin.
2. However, if the oil price drops like a stone, then the real value of the Kremlin’s profit falls and that reduces Russian GDP.
Do both together, and you have a fist closing around Putin’s balls. Further,
3. One thing Vladimir Putin has done consistently to maintain his populist power is import massively as and when things screw up…grain harvests, vegetable blights and so forth. A rising oil price made funding this relatively easy. After the Ukraine situation blew up, he retaliated against US/EU/UK sanctions by banning food imports. Now he finds himself with falling oil revenue, and falling oil margins….and thus popularity ‘bought’ by importing, as and when it resumes, will be horrendously expensive.
It looks to me like the US is doing to Russia what it did to Iran: using its reserve currency and petrodollar status to exert pressure. Russia’s central bank has not been slow to spot this: only yesterday, Reuters noted that:
‘…Russia’s central bank said [today] it is working on measures to support the economy should oil prices fall by as much as a third or more, showing growing concern as the ruble slides….’
I would also contend, in closing, that the IMF is an obvious creature of the US. It too is applying pressure by implying strongly that Russia’s economic outlook is not stable: the Fund halved its Russian growth forecast for 2015 to just 0.5% a few days ago.
That strikes me as an unintelligent forecast given the increasing likelihood of the petroruble’s creation…which in and of itself is, of course, a weapon designed to dilute American power.
One final point, slightly off-topic. Given the likelihood of oil’s drop continuing (manipulated or otherwise market-influenced) why on earth does Britain need fracking to produce affordable oil? Surely, buying both spot and futures now would obviate the investment, chaos, and water-threat required to commence this ecologically idiotic – and dead-end – form of getting at oil?