Oil, Power, and the Petro Dollar

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Should oil produced in the US be priced lower than the market price?

Does that sound like an anti-free market idea? Well, it is.

I know I risk being thrown out of the free market temple for even whispering such heresy, but hear me out…

The thing is, free trade is an abstraction, an ideal, and it is never fully in play across the economic board throughout the world…

There are always exceptions,quid pro quos, and other “managed trade” aspects to markets.

One reason is because even if the US were a dedicated, open market, free-trade zone—which it has rarely if ever been--the rest of the world is definitely not, and never has been.

That reality has several key impacts upon prices, supply and demand, as well as social and geopolitical impacts…

In the ideal free market zone, goods and services would be free to move around to the places where they are needed the most...

That is, where demand is highest.

And where would that be?

Wherever the prices are the highest, of course.

Managed Trade

But that affect wouldn't last long, because suppliers would soon try to produce more of the good or service, forcing the price lower…

Causing rapid supply changes and potential interruptions.

Such disruptions happen often enough in a managed market; a free market environment would have even more.

That is just one of the reasons why major world trade is not based upon free tradeper se, but on managed trade.

This is especially true in the case of oil, which is not just another commodity, but a national security issue in more ways than you may know.

On the world market, the supply of oil is largely influenced by OPEC, a cartel of oil producers who provide 60% of the crude oil traded globally...

This managed production keeps oil supply levels stable, even in the face of shocks or interruptions, like the first Gulf War, or when Libya’s oil output dropped last year.

So, by keeping both price and supply levels steady and predictable, OPEC is doing us a real solid, right?

Well, yes and no.

A gallon of regular gas in the US costs around $3.90. Three years ago, it was about half that much. There are reasons for that cost rise, which I will go into in a moment…

But do you know what a gallon of gas costs in OPEC countries?

Not world prices, not by a long shot.

In Saudi Arabia, a gallon of regular gas is about 91 cents.

In Venezuela, it costs about 12 cents.

Clearly, it pays to be in OPEC, doesn’t it?

And clearly, we in the US are subsidizing cheap gasoline for consumers in OPEC in place like Saudi Arabia and Venezuela.

Which begs the question: “Why shouldn’t domestically-produced oil be sold to Americans at a lower price?

After all, there are very limited transport costs…

There is certainly a captive market…

And though it would be nice to pull a Hugo Chavez and price a gallon of gas at 12 cents, pricing it at say, $1.50 would certainly help out millions of Americans.

And, it would help the economy, right? It would leave Americans with more money to spend on other goods and services…

Which would raise demand for those goods and services, prompting more hiring, lowering unemployment.

This of course, would lower the burden on federal unemployment benefits and increase the tax revenues.

Sounds like a good idea, no?

Well it would be a good idea except that it goes against the current system that supports the US dollar, US super power status, and our very own American standard of living.

The Crude, Oily Truth

The deal the US has with OPEC is that all oil on the world market has to be bought in dollars…

It’s been that way for a long time and has brought great benefits to the US.

Throughout the 1960s, the US piled up debt from the Vietnam War and the Welfare State. It could no longer afford to convert dollars into gold whenever any country demanded it. So, Nixon took the US off the gold standard in 1971...

US leaders replaced it with the "black gold" standard in 1975.

In that agreement, in exchange for US protection of Saudi Arabia and its oil reserves, Saudi Arabia agreed to not only price oil exclusively in dollars…

But also agreed to hold its massive oil profits in US Treasuries.

That was a pretty good deal for the US.

The world runs on oil and must buy it in dollars. That in itself guaranteed a demand for US dollars from around the world…

And guaranteed a demand for US debt. And it still does so, today.

This is known as the petro-dollar system, and it has kept the US as the dominant force in the world.

In fact, black gold has single-handedly supported the US dollar, even in the face of huge deficits and massive money printing by the Federal Reserve.

And it is the Fed’s money printing, by the way, that has caused the price of oil to rise the past three years…

Since the price of oil is in dollars, with many more of them about in the world, the value of each declines on the world markets, where oil is bought and sold.

Hence, the price oil goes up in dollars.

Voila!

You have your oil price inflation.

But, since the world’s demand for oil keeps rising, and as long as oil must be bought with US dollars, there will be a demand for them, and the US will keep its spot as top economic and military dog in the world.

So, given that reality, if US-produced oil were to compete with OPEC pricing, it would certainly jeopardize the petro dollar system.

But at the same time, rising powers like Russia, China, and India, not to mention the mullahs in Iran, are chomping at the bit to dump the petro dollar system.

If they were ever to do so, the dollar would be finished...as in overnight.

Interest rates would rise so fast, your head would spin…

Hyperinflation would be an understatement...

And the US economy would collapse.

Oil-related products would become outrageously expensive.

Now the irony is that at some point in all of that chaos, the US economy would slowly recover, but on a much smaller scale since our money supply would be only a fraction of what it is today.

But, on the upside, US produced oil would most likely cost less than world market prices.

That would be a heckuva way to get there though, wouldn’t it?

And those are…The Gorrie Details.

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