RSS

Musings on the Middle East

26 Aug

Middle-East Meets Far-East (courtesy Google Images)

Middle-East Meets Far-East (courtesy Google Images)

The Washington Times recently published an article entitled “China will surpass U.S. in oil imports; shift in supply and demand could transform geopolitics.”  According to that article,

 

“China will become the world’s largest importer of crude oil in October, surpassing the U.S. for the first time as the Asian giant’s rising consumer class of drivers grows increasingly thirsty for fuel, the U.S. Energy Information Administration is projecting.

“China already is the largest importer of oil from the troubled Middle East, taking away a distinction that plagued the U.S. since the 1970s. Its ascendance as the world’s largest importer—even as U.S. dependence on Middle Eastern oil declines to negligible levels—could transform regional and world politics as the focus of global defense efforts for decades has been keeping open the vital oil shipping lanes leading from the Persian Gulf.”

 

Imports,” “importer,” “largest importer,” etc.

Insofar as China is becoming the world’s “largest importer” of crude oil, China is also becoming the nation most dependent on the import of crude oil.

Insofar as China is becoming “the largest importer of oil from the troubled Middle East,” China is also becoming the nation most dependent on Middle East stability.

Thus, China has a growing interest in the Middle East.

Insofar as “U.S. dependence on Middle Eastern oil declines to negligible levels,” the U.S. also has a declining interest in the Middle East.  If The US is no longer dependent on Middle East oil, then the US has less obvious reason to keep the Middle East stable, and less obvious reason to involve itself militarily in the Middle East.  As the U.S. loses its need for oil imports, it will tend to leave the Middle East and thereby create a “power vacuum”.

Insofar as China is increasingly dependent on Middle East oil, then China will have a vested interest in maintaining stability in the Middle East and will “naturally” be drawn into the “power vacuum” that follows the U.S. departure.  That implies that China might become the primary “policeman” in the Middle East.  If so, we might therefore expect to see a growing Chinese military presence in the Middle East.

•  If China is increasingly dependent on Middle East oil, and the US wants to cause China some harm, the US could soon have an interest in destabilizing the Middle East.

If China enters the Middle East with military force, which nations will the Chinese support or oppose?  Which nations, if any, will continue existing alliances with the US?  Which nations will quickly shift their support to China?

What will happen to Israel?  If the U.S. loses its interest in Middle East oil and the petro-dollar, our government’s only remaining interest in the region might be Israel.  How likely is it that our relationship to Israel will remain as strong as it’s been over past 65 years?

What will happen to Saudi Arabia—that’s relied on US support and protection for the past 40 years?  Will it be attacked by neighboring Muslim countries or will it be split by an internal civil war?

The Washington Times was right.  If the U.S. interest in Middle East oil has become negligible, and China has become the single largest importer of Mid-East oil, then these changes could have a dramatic impact on “geo-politics”.

But if you like to speculate, that potential impact could be much greater than we’ve so far considered.

•  Since A.D. 1971, the U.S. presence in the Middle East wasn’t only based on our dependence on imported crude oil.  It was also based on the U.S. dollar’s status as the world’s “reserve currency”.  The dollar’s status on world reserve currency was based on deals cut with Saudi Arabia and OPEC nations in the early 1970s whereby those oil producing nations guaranteed to sell their crude oil for only U.S. dollars.  As a result, the U.S. (no longer backed by gold after A.D. 1971) became effectively “backed” by crude oil.  Any nation that needed to buy crude oil on the international market had to first acquire some “petro-dollars” to do so.

The resulting international demand for “petro-dollars” caused the intrinsically-worthless fiat dollar to acquire an illusory value that allowed it to be the world reserve currency and backbone for global free trade.

Thus, when Saddam Hussein began selling Iraqi crude for euros in A.D. 2,000, the U.S. trumped up some “weapons of mass destruction” pretext and invaded Iraq in A.D. 2003.  Why?  Because the U.S. government (and even the New World Order) had a profound interest in compelling all oil-producing nations to continue to sell their crude oil only for U.S. “petro-dollars”.  If Iraq was allowed to sell it’s crude for currencies other than petro-dollars, the U.S. fiat dollar would lose the illusion of value.

And that’s just what happened.  As measured by the U.S. Dollar Index, since A.D. 2000, the value of the U.S. fiat dollar has fallen from 125 to the current level of about 82.  We invaded Iraq to protect the U.S. “petro-dollar” but became so ensnared in that war that we couldn’t stop other OPEC nations from also beginning to sell their crude oil for currencies other than the fiat dollar or even for gold.

So it’s interesting that the U.S.—which waged an 8 year war in Iraq in an unsuccessful attempt to protect the fiat dollar—is now losing its energy dependence on Middle East oil and may be preparing to depart from the Middle East.  Does our government’s apparent departure from the Middle East signal that we are not only losing our interest in Middle East oil, but may also be losing our interest in maintaining the fiat dollar as a “petro-dollar” and world reserve currency?

I can’t see how the “petro-dollar” can’t avoid a further dramatic decline in perceived value if our government abandons its role as the Middle East’s policeman.  Once we’ve left the Middle East, nations of that region will sell their crude oil for any currency they like—and whatever illusion of U.S. dollar value might otherwise remain, will disappear.

•  But, coincidentally—at the same time the U.S. may be leaving the Middle East and may also be accepting another huge decline in the value of paper, fiat dollars—China may be entering the Middle East with enough dependency on Middle-East oil to replace the U.S. military presence with a Chinese military presence.

Plus, there’s been speculation that China—which has recently accumulated several thousand  tons of gold—may back its currency (the yuan) with gold and thereby provide a new “world reserve currency” sufficient to once again sustain Global Free Trade.  But whether China or anyone has enough gold to back a new, world reserve currency is questionable.

But, what if China cut deals with Saudi Arabia and OPEC nations whereby the world’s oil producing nations would all agree to sell their crude for only Chinese yuan.  Then the Chinese yuan could become the world’s “petro-currency” and world reserve currency—and nobody would have to create another currency backed by gold.

Thus, it’s at least conceivable that the U.S. may be about to abandon both the Middle East and the “petro-dollar” at the same time that China is entering the Middle East and might even be on the verge of creating a new “petro-yuan” and a new “world reserve currency”.

Of course, it may be that China will first issue a gold-backed yuan and the world will beat a path to its doorstep.  But after a few years of a gold-backed yuan and establishment of the yuan as the world reserve currency, could we expect China to cut some deals with the world’s oil-producing nations whereby China guaranteed their security so long as they guaranteed to sell their crude oil only for yuan?

I know.  The probability that the Chinese yuan will become the next “world reserve currency” isn’t very high.  I get that.

But I also know that the probability that the US fiat dollar will remain the “world reserve currency” for even five more years is also fairly low.

And I’ll bet that no matter what, there’s going to be a “world reserve currency”.  If so, and if the dollar is going, what might be coming besides the Chinese yuan–and gold?

So I see four possible “world reserve currencies”:

1.  U.S. petro-dollar;

2.  Chinese yuan backed by gold;

3.  Chinese yuan backed by petroleum;

4.  Gold bullion.

I doubt that the US petro-dollar can last much longer.  I doubt that the Chinese would back their yuan with gold.  A Chinese petro-yuan is an improbable but intriguing possibility.  Gold bullion strikes me as an inevitability–not necessarily the first replacement for the petro-dollar, but probably the ultimate replacement.

Interesting times, no?

 
7 Comments

Posted by on August 26, 2013 in Banking, Currency Wars, Money, US Dollar

 

Tags: , , ,

7 responses to “Musings on the Middle East

  1. Mike

    August 26, 2013 at 5:22 PM

    Smart article and for me explains our rush to war with Syria/Iran which will pull China and Russia into the mix. You catalyzed the current administrations push for more military action by showing me the possible outcome. Hmmm, yes we live in interesting times and by the way wasn’t statement originally a curse?

     
  2. Adask

    August 26, 2013 at 5:39 PM

    “Interesting times” is a Chinese curse and we might hope that it only curses the Chinese. For those of us who are not Chinese, “interesting times” may only mean that we’ll have something to think about besides Miley Cyrus.

     
  3. Jetlag

    August 26, 2013 at 6:24 PM

    FYI, the world’s reserve currencies as of now:

    US dollar: 62%
    Euro: 24%
    Pound sterling: 4%
    Japanese yen: 4%

    If the Middle East switched to yuan, this would surely put that currency on the list.

    The recent purchases of gold by the Chinese, and the upcoming BRICS Development Bank as competition to the IMF and World Bank, suggest a new reserve currency could be in the works.

    http://en.wikipedia.org/wiki/BRICS_Development_Bank

     
  4. PETER

    August 27, 2013 at 9:30 AM

    Jetlag, there should new developments coming out of the G-20 meeting in early September, the meeting will not be in attendance by the U.S. finance ministers.This may be evidenced by of one of the developments, that being isolation of the U.S., as in kicked to the curb. The world may make us convert our dollars into the new Gold Trade Notes in order to purchase in the world markets. also, look for the development of a natural gas coop with Gazprom in control, with OPEC merging into that structure.

    Al, you mentioned something on Melody’s program, if I can in any way help please let me know.

     
    • Adask

      August 27, 2013 at 9:54 AM

      HI Peter, thanks for your concern and offer of assistance. However, while I lost most of what I had, everything I really need was still preserved. I have my computers, some clothes, firearms, etc. If the fire had happened one day later, I would’ve lost 20 years worth of computer files. That would’ve stung. But, as it is, I just lost a bunch of “stuff” that I’d been dragging around for years. In some regards, the loss felt liberating. My personal possessions are now a little more than that of a college student. But I was and am amazed that the Good LORD preserved everything I really needed. It was all the miscellaneous stuff that went up in smoke.

      Thanks again.

       
  5. Joe

    August 27, 2013 at 9:57 AM

    All moot now that hydrogen on demand derived from H2O is a reality.

     

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s