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Running on Empty, Part IV

Running on Empty, Part IV

How the War between Russia and Ukraine is Destroying the Petrodollar System

Welcome to Part IV of Running on Empty, my four-part analysis of the Petrodollar system.

Part I of this series explained that the US dollar is the world’s first reserve currency that is not backed by precious metals. Instead it is backed by other people’s oil. Because of a secret treaty between the US and Saudi Arabia, petroleum can only be purchased with dollars. Every country needs oil, so everyone country needs dollars and sells imports to the US to get them. Demand for dollars has made the USD the primary American export, allowing the US to deindustrialize and financialize its economy.

Part II explained how the petrodollar has grossly enriched American asset holders (stocks, bonds, and real estate) and painfully impoverished American wage earners. Under the petrodollar system, dollars are created by private banks for profit. These dollars are recycled into the economy by OPEC nations, causing stocks, bonds, and real estate to rise. This profitable exchange is enforced by American military might, which punishes any country that seeks to exit the petrodollar system.

Part III explained that for the petrodollar system to function, America needs to be able to project power worldwide to secure international trade and enforce the system. America secures global commerce and projects military power by commanding the World Ocean, by which 90% of all goods are trafficked. To overcome America’s naval supremacy, both Russia and China have sought to establish control of the World Island, the Eurasian supercontinent that houses most of the world’s population and resources. The Russo-Ukraine War is a proxy war between the uncontested master of the World Ocean (America) and the would-be masters of the World Island (China and Russa).

…click on the above link to read the rest of the article…

Running on Empty, Part II

Running on Empty, Part II

How the Petrodollar Poisoned Foreign Policy with Financial Profiteering

Welcome to Part II of Running on Empty, my three-part analysis of the Petrodollar system. Part I of this series explained what the petrodollar system is, how it came to be, and what its financial effects have been on the United States. In Part II, I’ll explain the petrodollar’s implications for foreign policy. In Part III, I’ll show how those implications paved the way for the Russo-Ukraine War, and why that’s causing the system to break down.

America’s Chief Export is the US Dollar

As explained in the previous installment, the petrodollar system is based on an agreement between the US and Saudi Arabia. Under the terms of the deal, the US guarantees the security of Saudi Arabia and in exchange, Saudi Arabia guarantees that all petroleum is sold by OPEC for US dollars, with the US dollars re-invested into America via petrodollar recycling. The result: Since everyone needs petroleum, everyone needs US dollars. Oil replaces gold as the hard backing for the dollar. 1

Since the petrodollar system was put in place, the US has enjoyed a comparative advantage in manufacturing currency that no other nation enjoys. Under conditions of free trade, a country produces and exports more of a good for which it a comparative advantage, and produces less and imports more of the goods for which it doesn’t. And that’s what has happened: Since the petrodollar system was put in place in 1973, America has produced more and more dollars and produced less and less of everything else. The dollar is today our nation’s #1 export.

How large is the circulation of US dollars? As of April 2022, the American money supply, which economists call M2, stands at $21,728 Billion Dollars. M2 includes three types of money:

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Saudi Arabia warns that the world is running out of energy capacity: ‘I have never seen these things’

Saudi Arabia warns that the world is running out of energy capacity: ‘I have never seen these things’

Russian oil
The EU is planning a complete ban on Russian oil imports. 
iznashih/Getty Images
  • Saudi Oil Minister Prince Abdulaziz bin Salman warned Tuesday that the world is “running out of energy capacity at all levels.”
  • “I am a dinosaur, but I have never seen these things,” he said at a conference.
  • A UAE official also warned that more investment is needed in the energy sector for OPEC+ to deliver sufficient supplies.

The amount of unused capacity that the world can tap to produce more energy products is running out, warned top oil ministers.

Referring to recent price spikes for refined products, Saudi Oil Minister Prince Abdulaziz bin Salman said at a Tuesday conference, “I am a dinosaur, but I have never seen these things,” according to Bloomberg.

“The world needs to wake up to an existing reality. The world is running out of energy capacity at all levels,” he added.

Prices for crude oil have surged more than 50% from a year ago to roughly $105 a barrel. But prices for refined products like diesel have soared even higher. In the US, diesel prices are up 78% to $5.50 a gallon, Bloomberg data shows.

The United Arab Emirates’ oil minister said OPEC+ may not be able to deliver on sufficient energy supplies down the line without more investments.

“We’ve been warning about the lack of investment,” Suhail al Mazrouei said in an interview in Abu Dhabi, Bloomberg reported. “That lack of investment is catching up with a lot of countries.”

Mazrouei added that “politicization” of the oil market has pushed supply prices higher.

…click on the above link to read the rest of the article…

Collapse Is Happening Before Our Eyes

Collapse Is Happening Before Our Eyes

Analysts and authors, myself included, have been warning about the collapse of the dollar as the global reserve currency for years. I described this prospect in my first book, Currency Wars (2011), and in several other books in the years since.

This process can take many years. For example, the decline of sterling as the leading global reserve currency played out over 30 years from 1914 (the beginning of World War I) to 1944 (the Bretton Woods conference).

Still, events today are playing out so quickly that the collapse is happening in front of our eyes.

It’s no longer a matter of a major event on the horizon; it’s occurring in real-time. Russia has just linked the ruble to gold at a rate of 5,000 rubles to one gram of gold. China is discussing with Saudi Arabia the prospect of paying for oil in yuan.

Israel is likewise considering taking yuan in exchange for its high-tech exports. China and Russia are creating new payments systems to avoid U.S. sanctions. You get the point.

Foreign Central Banks Aren’t Dumb

Central banks have been net buyers of physical gold since 2010. Countries all over the world are considering dumping dollars for fear that they will be next on the list to have their dollar assets frozen or seized the way the U.S. seized the dollar-denominated assets of the Central Bank of Russia.

That makes sense. What’s the point of holding dollars in your reserve positions if the U.S. can freeze those accounts on a whim? Americans tend to take dollar strength for granted, but that’s a mistake. It’s helpful at times like this to get a foreign perspective.

…click on the above link to read the rest of the article…

The Petrodollar Collapse is Here! Disaster for U.S.

The Petrodollar Collapse is Here! Disaster for U.S.

US dollar’s dominance in oil markets may face challenge as Saudis reportedly eye yuan-based sales deal with China

US dollar’s dominance in oil markets may face challenge as Saudis reportedly eye yuan-based sales deal with China

HANGZHOU, CHINA - SEPTEMBER 04: Chinese President Xi Jinping (right) shakes hands with Saudi Arabian Deputy Crown Prince and Minister of Defense Mohammed bin Salman bin Abdulaziz Al Saud to the G20 Summit on September 4, 2016 in Hangzhou, China. World leaders are gathering in Hangzhou for the 11th G20 Leaders Summit from September 4 to 5. (Photo by Lintao Zhang/Getty Images)
Saudi Crown Prince Mohammed bin Salman and Chinese President Xi Jinping. 
Lintao Zhang/Getty Images
  • Saudi Arabia is in talks to sell oil to China and be paid in yuan, according to the Wall Street Journal.
  • For nearly 50 years, the world’s top oil exporter has traded crude exclusively in US dollars.
  • Relations between Saudi Arabia and the US have deteriorated under the Biden administration.

Saudi Arabia is in talks to sell oil to China and be paid in yuan instead of dollars, according to a Wall Street Journal report.

About 80% of global oil sales are done in dollars, and Saudi Arabia has conducted its deals exclusively in the greenback since 1974. So if a Saudi-yuan deal were to be made, it would bolster China’s currency at the expense of the dollar as Beijing looks to challenge US leadership in financial markets.

The likelihood of a potential deal between Saudi Arabia and China has picked up recently, according to the Journal. The longtime Mideast ally has grown unhappy with the US due to the Biden administration’s reluctance to do more in the Yemen civil war and its push to revive the Iran nuclear deal.

In 2020, Biden also promised to make Saudi Arabia a “pariah” over the murder of a journalist. And since becoming president, he has made it clear that he doesn’t consider Saudi Arabia as an ally, but rather as a partner.

What’s more, Saudi Crown Prince Mohammed bin Salam reportedly rejected a request for a call with Biden to discuss Ukraine and boost oil production amid the West’s sanctions against Russia.

…click on the above link to read the rest of the article…

Saudis, Russians Consider Pausing Oil Production Increases In Retaliation To Biden SPR Release

Saudis, Russians Consider Pausing Oil Production Increases In Retaliation To Biden SPR Release

When commenting on yesterday’s SPR release announcement by the Biden admin and several assorted hanger-on nations – which has backfired spectacularly sending the price of oil soaring now that the rumor can no longer be sold so the news has to be bought in line with every single SPR release in the past…

… we said that not only was the release far to smmal, but that in retaliation for the SPR release, “OPEC could easily consider halting its production hikes to offset the detrimental SPR impact of lower oil prices on the needed recovery in global oil capex, likely justifying such action as prudent in the face of COVID demand risks.

Well, fast forward just a few hours when moments ago the WSJ reported that the leaders of OPEC+ and the world’s two top oil producers Saudi Arabia and Russia, are considering a pause to their recent efforts to provide the world with more crude, citing to people familiar with those discussions. The move, as expected, is in retaliation to Washington releasing tens of millions of barrels of oil in an effort to lower prices.

As a reminder, OPEC+ is meeting next week to review the long-term deal they reached earlier this year to boost their collective oil output – the deal involves boosting output by 400,000 barrels a day each month through next year, until the group hits its pre-pandemic pumping level and follows a sharp cut in output in 2020 as demand evaporated amid Covid-19 lockdowns.

However, it now appears that OPEC+ may change its mind and not raise output at all; and while Biden is quick to note that oil prices have hovered near multiyear highs, OPEC and other forecasting agencies have struggled to predict demand amid the on-again-off-again nature of Covid-19 restrictions…

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Biden Targets Another US Pipeline For Shutdown After ‘Begging’ Saudis For More Oil

Biden Targets Another US Pipeline For Shutdown After ‘Begging’ Saudis For More Oil

Despite approval ratings in the toilet, President Biden and his administration are reportedly exploring the closure of yet another pipeline in a bid to shift the US away from fossil fuels and appease environmental activists.

The move – shutting down the Line 5 pipeline which links Superior, WI to Sarnia, Ontario, would cost tens of thousands of US jobs, billions of dollars in economic activity, and further exacerbate energy shortages and price increases hitting lower-income Americans the hardest, according to a Thursday letter from 13 House Republicans led by Rep. Bob Latta

Via the Daily Mail

According to the letter, the closure would affect workers across “Ohio, Michigan, Wisconsin, and the region,” and would place the environment at greater risk “due to additional trucks operating on roadways carrying hazardous materials.”

Line 5 is part of a network of oil pipes which move approximately 540,000 barrels per day from western Canada to Escanaba, Michigan.

“Furthermore, as we enter the winter months and temperatures drop across the Midwest, the termination of Line 5 will undoubtedly further exacerbate shortages and price increases in home heating fuels like natural gas and propane at a time when Americans are already facing rapidly rising energy prices, steep home heating costs, global supply shortages, and skyrocketing gas prices.”

This comes less than two weeks after the White House begged OPEC to increase oil production amid ‘supply issues’ and soaring energy prices.

It also comes after a weekend which started out with US Energy Secretary Jennifer Granholm scoffing at the notion of increasing domestic oil production…

…and ended on Sunday with her warning that Americans should expect to pay higher costs to heat their homes this winter – telling CNN‘s “State of the Union”:

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Saudis Respond To Biden: Your Energy Crisis Isn’t Our Problem

Saudis Respond To Biden: Your Energy Crisis Isn’t Our Problem

US gas prices at the pump (national average) are at $3.421, having soared since President Biden was elected – much like they did when President Obama was elected – to some of the highest prices in history…

President Biden refuses to take any blame for this. Instead of realizing the climate-crisis-focused policies are impacting the fossil fuel supply chain before the replacements are ready to fill the void, he has blamed COVID and OPEC+ – driving America to be more dependent on foreign oil rather than increase production domestically.

“Oil is not the problem… The problem is the energy complex is going through havoc and hell.”

Of course, always wanting to signal their virtue and follow the narrative – and amid the farce that is COP26 – Democrats have decided that this is the right time to offer a bill that stops banks from financing fossil fuel plans.

Senators Edward Markey and Jeff Merkley introduced the bill which would would require the Federal Reserve to mandate that major banks stop the financing of projects that emit greenhouse gas emissions.

The legislation would prohibit financing of new or expanded fossil fuel projects by 2022 and prohibit the financing of all fossil fuel projects by 2030. It would also prohibit thermal coal financing by 2025.

Which, of course, will lead to less development, lower supply, and higher and higher prices…

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Leaked documents reveal the fossil fuel and meat producing countries lobbying against climate action

Leaked documents reveal the fossil fuel and meat producing countries lobbying against climate action

Files show how Brazil, Argentina, Australia, Japan, Saudi Arabia and OPEC have pressed to water down a key UN scientific report. 

The revelations – which show how this small clutch of nations is attempting to water-down the International Panel on Climate Change’s (IPCC) major upcoming assessment of the world’s options for limiting global warming – come just days before the start of crucial international climate negotiations in Glasgow.

They come from a leak of tens of thousands of comments by governments, corporations, academics and others on the draft report of the IPCC’s ‘Working Group III’ – an international team of experts that is assessing humanity’s remaining options for curbing greenhouse gas (GHG) emissions or removing them from the atmosphere.

The documents passed to Unearthed show how fossil fuel producers including Australia, Saudi Arabia and the Organization of Petroleum Exporting Countries (OPEC), are lobbying the IPCC – the world’s leading authority on climate change – to remove or weaken a key conclusion that the world needs to rapidly phase out fossil fuels.

In one comment seen by Unearthed, a senior Australian government official rejected the largely uncontroversial conclusion that one of the most important steps to reduce greenhouse gas emissions was to phase out coal-fired power stations.

Phrases like ‘the need for urgent and accelerated mitigation actions at all scales’ should be eliminated

Meanwhile, Brazil and Argentina, two of the world’s biggest producers of beef and animal feed, have been pressing to delete messages about the climate benefits of promoting ‘plant-based’ diets and of curbing meat and dairy consumption.

…click on the above link to read the rest of the article…

Aramco On Lockdown After Houthi Missile Attack

Aramco On Lockdown After Houthi Missile Attack

Saudi Arabia had intercepted a ballistic missile attack on facilities owned by state oil major Aramco in the Eastern Region, Reuters has reported, citing the Saudi defense ministry.

Earlier reports said Aramco facilities in Dharan had gone on lockdown because of a suspected attack.

The Iran-affiliated Yemeni Houthi group claimed responsibility for the attacks on Sunday, saying it had used ballistic missiles and drones.

Ras Tanura, which is home to extensive oil infrastructure, was not the only target of the attack: the Houthis also targeted Aramco property in the southern Saudi provinces of Jizan and Najran, according to the rebel group’s spokesman who claimed responsibility for the attacks.

Aramco oil facilities are understandably a preferred target for the Houthis, which Saudi Arabia is trying to oust from Yemen after they removed the Saudi-affiliated government of the country in 2014 and has since then assumed power in most of Yemen. The Yemeni war, which has resulted in the worst humanitarian crisis in modern times, is widely seen as a proxy war between regional rivals Saudi Arabia and Iran.

The Saudis most often intercept the Houthi attacks but not always. The most notable attack that the Yemeni rebel group claimed responsibility for was the September 2019 attacks on Saudi Aramco’s oil facilities, including an oil field and a processing plant

That attack cut off 5 percent of the daily global supply for weeks, sending oil prices soaring. But Saudi Arabia and the United States said at the time that it was Iran—and not the Houthis—that was responsible for the attack, even though the Yemeni group again claimed responsibility for the strikes.

Since the start of the Yemen war, several attempts have been made at reaching a ceasefire agreement, but so far, all have failed, locking the Saudis and the Houthis in a stalemate.

The Real Russian Threat

The Real Russian Threat

I’ve written for years about different nations’ persistent efforts to dethrone the U.S. dollar as the leading global reserve currency and the main medium of exchange.

At the same time, I’ve said that such processes don’t happen overnight;  instead, they happen slowly and incrementally over decades.

The dollar displaced sterling as the leading reserve currency in the twentieth century, but it took thirty years, from 1914 to 1944, to happen. The decline started with the outbreak of World War I and the UK’s liquidation of assets and money printing to finance the war.

It ended with the Bretton Woods agreement in 1944 that cemented the dollar’s link to gold as the new global standard.

Even after the gold link was broken in 1971, the dollar standard remained because there was no good alternative. Then the 1974 deal with Saudi Arabia (along with other OPEC cartel members) to price oil in dollars created increased global demand for the dollar.

Because of the deal, dollars would be deposited with U.S. banks, so they could be loaned to developing economies, who could then buy U.S. manufactured goods and agricultural products.

This would help the global economy and allow the U.S. to maintain price stability. The Saudis would get more customers and a stable dollar, and the U.S. would force the world to accept dollars because everyone would need dollars to buy oil.

By the way, behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force.

I personally discussed these invasion plans in the White House with Henry Kissinger’s deputy, Helmut Sonnenfeldt, at the time. But the Petro-Dollar plan worked brilliantly, and the invasion never happened.

Despite all this, nearly 50 years later, the erosion of the dollar’s role has begun and is visible in many metrics.

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How Much Oil Can Saudi Arabia Really Produce?

How Much Oil Can Saudi Arabia Really Produce?

For decades, the true numbers relating to Saudi Arabia’s level of crude oil reserves and production have been a subject of much debate and confusion, not helped by the obfuscation from the Saudis over precisely what these numbers are. The reason for obfuscation is that Saudi Arabia’s only source of real power in the world begins and ends with its oil reserves and production, so the higher these numbers, the more the power, and the lower the number the less the power. In recent weeks this debate has become even more pronounced in the run-up to Saudi Arabia’s latest bond offering and in the debate oversupply and demand in the oil market over the remainder of this year and beyond. As detailed below, much of what Saudi Arabia has said about its oil reserves, current production, and likely future production is an exaggeration made for the purposes of self-aggrandizement but despite that, the numbers have increased somewhat compared to where they were 10 years ago.  To begin with the claimed crude oil reserves numbers: these have been a work of stunning bravado and almost complete fiction since 1990 when the Kingdom suddenly increased the official number from 170 billion barrels to 257 billion barrels, despite absolutely no new oil discoveries or improvements in recovery rates being made, as highlighted in my last book on the oil markets. Shortly thereafter, Saudi Arabia increased its official crude oil reserves numbers again, to 266.4 billion barrels, a level that persisted until a slight increase in 2017, to 268.5 billion barrels. Over the same period – in fact, from 1973 to last month – Saudi Arabia has pumped an average of 8.162 million barrels per day (bpd)…

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Saudi Arabia And Russia Warn Of Major Oil Supply Crunch

Saudi Arabia And Russia Warn Of Major Oil Supply Crunch

The debate about emissions reduction and the path forward for oil companies moved to a whole new level since the International Energy Agency (IEA) dropped last month the bombshell report suggesting no new investment in oil and gas would be needed if the world is to reach net-zero emissions by 2050.

Environmentalists and activist shareholders intensified pressure on large public oil firms to align their businesses with a net-zero scenario, while some of the international majors acknowledged they have a part to play in the energy transition.

But the leaders of the OPEC+ group, Saudi Arabia and Russia, will continue to invest in oil and gas because, they say, the world will still need those resources for decades, despite the growing push against fossil fuels and investment in new supply.

Chronic underinvestment in oil and gas supply while operational oilfields mature would lead to a supply crunch and a spike in oil prices down the road, analysts and Big Oil top executives such as TotalEnergies’ Patrick Pouyanné say.

While international oil majors were somewhat more contained in their views on the IEA report—those that commented on it anyway—Saudi Arabia and Russia didn’t beat around the bush and said outright that the suggestion of no new oil and gas investments ever is “unrealistic,” “simplistic,” and taken out of a “La La Land” script.

BP’s chief executive Bernard Looney wrote that forecasts of much lower investments in oil and gas were “in many ways consistent with our approach – to reduce our oil and gas production by 40% in the next decade.” Eni’s CEO Claudio Descalzi commented on Looney’s post that “We are now at a historic turning point, where each of us needs to play an active role.”

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Saudi Arabia Goes the way of the Garamantes. Google Earth Confirms the Collapse of the Water Supply 

Saudi Arabia Goes the way of the Garamantes. Google Earth Confirms the Collapse of the Water Supply 

In 2008, I noted the decline in Saudi Arabian water production and I published an article in “The Oil Drum” titled “Peak Water in Saudi Arabia.” Using a simple version of the Hubbert model of resource depletion, I noted how the supply of “fossil water” had peaked in 1990 and had been declining ever since. This is the typical behavior of “fossil” resources: they tend to peak and then decline. It had already happened to the ancient Garamantes, inhabitants of central Sahara, who had developed sophisticated technologies of water extraction during the 1st millennium BC. That had allowed them to prosper for about one thousand years, but then depletion had its revenge and they vanished among the sand dunes. Something similar (but probably much faster) is going to happen in the Arabian peninsula. 

The old Hubbert model was developed to describe the cycle of extraction of crude oil. It may be oversimplified if you want to use it for detailed predictions. But, as a quick tool for understanding the situation of the production of a non renewable resource, it tells you a lot of what you need to know. That first stab of mine on water production in Saudi Arabia turned out to be correct.

It is impressive how, today, you can use Google Earth to look at the situation “from above.” You can see the collapse of the agricultural fields as depletion progresses. Here are the images of an irrigated area for a region East of Al Jubail, in Saudi Arabia,  26°48’29.60″N and  49° 8’47.58″E.

Let’s start with an image of the desert in 1984. There is absolutely nothing there:

One year later, 1985. Someone has started extracting water and irrigating the land. There are two active fields there.

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Olduvai IV: Courage
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Olduvai II: Exodus
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