US shale fracking has not solved the problem.

Discussion of current events
User avatar
cassowary
Posts: 1589
Joined: Thu Dec 15, 2016 11:30 pm

Re: US shale fracking has not solved the problem.

Post by cassowary » Wed Feb 28, 2018 7:24 pm

neverfail wrote:
Wed Feb 28, 2018 2:57 pm
cassowary wrote:
Wed Feb 28, 2018 3:25 am
neverfail wrote:
Tue Feb 27, 2018 11:07 pm
Milo wrote:
Tue Feb 27, 2018 9:07 pm

America spent over a trillion dollars securing the Iraqi oil supply, they will do plenty to correct the scenario you posit.
.

Yep, and fail again just like in Iraq too!
If they are self-sufficient in oil or better yet, a net oil exporter, they may not bother about Persian Gulf oil, the next time there is a crisis.
Cass: even when the US was at its most oil import dependent barely a decade ago the US imported precious little oil from the ME. Think of the logistical costs associated with importing oil from such distant parts. Most of America's imported oil cam from source countries closer to hand: such as Canada, Mexico, Venezuela and Nigeria.

Make sense?


There is an aspect of American concern for ME (especially Persian Gulf) oil that you might not have considered. Whilst America might never have been particularly ME oil dependent, virtually all of America's allies overseas were. These included NATO member states in Western Europe (as well as neutrals like Sweden and Switzerland), along with Japan, South Korea and The Philippines in east Asia.

The fact that the US Navy patrolled the global sea lanes and had Saudi-Arabia, the OPEC "swing" producer (technically as ally of convenience but de facto as American protectorate) throughout the Cold War years must have been a potent geostrategic tool in ensuring that these loyal US allies remained loyal allies. Likewise, it put the US in the position where potentially it could cut off supplies of crude to the USSR and/or its satellites should they have attempted to import significant amounts to augment their own domestic supplies. This compelled the entire Soviet bloc to subsist off the Caspian Sea reserves pushing these towards premature exhaustion.


It placed the US in the position of being the "power broker" of last resort in the position to decide who gets seaborne supplies of oil and who could be denied these.


Then there is the matter of oil globally being priced in US dollars. It ensures a continued flow of petrodollars into US government bonds (i.e.US government debt) thereby permitting the US to continue living beyond its means and underpinning the cost to the US of maintaining its global power with a (so far) unending stream of borrowed money.

So Cassowary, I put it to you that if the entrance/exit to the Persian Gulf were suddenly to be blocked as I have described above the US would need to react in some way. Not because the US needs the oil but because it needs the Saudi and Gulf states' money.On
Thanks for the reply, Neverfail. You have raised many good points. Here are my comments:

While it is true that the US did not and does not import oil from the Persian Gulf due to its distance,
what happens there will affect the US economy. A high price of oil meant the US economy went into recession during the Arab oil embargo in 1973(?).

Its Balance of Trade also worsened because it was an oil importer then. But if the US is a net exporter of oil/gas,
the US makes more money by exporting oil and not lose money by importing oil. Its oil and gas industry will be booming with new jobs as oil companies struggle to meet demand.

On the other hand, US trading partners like the EU and Japan will probably go into recession because they are oil importers. US exports to them will suffer. It is not clear if high oil price will be a net gain or loss for the US. It depends on how much of an oil/gas exporter the US becomes under Trump's energy dominance strategy. If the benefits of high oil prices to the US outweigh the costs, then the US might not want to intervene in a future disruption of Persian Gulf oil. Let the Europeans and Japanese use their own navy and army to deal with the problem. Or perhaps the Chinese will deal with it.


The USSR, like its successor state, Russia was a net energy exporter. So it does not need Persian Gulf oil. The US was keeping an eye on the Persian oil supply for the benefit of itself and its allies. If it becomes a net oil exporter as it is projected to do, under Trump's "energy dominance" policy, the incentive to continue protecting Persian Gulf oil supply diminishes.

That is the canard that I have debunked before. Oil can be priced at whatever currency and it has no impact on the US. Let's say Saudi Arabia gets $ in exchange for oil. Do the Saudis keep all of it in $? No! It will keep some to buy US goods and US investments. But it will also buy European, Japanese and Chinese goods and investments. So it needs to change the $ for Yen, Euros etc. What if it gets paid in say Euros? It also won't keep all of it in Euros. It will change some of it to US$ and other currencies, depending on its needs. It will invest in US treasuries but also Japanese and European ones depending on the investment advice their bankers give them. The idea that the Petrodollar keeps the US government afloat is not true.

neverfail
Posts: 1667
Joined: Sun Dec 18, 2016 3:47 am

Re: US shale fracking has not solved the problem.

Post by neverfail » Wed Feb 28, 2018 8:03 pm

cassowary wrote:
Wed Feb 28, 2018 7:24 pm


That is the canard that I have debunked before. Oil can be priced at whatever currency and it has no impact on the US. Let's say Saudi Arabia gets $ in exchange for oil. Do the Saudis keep all of it in $? No! It will keep some to buy US goods and US investments. But it will also buy European, Japanese and Chinese goods and investments. So it needs to change the $ for Yen, Euros etc. What if it gets paid in say Euros? It also won't keep all of it in Euros. It will change some of it to US$ and other currencies, depending on its needs. It will invest in US treasuries but also Japanese and European ones depending on the investment advice their bankers give them. The idea that the Petrodollar keeps the US government afloat is not true.
A Canard? :o Really?

https://www.investopedia.com/articles/f ... dollar.asp

How Petrodollars Affect The U.S. Dollar By Zaw Thiha Tun | July 29, 2015 — 11:06 PM EDT

After the collapse of the Bretton Woods gold standard in the early 1970s, the U.S. struck a deal with Saudi Arabia to standardize oil prices in dollar terms. Through this deal, the petrodollar system was born, along with a paradigm shift away from pegged exchanged rates and gold-backed currencies to non-backed, floating rate regimes.

The petrodollar system elevated the U.S. dollar to the world's reserve currency and through this status, the U.S. is able to enjoy persistent trade deficits, and become a global economic hegemony. The petrodollar system also provides the United States’ financial markets with a source of liquidity and foreign capital inflows through petrodollar "recycling."
(unquote).

You might like to inform Investopedia about your :lol: oh so authoritative debunking of my "canard" Cassowary. They don't seem to have heard about it. :D
Last edited by neverfail on Wed Feb 28, 2018 8:19 pm, edited 1 time in total.

neverfail
Posts: 1667
Joined: Sun Dec 18, 2016 3:47 am

Re: US shale fracking has not solved the problem.

Post by neverfail » Wed Feb 28, 2018 8:19 pm

Milo wrote:
Wed Feb 28, 2018 8:47 am
neverfail wrote:
Tue Feb 27, 2018 11:07 pm
Milo wrote:
Tue Feb 27, 2018 9:07 pm

America spent over a trillion dollars securing the Iraqi oil supply, they will do plenty to correct the scenario you posit.
.

Yep, and fail again just like in Iraq too!
Actually the only thing they succeeded in was restoring the oil production, under American control.
Prior to the brutal 2003 invasion of Iraq their oil production had been restricted by United Nations sanctions that had been in place ever since the first Gulf War in 1990-91. With the ridding of Saddam Hussein the embargo had become redundant. As for "American control" that did not last long. I believe that since then the Iraqi government has sold off (privatised) the country's oil concessions predominantly to Chinese and other non-US investors.

neverfail
Posts: 1667
Joined: Sun Dec 18, 2016 3:47 am

Re: US shale fracking has not solved the problem.

Post by neverfail » Wed Feb 28, 2018 8:30 pm

cassowary wrote:
Wed Feb 28, 2018 7:24 pm

On the other hand, US trading partners like the EU and Japan will probably go into recession because they are oil importers.
Mate: are you unaware that the combined GDP's of the PRC, Japan, India etc (the monsoon Asia bloc of countries) now exceeds that of the USA in size by a significant margin. The notion that if the USA sneezes then the rest of the World catches cold is out of date.

The respective strength of the two were tested back during the 2007-08 GFC. Remember what happened? Whereas Europe was dragged down into a long recession (which for several EU member states has still not ended) along with the USA; China and all within its sphere of influence weathered the storm quite well. By remaining solvent these countries arguable spared the World, even the improvident West, from plunging into another Great Depression.

The health of the World economy now depends a lot more on the state of monsoon Asia than it does on the United States.

neverfail
Posts: 1667
Joined: Sun Dec 18, 2016 3:47 am

Re: US shale fracking has not solved the problem.

Post by neverfail » Wed Feb 28, 2018 8:34 pm

cassowary wrote:
Wed Feb 28, 2018 7:24 pm

On the other hand, US trading partners like the EU and Japan will probably go into recession because they are oil importers.
Mate: are you unaware that the combined GDP's of the PRC, Japan, India etc (the monsoon Asia bloc of countries) now exceeds that of the USA in size by a significant margin? The notion that if the USA sneezes then the rest of the World catches cold is out of date.

The respective strength of the two were tested back during the 2007-08 GFC. Remember what happened? Whereas Europe was dragged down into a long recession (which for several EU member states has still not ended) along with the USA; China and all within its sphere of influence weathered the storm quite well. By remaining solvent these countries arguable spared the World, even the improvident West, from plunging into another Great Depression.

Were a crisis like the one I visualise to erupt I would put my money on Asia coming through it better than the US (or Europe).

The health of the World economy now depends a lot more on the state of monsoon Asia than it does on the United States.

User avatar
cassowary
Posts: 1589
Joined: Thu Dec 15, 2016 11:30 pm

Re: US shale fracking has not solved the problem.

Post by cassowary » Wed Feb 28, 2018 9:25 pm

neverfail wrote:
Wed Feb 28, 2018 8:30 pm
cassowary wrote:
Wed Feb 28, 2018 7:24 pm

On the other hand, US trading partners like the EU and Japan will probably go into recession because they are oil importers.
Mate: are you unaware that the combined GDP's of the PRC, Japan, India etc (the monsoon Asia bloc of countries) now exceeds that of the USA in size by a significant margin. The notion that if the USA sneezes then the rest of the World catches cold is out of date.

The respective strength of the two were tested back during the 2007-08 GFC. Remember what happened? Whereas Europe was dragged down into a long recession (which for several EU member states has still not ended) along with the USA; China and all within its sphere of influence weathered the storm quite well. By remaining solvent these countries arguable spared the World, even the improvident West, from plunging into another Great Depression.

The health of the World economy now depends a lot more on the state of monsoon Asia than it does on the United States.
That's besides the point. My point is that oil importing nations will suffer if there is a disruption on Persian Gulf oil while oil exporting nations will benefit. Oil prices will go up and likely trigger a recession in oil importing nations. Oil exporting nations will benefit from higher oil prices. Trump wants the US to be an oil exporter. So the US will actually earn more money from its oil exports if the price of oil shoots up for whatever reason. Whether that is sufficient to compensate for a drop in other exports to oil importing regions like the EU and Japan (suffering from recession) is something we don't know.

But they won't suffer as much as oil importing nations. That is for sure. If there is a net gain in higher oil price, the US will face a disincentive from intervening in the Gulf like they did when Saddam Hussein invaded Kuwait. In other words, if the US believes that their population will be richer as a result of higher oil price, then why invade to bring oil price down? So if Iran sinks a tanker at the Straits of Hormuz and thus makes the US richer, why bother to deal with other people's problem?

neverfail
Posts: 1667
Joined: Sun Dec 18, 2016 3:47 am

Re: the US has the devil's choice to make in an energy based global recession.

Post by neverfail » Thu Mar 01, 2018 7:03 pm

cassowary wrote:
Wed Feb 28, 2018 9:25 pm


My point is that oil importing nations will suffer if there is a disruption on Persian Gulf oil while oil exporting nations will benefit. Oil prices will go up and likely trigger a recession in oil importing nations. Oil exporting nations will benefit from higher oil prices.
But if the oil importing countries go into recession then logically their demand for imported oil will also go down and world oil prices shall collapse - yielding no benefit to the oil exporters. It seems to me that you have put your case into a state of self-contradiction Cass. :shock:
cassowary wrote:
Wed Feb 28, 2018 9:25 pm
Trump wants the US to be an oil exporter. So the US will actually earn more money from its oil exports if the price of oil shoots up for whatever reason. Whether that is sufficient to compensate for a drop in other exports to oil importing regions like the EU and Japan (suffering from recession) is something we don't know.
For the US to export a limited supply of oil shall do neither itself nor reciprient importers any harm. But if it ends up becoming Saudi Arabia big as an oil exporter then God help every other export industry in the US (along with most of its import-substitute industries) for the strengthened US dollar will more likely make these uncompetitive and moribund. Indeed, if the global oil price shock sends the oil importing countries down into a deep recession, the greenback will likely become so strengthened as to price most US exports out of the global market anyhow.
cassowary wrote:
Wed Feb 28, 2018 9:25 pm
But they won't suffer as much as oil importing nations. That is for sure.
You merely assume that out of ignorance. With memory of the effects of the 1970's world oil shock I have reason to believe that it will be nothing like that simple.

So much for another of your theoretical straw men, Cassowary. :)

User avatar
cassowary
Posts: 1589
Joined: Thu Dec 15, 2016 11:30 pm

Re: US shale fracking has not solved the problem.

Post by cassowary » Fri Mar 02, 2018 12:04 am

neverfail wrote:
Wed Feb 28, 2018 8:03 pm
cassowary wrote:
Wed Feb 28, 2018 7:24 pm


That is the canard that I have debunked before. Oil can be priced at whatever currency and it has no impact on the US. Let's say Saudi Arabia gets $ in exchange for oil. Do the Saudis keep all of it in $? No! It will keep some to buy US goods and US investments. But it will also buy European, Japanese and Chinese goods and investments. So it needs to change the $ for Yen, Euros etc. What if it gets paid in say Euros? It also won't keep all of it in Euros. It will change some of it to US$ and other currencies, depending on its needs. It will invest in US treasuries but also Japanese and European ones depending on the investment advice their bankers give them. The idea that the Petrodollar keeps the US government afloat is not true.
A Canard? :o Really?

https://www.investopedia.com/articles/f ... dollar.asp

How Petrodollars Affect The U.S. Dollar By Zaw Thiha Tun | July 29, 2015 — 11:06 PM EDT

After the collapse of the Bretton Woods gold standard in the early 1970s, the U.S. struck a deal with Saudi Arabia to standardize oil prices in dollar terms. Through this deal, the petrodollar system was born, along with a paradigm shift away from pegged exchanged rates and gold-backed currencies to non-backed, floating rate regimes.

The petrodollar system elevated the U.S. dollar to the world's reserve currency and through this status, the U.S. is able to enjoy persistent trade deficits, and become a global economic hegemony. The petrodollar system also provides the United States’ financial markets with a source of liquidity and foreign capital inflows through petrodollar "recycling."
(unquote).

You might like to inform Investopedia about your :lol: oh so authoritative debunking of my "canard" Cassowary. They don't seem to have heard about it. :D
I read through the article and cannot see how a simple matter like pricing oil in $ could give the US economic hegemony and run persistent trade deficits. The writer fails to explain but merely assert it as though it were fact.

Why don't we run through where the money goes when Saudi Arabia sells its oil for $.

Let's see what happens when Aramco, the Saudi oil company, receives $ for its oil. The Saudi government normally would spend some of it and invest the rest.

Domestic spending.

The government pays its civil servants, builds infrastructure, buys military equipment etc.

As an example, a civil servant Ahmad received a paycheck in Riyal. He might spend some of it to buy a German car. The local car dealers will sell him the car. But Ahmed is not the only one buying German cars. Noticing a demand for German cars, the dealer might order more German cars. So he pays the German manufacturer in Euros. His bank will request the Saudi Central Bank for Euros in exchange of Riyals. If the Central bank does not have the riyal, it will go into the international markets to exchange its large reserve of US$ which it has in abundance since oil is denoted in $.

So the demand for Euros, yen and other currencies will depend on the millions of its citizens who make independent decisions to buy European or Japanese goods. Pricing oil in US$ does not mean that the Saudi government keeps dollars only.

Investments

Most of the time, the Saudi government does not spend all their export earnings. (Yes, I am aware that in recent years they have been overspending because of the Yemen War.) So when there are savings, the Saudi government will invest the money. They have hired the best bankers in London and New York to invest their money.

Knowing how fund management works, they will diversify. The Saudi government will give these bankers of lump of US$ which they will then convert to other currencies and buy assets in those currencies. These assets incudes stocks, bonds, cash and real estate.

This is what happens to the US$ Saudi Arabia receives from selling oil in $. How does this process allow the US to maintain persistent trade deficits? The writer did not explain. How does this allow the US to run persistent budget deficits?

People who think that the Petrodollar allows the US to maintain its budget and trade deficits are assuming that the oil exporting countries only buy US goods and investment assets.

User avatar
cassowary
Posts: 1589
Joined: Thu Dec 15, 2016 11:30 pm

Re: the US has the devil's choice to make in an energy based global recession.

Post by cassowary » Fri Mar 02, 2018 12:53 am

neverfail wrote:
Thu Mar 01, 2018 7:03 pm
cassowary wrote:
Wed Feb 28, 2018 9:25 pm


My point is that oil importing nations will suffer if there is a disruption on Persian Gulf oil while oil exporting nations will benefit. Oil prices will go up and likely trigger a recession in oil importing nations. Oil exporting nations will benefit from higher oil prices.
But if the oil importing countries go into recession then logically their demand for imported oil will also go down and world oil prices shall collapse - yielding no benefit to the oil exporters. It seems to me that you have put your case into a state of self-contradiction Cass. :shock:
Hang on, mate. If the oil price collapse then the countries will recover from the recession. It is high oil price that caused the recession in the first place.
cassowary wrote:
Wed Feb 28, 2018 9:25 pm
Trump wants the US to be an oil exporter. So the US will actually earn more money from its oil exports if the price of oil shoots up for whatever reason. Whether that is sufficient to compensate for a drop in other exports to oil importing regions like the EU and Japan (suffering from recession) is something we don't know.
For the US to export a limited supply of oil shall do neither itself nor reciprient importers any harm. But if it ends up becoming Saudi Arabia big as an oil exporter then God help every other export industry in the US (along with most of its import-substitute industries) for the strengthened US dollar will more likely make these uncompetitive and moribund. Indeed, if the global oil price shock sends the oil importing countries down into a deep recession, the greenback will likely become so strengthened as to price most US exports out of the global market anyhow.
This is just conjecture. We don't know if the US will become as big an exporter as Saudi Arabia. Even if it did, we don't know if the US$ will appreciate so much as to render its exporting industries uncompetitive. I think if the US exports as much as Saudi Arabia, it means oil price will collapse. This will bring prosperity around the world.
cassowary wrote:
Wed Feb 28, 2018 9:25 pm
But they won't suffer as much as oil importing nations. That is for sure.
You merely assume that out of ignorance. With memory of the effects of the 1970's world oil shock I have reason to believe that it will be nothing like that simple.
It is logical to me. If the US becomes an oil exporter, won't it make more money from its oil exports under the scenario of a disruption of the oil from the Persian Gulf? The high oil price will trigger a recession in the oil importing countries and they will thus import less US goods. But won't US exports of oil itself soften at least the effects of a global recession?

User avatar
cassowary
Posts: 1589
Joined: Thu Dec 15, 2016 11:30 pm

Debunking the Petrodollar myth

Post by cassowary » Fri Mar 02, 2018 1:19 am

Debunking the dropping the Petrodollar conspiracy

Neverfail,

Read the above. Perhaps now you will stop believing in the Petrodollar nonsense. Let me quote just one sentence from the article:
If Saudi Arabia wanted to hold euros rather than dollars, it could almost instantly offload as many dollars as it desired.
That's exactly what I told you. After Saudi Arabia receives dollars in exchange for its oil, it can always sell off as much of the dollars as it wishes to pay for German cars and European stocks for example. So how does the Petrodollar result in boosting the US$ and help pay for its profligate spending?

Are you saying the Saudis do not convert any of the $ into other currencies and buy nothing except US government bonds?

Post Reply