Russia Breaking Wall St Oil Price MonopolyBy F. William Engdahl
January 13, 2016 "Information Clearing House" - "NEO" - Russia
has just taken significant steps that will break the present Wall
Street oil price monopoly, at least for a huge part of the world oil
market. The move is part of a longer-term strategy of decoupling
Russia’s economy and especially its very significant export of oil, from
the US dollar, today the Achilles Heel of the Russian economy.
Later
in November the Russian Energy Ministry has announced that it will
begin test-trading of a new Russian oil benchmark. While this might
sound like small beer to many, it’s huge. If successful, and there is no
reason why it won’t be, the Russian crude oil benchmark futures
contract traded on Russian exchanges, will price oil in rubles and no
longer in US dollars. It is part of a de-dollarization move that Russia,
China and a growing number of other countries have quietly begun.
The
setting of an oil benchmark price is at the heart of the method used by
major Wall Street banks to control world oil prices. Oil is the world’s
largest commodity in dollar terms. Today, the price of Russian crude
oil is referenced to what is called the Brent price. The problem is that
the Brent field, along with other major North Sea oil fields is in
major decline, meaning that Wall Street can use a vanishing benchmark to
leverage control over vastly larger oil volumes. The other problem is
that the Brent contract is controlled essentially by Wall Street and the
derivatives manipulations of banks like Goldman Sachs, Morgan Stanley,
JP MorganChase and Citibank.
The ‘Petrodollar’ demise
The
sale of oil denominated in dollars is essential for the support of the
US dollar. In turn, maintaining demand for dollars by world central
banks for their currency reserves to back foreign trade of countries
like China, Japan or Germany, is essential if the United States dollar
is to remain the leading world reserve currency. That status as world’s
leading reserve currency is one of two pillars of American hegemony
since the end of World War II. The second pillar is world military
supremacy.
US wars financed with others’ dollars
Because
all other nations need to acquire dollars to buy imports of oil and
most other commodities, a country such as Russia or China typically
invests the trade surplus dollars its companies earn in the form of US
government bonds or similar US government securities. The only other
candidate large enough, the Euro, since the 2010 Greek crisis, is seen
as more risky.
That
leading reserve role of the US dollar, since August 1971 when the
dollar broke from gold-backing, has essentially allowed the US
Government to run seemingly endless budget deficits without having to
worry about rising interest rates, like having a permanent overdraft
credit at your bank.
That
in effect has allowed Washington to create a record $18.6 trillion
federal debt without major concern. Today the ratio of US government
debt to GDP is 111%. In 2001 when George W. Bush took office and before
trillions were spent on the Afghan and Iraq “War on Terror,” US debt to
GDP was just half, or 55%. The glib expression in Washington is that
“debt doesn’t matter,” as the assumption is that the world—Russia,
China, Japan, India, Germany–will always buy US debt with their trade
surplus dollars. The ability of Washington to hold the lead reserve
currency role, a strategic priority for Washington and Wall Street, is
vitally tied to how world oil prices are determined.
In
the period up until the end of the 1980’s world oil prices were
determined largely by real daily supply and demand. It was the province
of oil buyers and oil sellers. Then Goldman Sachs decided to buy the
small Wall Street commodity brokerage, J. Aron in the 1980’s. They had
their eye set on transforming how oil is traded in world markets.
It
was the advent of “paper oil,” oil traded in futures, contracts
independent of delivery of physical crude, easier for the large banks to
manipulate based on rumors and derivative market skullduggery, as a
handful of Wall Street banks dominated oil futures trades and knew just
who held what positions, a convenient insider role that is rarely
mentioned inn polite company. It was the beginning of transforming oil
trading into a casino where Goldman Sachs, Morgan Stanley, JP
MorganChase and a few other giant Wall Street banks ran the crap tables.
In
the aftermath of the 1973 rise in the price of OPEC oil by some 400% in
a matter of months following the October, 1973 Yom Kippur war, the US
Treasury sent a high-level emissary to Riyadh, Saudi Arabia. In 1975 US
Treasury Assistant Secretary, Jack F. Bennett, was sent to Saudi Arabia
to secure an agreement with the monarchy that Saudi and all OPEC oil
will only be traded in US dollars, not Japanese Yen or German Marks or
any other. Bennett then went to take a high job at Exxon. The Saudis got
major military guarantees and equipment in return and from that point,
despite major efforts of oil importing countries, oil to this day is
sold on world markets in dollars and the price is set by Wall Street via
control of the derivatives or futures exchanges such as
Intercontinental Exchange or ICE in London, the NYMEX commodity exchange
in New York, or the Dubai Mercantile Exchange which sets the benchmark
for Arab crude prices. All are owned by a tight-knit group of Wall
Street banks–Goldman Sachs, JP MorganChase, Citigroup and others. At the
time Secretary of State Henry Kissinger reportedly stated, “If you
control the oil, you control entire nations.” Oil has been at the heart
of the Dollar System since 1945.
Russian benchmark importance
Today,
prices for Russian oil exports are set according to the Brent price in
as traded London and New York. With the launch of Russia’s benchmark
trading, that is due to change, likely very dramatically. The new
contract for Russian crude in rubles, not dollars, will trade on the St.
Petersburg International Mercantile Exchange (SPIMEX).
The
Brent benchmark contract are used presently to price not only Russian
crude oil. It’s used to set the price for over two-thirds of all
internationally traded oil. The problem is that the North Sea production
of the Brent blend is declining to the point today only 1 million
barrels Brent blend production sets the price for 67% of all
international oil traded. The Russian ruble contract could make a major
dent in the demand for oil dollars once it is accepted.
Russia
is the world’s largest oil producer, so creation of a Russian oil
benchmark independent from the dollar is significant, to put it mildly.
In 2013 Russia produced 10.5 million barrels per day, slightly more than
Saudi Arabia. Because natural gas is mainly used in Russia, fully 75%
of their oil can be exported. Europe is by far Russia’s main oil
customer, buying 3.5 million barrels a day or 80% of total Russian oil
exports. The Urals Blend, a mixture of Russian oil varieties, is
Russia’s main exported oil grade. The main European customers are
Germany, the Netherlands and Poland. To put Russia’s benchmark move into
perspective, the other large suppliers of crude oil to Europe – Saudi
Arabia (890,000 bpd), Nigeria (810,000 bpd), Kazakhstan (580,000 bpd)
and Libya (560,000 bpd) – lag far behind Russia. As well, domestic
production of crude oil in Europe is declining quickly. Oil output from
Europe fell just below 3 Mb/d in 2013, following steady declines in the
North Sea which is the basis of the Brent benchmark.
End to dollar hegemony good for US
The
Russian move to price in rubles its large oil exports to world markets,
especially Western Europe, and increasingly to China and Asia via the
ESPO pipeline and other routes, on the new Russian oil benchmark in the
St. Petersburg International Mercantile Exchange is by no means the only
move to lessen dependence of countries on the dollar for oil. Sometime
early next year China, the world’s second-largest oil importer, plans to
launch its own oil benchmark contract. Like the Russian, China’s
benchmark will be denominated not in dollars but in Chinese Yuan. It
will be traded on the Shanghai International Energy Exchange.
Step-by-step,
Russia, China and other emerging economies are taking measures to
lessen their dependency on the US dollar, to “de-dollarize.” Oil is the
world’s largest traded commodity and it is almost entirely priced in
dollars. Were that to end, the ability of the US military industrial
complex to wage wars without end would be in deep trouble.
Perhaps
that would open some doors to more peaceful ideas such as spending US
taxpayer dollars on rebuilding the horrendous deterioration of basic USA
economic infrastructure. The American Society of Civil Engineers in
2013 estimated $3.6 trillion of basic infrastructure investment is
needed in the United States over the next five years. They report that
one out of every 9 bridges in America, more than 70,000 across the
country, are deficient. Almost one-third of the major roads in the US
are in poor condition. Only 2 of 14 major ports on the eastern seaboard
will be able to accommodate the super-sized cargo ships that will soon
be coming through the newly expanded Panama Canal. There are more than
14,000 miles of high-speed rail operating around the world, but none in the United States.
That
kind of basic infrastructure spending would be a far more economically
beneficial source of real jobs and real tax revenue for the United
States than more of John McCain’s endless wars. Investment in
infrastructure, as I have noted in previous articles, has a multiplier
effect in creating new markets. Infrastructure creates economic
efficiencies and tax revenues of some 11 to 1 for every one dollar
invested as the economy becomes more efficient.
A
dramatic decline for the role of the dollar as world reserve currency,
if coupled with a Russia-styled domestic refocus on rebuilding America’s
domestic economy, rather than out-sourcing everything, could go a major
way to rebalance a world gone mad with war. Paradoxically, the
de-dollarization, by denying Washington the ability to finance future
wars by the investment in US Treasury debt from Chinese, Russian and
other foreign bond buyers, could be a valuable contribution to genuine
world peace. Wouldn’t that be nice for a change?
F.
William Engdahl is strategic risk consultant and lecturer, he holds a
degree in politics from Princeton University and is a best-selling
author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.
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