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Loss of petrodollar recycling to add pressure to the dollar

Friday, November 28, 2008, 4:48 PM

What is "petrodollar recycling"?

It refers to the use of dollars for the purchase of oil and the subsequent reinvesting of those same dollars by oil exporting nations back into the US financial markets.

Many hundreds of billions of US dollars have flowed from its shores only to come back in the form of oil and purchases of Treasury and  Agency debt.

That mechanism is certainly wounded now...

Crude falls on speculation OPEC won't cut production
Nov. 28, 2008 NEW YORK (MarketWatch) -- Crude-oil futures fell Friday on speculation that the Organization of Petroleum Exporting Countries won't cut its production at Saturday's meeting. Crude for December delivery fell 73 cents, or 1.3%, to $53.71 a barrel in early electronic trading. OPEC has not ruled out cutting output at the meeting, but several delegates have said they were likely to only measure compliance of previous cuts and leave the decision on cuts till December.

Making a rough assumption that 1/2 of the world's oil that is produced is exported (I think this is reasonably fair), we can calculate the "loss" of extra dollars that are no longer available for oil exporting countries to use for such things as, say, buying all the new US Treasury issuances that are coming up.

(86Mbd *  365 * $147) = $2,300 billion dollars  [this is the peak amount]

(86Mbd * 365 * $53) =  $830 billion dollars [this is the current amount]

Subtracting these two, we find that there is a nearly $1,500 billion dollars ($1.5 trillion) difference between the rate of dollar accumulation at the Peak Oil price, compared to today.

This is a massive difference, and it makes me wonder from whom it is exactly that the US plans on borrowing nearly $2 trillion this year.  Certainly OPEC and Russia would be bad candidates, as they may find their export revenues barely sufficient to keep the lights on at home.

This provides one more bit of confirmation that the most likely source for all the required US borrowing is going to come from printing out of thin air, as opposed to the much less inflationary source of honest-to-goodness production.  

More immediately (and more certain) is the loss of buying pressure for the US dollar that will result from oil exporting nations curtailing their purchases of US financial instruments because they no longer have the money to recycle.  If it gets bad enough, they could even sell their existing holdings to meet local needs for funds.

This will add pressure to the dollar.

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12 Comments

gak's picture
gak
Status: Member (Offline)
Joined: Nov 10 2008
Posts: 12
Re: Loss of petrodollar recycling to add pressure to the ...

Chris,

 What about the trillions that China has in USD? Won't they use that to  help the US gov keep the charade going by buying the debt so that we can get out of this recession/depression? After all I think that decoupling has now been thoroughly debunked and China realizes that they depend on our markets for export. And if we don't buy, they sink.

 

Gak 

joemanc's picture
joemanc
Status: Martenson Brigade Member (Offline)
Joined: Aug 16 2008
Posts: 834
Re: Loss of petrodollar recycling to add pressure to the ...

Gak,

I'd think China would be better off buying gold(which they've already indicated they are going to do) with their Bernanke dollars, rather than treasuries that pay paltry sums of money anyways.  I know China announced a stimulus program which I got the impression they would use to prop up their domestic economy so they could decouple from the U.S. So hold off on the decoupling being debunked just yet.

Chris - I posted this on another thread, but I heard Jim Rogers last week on Bloomberg indicate that our biggest creditors, such as China, Japan, Korea, etc, will stop buying Treasuries in March/April of '09. Add in what you are talking about above with the loss of petro-dollars, and wow, better oil up those printing presses Helicopter Ben!

Headless's picture
Headless
Status: Gold Member (Offline)
Joined: Oct 28 2008
Posts: 363
Re: Loss of petrodollar recycling to add pressure to the ...

 

About Gifts from China:

Currently:

1. China enables U.S. purchasing power (buying bonds);

2. U.S. purchases Chinese goods;

3. Repeat steps 1 and 2 ad naseum;

4. Result? China has big balance in bank book; i.e., there is a big number written in 1's and 0's somewhere.

 

Alternate Scenarios (threaded for "A" and "B"):

I. China does not enable U.S. purchasing power (not buying bonds);

IIA. U.S. does not purchase Chinese goods; or

IIB. U.S. prints money and induces citizens to buy Chinese goods;

III A 1. China uses money they would have loaned to U.S. to buy Chinese products, then dumps products in ocean; or

III A 2. China uses money they would have loaned to U.S. to begin transition process which is a combination of buying own products and dumping them in the ocean, and redirecting excess capacity toward internal infrastructure expansion and improvement;

III B. China says "Hey! You big printer.  We're doing just fine over here and the ocean is deep. If you want our stuff, you need to pay a lot more;

IV A 1. Big number on bank book stays same; loss on (currency value) of Foreign Reserves held in U.S. bonds is offset by deflationary effect (materials in Yuan) caused by decreased U.S. purchasing power;

 IV A 2. Big number on bank book stays same--again; loss on (currency value) of Foreign Reserves held in U.S. bonds is partially offset by fractional deflationary effect (materials in Yuan) caused by decreased U.S. purchasing power, and  is partially offset by increased efficiencies attained by implementing technologically advanced infrastructures (green, most likely); Chinese infrastructure gradually develops to be most modern and technologically advanced system known to humankind. Standard of living in China improves in direct proportion to the decrease in the U.S. standard of living; there occurs a tendency toward Inevitable World-Wide Wage Equilibrium (IW3E).

IV B. Standard of living in China improves in direct proportion to the decrease in the U.S. standard of living; there occurs a tendency toward Inevitable World-Wide Wage Equilibrium (IW3E).

 

davec007's picture
davec007
Status: Member (Offline)
Joined: Aug 18 2008
Posts: 2
Re: Loss of petrodollar recycling to add pressure to the ...

Your calculations are essentially correct, but you should use the oil, not the all liquids number.

Oil = crude oil + condensate + natural gas liquids, which is approximately 81 million barrels per day.

What's even more amazing is how much revenue some of these exporting countries require to balance their own budgets. With oil at $50/barrel, some spendthrift countries (e.g. Venezuela) can't get by. Saudi Arabia is breaking even. The money is unavailable for petrodollar recycling in any case with the oil price so low.

And I doubt we'll be getting it from China or Japan ;-)

-- Dave Cohen

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1233
Re: Loss of petrodollar recycling to add pressure to the ...

cmartenson wrote:

This is a massive difference, and it makes me wonder from whom it is exactly that the US plans on borrowing nearly $2 trillion this year.  Certainly OPEC and Russia would be bad candidates, as they may find their export revenues barely sufficient to keep the lights on at home.

Hmm... I'd be inclined to look at this issue from the other side of the fence: The U.S. Gov't needs to finance this massive bailout mania to the tune of at least $2T. Forced monetization where the gov't has no choice but to print money would look really, really bad.

So if I were a sleazeball working in a senior government role, I'd be trying to figure out what to do to push oil prices back up above $120/bbl. After all Americans already went through price shock on gas prices once, and the second time around is always emotionally easier to swallow. But our goverment desperately needs those recycled petrodollars to finance this mess its gotten itself into. Doing the wrong thing for the American people and the right thing for the burocrats in the government (who can afford $5 gas) by intentionally manipulating oil prices upward seems like the obvious "solution".

Erik

Davos's picture
Davos
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Posts: 3620
gak's picture
gak
Status: Member (Offline)
Joined: Nov 10 2008
Posts: 12
Re: Loss of petrodollar recycling to add pressure to the ...

joemanc,

 I agree that China (and the oil states of the Persian Gulf) are buying gold right now. I also agree that decoupling what will happen sometime in the future. The evidence right now clearly indicates that it is not occurring at present. If you can show me evidence that decoupling is occurring, I would love to see it. 

I think that everyone is looking long term and planning for a future when the dollar has either collapsed or been debased beyond all recognition.  However, I don't think anyone (including myself) knows when that is going to occur.  If you plan on it occurring (and invest in a particular way) well before it does, then you will find yourself very, very broke.  But on the other hand, if it occurs one day before you think it's going to occur, then you will find yourself very very broke. It is a tricky problem for certain.

That is why I think China is going to keep buying our treasuries.Since the US is so dependent upon debt, when it comes time for the treasury to decide which obligations it is not going to honor, then the bondholders, the holders of US treasuries will be the last ones forsaken.

So again I think that you're going to see China continue to buy US treasuries, not because they want to, but because they have to.  Until their middle class is developed enough to buy the goods that they create, they cannot afford for the US to stop buying their products.  And that is exactly what is happening right now.  And it is devastating them. Even more so then it is devastating the US.

 Gak 

capesurvivor's picture
capesurvivor
Status: Platinum Member (Offline)
Joined: Sep 12 2008
Posts: 956
Re: Loss of petrodollar recycling to add pressure to the ...

Gak,

 

That is one of the questions the folks on this thread (and everywhere) struggle with, of course. No one wants to be last man standing holding cash when it hyperinflates or gold when it doesn't. The U.S. government seems to be quite skilled in screwing whoever necessary to get what ends it desires. I don't think they can avoid accelerating deflation in the next year or so (of course I have never taken an economics course), tho, they have been screwed by even sleazier Wall Street bankers this time. Lots of smart folks seem to think inflation starts in 2010.

 

I am holding cash but trying to acquire some gold coins.

 

JMHO.

 

SG

gak's picture
gak
Status: Member (Offline)
Joined: Nov 10 2008
Posts: 12
Re: Loss of petrodollar recycling to add pressure to the ...

Nonzeroone,

Good analysis. And for those playing at home, peruse this from the Great Depression and how President Hoover tried to "defeat" deflation. Think about this when you consider China dumping goods in the Ocean. The parallels are striking since we don't manufacture anything any more. And yes, I realize that Hoover (in this example) was dealing with farming, but this could be easily applied to any industry that manufactures a product:

And so the grandiose stabilization effort of the FFB failed ignominiously. Its loans encouraged greater production, adding to its farm surpluses, which overhung the market, driving prices down both on direct and on psychological grounds. The FFB thus aggravated the very farm depression that it was supposed to solve. With the FFB generally acknowledged a failure, President Hoover began to pursue the inexorable logic of government intervention to the next step: recommending that productive land be withdrawn from cultivation, that crops be plowed under, and that immature farm animals be slaughtered-all to reduce the very surpluses that government's prior intervention had brought into being. It was left to the Roosevelt administration, however, to carry out the next great logical step down the road to a wholly socialized agriculture-an agriculture socialized, we might add, on principles of irrationality and destruction.[25] 

  http://mises.org/rothbard/AGD/chapter8.asp 

 

Gak 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Loss of petrodollar recycling to add pressure to the ...

The new administration looks polarized to me.

On one pole you have a mad printer from the Fed now going to the Treasury, and then on the clean up crew you have a professor who advocates a fast redenomination along side the big V with his 18% interest rates.

I think they are going to destroy the dollar, pay down the trillions to save the democrats beloved entitlements, quickly redomination the trashed buck and then contain the new currency. I'm hearing 12-18 months, but I'm betting it'll be six and we are already 2 into it. Just an off the wall guess. With all the central banks beating the same press I think gold will be the only benchmark.

 

gak's picture
gak
Status: Member (Offline)
Joined: Nov 10 2008
Posts: 12
Re: Loss of petrodollar recycling to add pressure to the ...

Capesurvivor,

I could not agree more.  And I do not think it is possible to know when the deflation will end and the inflation (hyperinflation?) will begin.

Why?

Because no one (especially the government, see Paulson, Hank, Bernanke, Ben and Geithner, Tim for examples) knows what they're going to do next. Governments' actions are what is going to drive this train wreck for the foreseeable future.

 I am calling it "The great race to debased to try and save face."

What better way to honor absurd commitments than printing absurd amounts of money. 

Gak 

RubberRims's picture
RubberRims
Status: Silver Member (Offline)
Joined: Nov 22 2008
Posts: 145
Re: Loss of petrodollar recycling to add pressure to the ...

Hi all

It is welcoming to drift over this forum as it reads well.

I was speaking some time ago to my parents about the recession they experienced in 1970. However this was in the UK.

Back then there was no Internet and things generally moved a little slower. In stark contrast how the Internet has moved this issue so fast in the minds of you and me. I cant but help but think we are looking at the future through rose tinted glasses at this point in time. Saying that I genuinely have good aspirations for the future, if capitalism began to wobble, and I could not get my cappuccino from the high street then so be it. I for one am a socialist, may be this is because I canot not afford to be anything more.

Moving on, does any one think anything of the Amero. It may be a topic for discution for another thead.    

http://www.thelangreport.com/brain-food/the-amero-and-the-north-american-union-fact-or-fiction/ 

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