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Countdown to ?100 oil (54): OPEC ready to dump dollar?

by Jerome a Paris Sun Nov 18th, 2007 at 04:41:53 PM EST

It's a good thing that Saudi Arabia is an old ally of the USA, because they are the last holdout against a freefall of the dollar. Oh, they're not doing much to actually prevent that: they're just refusing to talk about it

Saud Al-Faisal, the Saudi foreign affairs minister, warned the meeting: "The mere mention that Opec is studying the issue of the dollar is going to have an impact." He said a reference to the US currency in the declaration could cause the dollar to "collapse".

OPEC frets over response to dollar

In other headlines:
OPEC unites behind higher prices
OPEC Summit Highlights Growing Political Divide
Mortgage Loan Losses Pose Risk of Systemic Shock

Iran and Venezuela -- hawkish allies in the group and united by their troubled relations with the U.S. -- have pushed OPEC to discuss a possible oil currency basket and sought to include a mention of the weakening dollar in the summit's final communique.

Their efforts prompted a blunt response from Saudi Arabia's Foreign Minister Prince Saud Al-Faisal to take the issue up separately with finance ministers, as he warned "we shouldn't mention the dollar because that would only endanger it more and aid its collapse."

The final communique omitted any overt reference to the dollar but appeared to bow to pressure from Iranian President Mahmoud Ahmadinejad and his Venezuelan ally Hugo Chavez, who said they would raise the issue in the closed session, by substantially changing the wording of a clause from the draft version.

The final version instructed ministers "to study ways and means of enhancing financial cooperation ... including proposals by some of the heads of state and governments in their statements to the summit."

The original draft of the communique, reviewed by Dow Jones Newswires Friday, read that the group seek to "encourage greater economic and financial cooperation among member countries."

That communiqué is a pretty sneaky work of diplomacy, but its message could not be clearer: while it does not include any hostile words - no references to $100 oil as a nice thing, no threat to move away from the dollar - it links explicitly to declarations that do, from the usual suspects Chavez and Ahmedinejad, in a clear demonstration of their influence over the proceedings:

Hugo Chavez, the left-wing president of Venezuela, opened the summit welcoming oil prices at close to $100 a barrel, describing them as "fair". (...)

Mr Chavez wants Opec to take a much more active stance in world politics, recalling in his speech the "remarkable days of the 1960s and 1970s." He said the objectives of Opec should be to "demand respect for our countries" and "ask the most powerful nation on earth to stop threatening Opec members;" a clear reference to Iran, whose president Mahmoud Ahmadi-Nejad is also attending the summit.

Mr Chavez added: "If the US is mad enough to attack Iran the price of a barrel oil will be $150 or $200."

Mr Ahmadi-Nejad said after the opening ceremony he agreed with Mr Chavez that $100 a barrel was a fair price for oil. "King Abdallah said the same: even $100 is less than it should be," he said.

Iran has argued that the fall in the dollar means that in euro terms, the average oil price so far this year is lower than it was last year.

And the FT goes on to quote King Abdullah of Saudi Arabia,as saying that taking into account inflation, prices were still "not yet at the level of the 1980s," thus appearing to also suggest that such price levels were not seen as excessive (note that this is in line with the recent interview of the Saudi oil minister (mention in my latest Countdown diary), which similarly deflected all blame for current price levels to speculators and "unhelpful" pessimistic talk about resource depletion and lack of investment...

:: ::

But OPEC members fretting about the dollar is understandable:

  • their own currencies are, for several of them, pegged to the dollar, which means increasing levels of inflation for them as they import almost everything they consume from the eurozone and other strong currency areas
  • their reserves are held, to a large extent, in US dollar and are losing value;
  • their recent forays into the happy world of equity investment, private funds investment and the like, in a quest for better returns, is being threatened by the chaos in the financial markets (cf the Saudi prince who is the first shareholder of Citigroup)

Which brings me to my last tidbit via Bloomberg:

Mortgage Loan Losses Pose Risk of Systemic Shock

Nov. 13 (Bloomberg) -- There's a greater than 50 percent probability that the financial system ``will come to a grinding halt'' because of losses from mortgages, Gregory Peters, head of credit strategy at Morgan Stanley, said.

The world's biggest banks and securities firms have written down at least $45 billion in the value of assets linked to subprime mortgages for the third quarter after borrowers with poor credit histories failed to keep up with payments. Structured investment vehicles have defaulted on debt, forcing lenders including Legg Mason Inc. and SunTrust Banks Inc. to prop up their money-market funds to cushion them from possible losses.

``You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer's balance sheet in the banks,'' Peters said in an interview in New York. ``That's all toppling at once.''

The risk of systemic shock from the current subprime meltdown is quite large in the near term, Peters said. ``It's an overarching concern that we have,'' he said.

Losses stemming from the subprime mortgages have caused a seizure of a lot of other markets, especially the securitization market, Peters said.

There is increased risk aversion in the money and credit markets. Banks and other players are craving for liquidity, hoarding cash, and mistrusting one another. One of the great sources of liquidity in the past 2 years has been, as the Fed increased its rates, the large cash surplus of the oil exporting countries, which was, by default, invested in the USA, in US-denominated assets (Treasuries or others). That helped limit the first rumbles of the housng crisis (which, after all, started in late 2005) and kept debt markets buoyant until this summer - and US household consumption with it. This has now seized up completely, because banks suddenly decided it could not go on for ever, and acted accordingly - lemming-like, brutally, astonishingly quickly, the markets seized. Will petrodollars, which are still around, continue to be invested in the remaining asset classes that are still considered safe (mainly Treasuries as municipal bonds are now tainted), or will they switch to other currencies, which are deemed less subject to systemic risk?

And thus two long-running predictions, that of the "Dollar Dump", and that of my Countdown series, are becoming inextricably linked together, and are becoming one - that of the debasing of the dollar by an administration that wasted, stole and looted to such an amount that it's become visible in macro-economic terms.

:: ::

Earlier Countdown diaries:
Countdown to $100 oil (53) - Saudis happy with $100 oil
Countdown to $100 oil (52) - buying protection
Countdown to $100 oil (51) - we'll never see 100mbd
Countdown to $100 oil (50) - it's no longer 'oil', it's 'liquids'
Countdown to $100 oil (49) - peak oil and libertarians
Countdown to $100 oil (48) - 85, 86, 87, 88, ...
Countdown to $100 oil (47) - Malthus, Mein Kampf and ostriches
Countdown to $100 oil (46) - what's a dollar worth?
Countdown to $100 oil (45) - time to bet again (eurotrib)
Countdown to $100 oil (45) - time to bet again (DailyKos)
Countdown to $100 oil (44) - oil industry admits it cannot save us
Countdown to $100 oil (43) - IEA boss denies and confirms peak oil in same breath
Countdown to $100 oil (42) - IEA predicts shortages within 5 years
Countdown to $100 oil (41) - oil more expensive than it appears
Countdown to $100 oil (40) - Undulating plateau
Countdown to $100 oil (39) - BigOil running out of oil
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)
* added to the series after the fact


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Nov 18th, 2007 at 04:42:20 PM EST
No significant movements as I write on either the dollar/euro exchange rate or the price of oil.

So the Chavez declarations were seen as theater, and the Saudi ones as a sign that they will hold firm in the dollar camp for now.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Nov 19th, 2007 at 04:37:00 AM EST
[ Parent ]
Ohio posted a link to the changes in US dept held by other countries. Many countries reduced their holdings, but the two big increases were Brazil and the UK. How would you explain these, especially the former?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Nov 19th, 2007 at 05:17:15 AM EST
[ Parent ]
Brazil - I expect this is a mechanical result of their massively increasing trade surplus, with at least a good chunk parked in US TReasuries

UK - this is where the majority of hadge funds and private equity funds are based (as well as Russian and other emerging billionaires' money), and they have invested in a lot of US assets. Note that the other big center for hedge funds and the like is the "Caribean" area.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Nov 19th, 2007 at 05:59:59 AM EST
[ Parent ]
You mean, the UK increase is mostly moving off-shore assets from the Carribean to the UK?

July 2007January 2007July 2006
China, Mainland407.8400.9378.2
United Kingdom (2)210.1103.344.3
Oil Exporters (3)123.8111.8112.4
Hong Kong58.954.748.9
Caribbean Banking Centers (4)

Given that the biggest shedding of debt holdings was from Q3, I am really curious how the next list will look.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Nov 19th, 2007 at 06:31:50 AM EST
[ Parent ]
Like Cyprus being one of the biggest recievers of Russian direct investment, lol.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 21st, 2007 at 01:33:59 AM EST
[ Parent ]

Coal addiction hinders climate cleanup

Coal, the dirtiest fossil fuel, is the crack cocaine of the developing world

It is the inexpensive and plentiful fuel powering the rising economies of Asia -- and because of that, it has become one of the most intractable problems in combating global warming.

Even as the political will and grass-roots support to rein in rising carbon dioxide levels is growing, a large segment of the world is using more coal than ever.


Leading the coal spree is China, which has more than doubled its CO2 emissions from coal since 2000 to more than 2.7 billions tons a year, according to the database.

Over the last eight years, China has built 603 coal-fired generators -- 64% of the new generators installed worldwide. India has added 133generators, according to the database.

They're not the only coal addicts.

In raw numbers, China has merely caught up to the United States, according to the database. In Europe, which has led the world in greenhouse gas reductions, coal use is expected to creep up in the next several years -- driven by rising oil and natural gas prices.


It's cheap and abundant, and as Leon E. Clarke, an economist at the Joint Global Change Research Institute at the University of Maryland, added: "Unlike conventional oil and gas, it can be treated as virtually inexhaustible over the coming century."


Coal accounts for 77% of China's power capacity, compared with 42% worldwide and 48% in the United States.

Coal is neither cheap (it does not pay for the pollution it causes) nor as abundant as is believed, but it is the default solution for industry and politicians everywhere in the face of higher energy costs - with the accompanying lobbying to avoid making it pay for its externalities.

Avoiding oil dependency only to jump into the coal illusion would be just a different nightmare...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Nov 18th, 2007 at 04:55:14 PM EST
The fool times should get its translations right.  Chavez actually said:  

"If the US is mad enought to attack Iran, or (agredir) interfere in Venezuela again, we won´t have $100 oil, we may have $200 oil."

At that point, Ahmadinejad raised his hand to him in agreement.

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Sun Nov 18th, 2007 at 05:55:15 PM EST
Swiss Re wrote down of billion of subprime loss exposure.  When it reaches that high up the food chain...

Have a good week, all.  I get to take a deep look at a new 2.5MW turbine design from the team at W2E this week.

"Life shrinks or expands in proportion to one's courage." - Anaļs Nin

by Crazy Horse on Mon Nov 19th, 2007 at 02:32:31 AM EST
Nice round-up Jérôme. The dollar meltdown and the rise in oil prices have been a single event all along. The same happened I 1973 during the OPEC embargo, not only oil prices shot up but also other commodities (especially food) and foreign currencies.

Why is it so was explained by M. King Hubbert when he addressed the US Congress in 1974: currency supply grows exponentially in tandem with industrial output (made possibly by resource consumption growth).

Once oil production stalled in 2004 it all happened again, resources drawn to the economy eased while paper currency kept flowing. The Fed then engaged on a program of central rates hiking - trying to mimic Paul Vockler's actions in the 1980s. But this time the American folk was so indebted that it only took 5% to burst the housing market and create a credit crisis.

In order to avoid further financial/credit pain the Fed has to keep the money flowing - weakening the currency and inflating commodities.

I wrote about this here.


by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Mon Nov 19th, 2007 at 04:15:05 AM EST
Hmm, I didn't read that diary nearly carefully enough when you posted it in July.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Mon Nov 26th, 2007 at 07:09:54 AM EST
[ Parent ]
From CNNMoney:

But by Sunday, it appeared that Saudi Arabia had compromised. Though the final declaration delivered Sunday did not specifically mention concern over the weak dollar, the organization directed its finance ministers to study the issue.


Iran's oil minister went a step further and said OPEC will form a committee to study the dollar's affect on oil prices and investigate the possibility of a currency basket.

"We have agreed to set up a committee consisting of oil and finance ministers from OPEC countries to study the impact of the dollar on oil prices," Gholam Hussein Nozari told Dow Jones Newswires.

Iraqi Oil Minister Hussein al-Shahristani said the committee would "submit to OPEC its recommendation on a basket of currencies that OPEC members will deal with." He did not give a timeline for the recommendation.

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Mon Nov 19th, 2007 at 08:58:29 AM EST

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