SPEAKING FREELY Price dollars in oil,
not oil in dollars By Chris
Cook
Speaking Freely is an Asia
Times Online feature that allows guest writers to
have their say. Please click hereif you are interested in
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A very strong case
has been made by William Engdahl (the author of
A Century of War - Anglo-American Politics and
the New World Order) that the three principal
goals of US foreign policy in the last 100 years
have been energy security, energy security and
energy security.
But it is becoming clear
that the Iraq war - while aimed at reducing US
reliance upon Saudi oil - may have unintended
consequences in terms of changing the dynamics of
the oil market generally and the Organization of
the Petroleum Exporting Countries (OPEC) in
particular. When it is considered that the US,
with 5% of the global population consumes 25% of
global energy supplies, we see the sheer
impossibility for China or India to begin to
approach US levels of consumption within the
existing global political and financial market
settlement that has been maintained since Bretton
Woods in 1944. But what is the alternative?
The pricing of oil There has
been a growing realization on the part of major
oil producers such as Iran and Saudi Arabia that
oil is not priced in dollars but rather dollars
are priced in oil. The reality underpinning this
epiphany is the fact that oil has "value", or
"money's worth" - in exchange for commodities,
goods and services - whereas the financial object
we are accustomed to think of as the "dollar" is
merely a "claim over value", or IOU issued by the
US Federal Reserve Bank.
If we look at the
current structure of the global energy market, we
are conditioned to think that the "big bad wolf"
is a "cartel" of OPEC members. However, the fact
of the matter is that while there has indeed been
a cartel extracting extraordinary profits from
energy markets in recent years, this has consisted
of intermediary investment banks and energy
traders, who control the global market platform on
which oil is traded and benchmark prices are set.
In other words, the derivative tail has been
wagging the oil market dog.
This is set to
get worse, to the extent that a major trading
disaster is only a matter of time - possibly as
soon as this winter, if Goldman Sachs' prognosis
of a "super-spikes" to $100/barrel oil is
realized. The reason for this is the fact that
investment banks and oil companies have themselves
now lost control of the price-setting process to a
wall of hedge fund money under the control of star
traders attracted by rewards beyond the dreams of
avarice - as opposed to the pittance they were
receiving with their former employers.
Hedge funds - as the Long Term Capital
Management meltdown showed us in 1998 - are almost
entirely unregulated, since there is no regulatory
body with access to data in relation to their
transactions (particularly "off-exchange") or with
the capability to take enforcement action over the
offshore entities typically used by hedge funds.
Due to the lack of transparency in
"off-exchange" trading, oil producers and
consumers do not even know that they are losing -
a phenomenon which J K Galbraith memorably
described as the "bezzle". However, while oil
producers and consumers have now woken up to the
bezzle, the problem they have is what to do about
it. It has long been clear that a Middle Eastern
benchmark oil price is a key part of the solution,
and the creation and domination of such a
benchmark has been the Holy Grail for the
International Petroleum Exchange and New York
Mercantile Exchange for some 15 years.
Whatever the benchmark and market
mechanism, there are two functions which are
generic to all markets: money, capital,
commodities, energy, whatever. First, there is a
requirement for a legally binding contract -
"transaction registration"; second, there is the
function of transfer of title against payment.
Together these are thought of as "clearing and
settlement". These two functions constitute a
natural monopoly and should therefore only take
place in the context of an "enterprise model"
(legal and financial structure) which is neutral
both in terms of participation and absence of
outside investors.
The requirement is
therefore for an "Energy Clearing Union"
comprising all market participant constituencies -
whether producers, consumers or intermediaries -
constituted as an "International Energy Trade
Association" ("IETA") and served by a consortium
of providers of services such as communications,
technology, risk management and so on. Such an
IETA would not only have access to trading data
both on and off-exchange but would also be in a
position to impose standards of probity and market
behavior with the threat of sanctions such as
suspension - temporary or permanent - of the right
to register transactions.
Bilateral
transactions between IETA members would be subject
to mutual guarantee, backed by suitable deposit or
margin arrangements and/or a default fund. A risk
management partner - rather than a central
counterparty "Clearing House" - would manage the
system and the risk. The outcome is a "Clearing
Union" or "Guarantee Society", as recently adopted
by the Scottish Liberal Democrats as part of their
policy to stimulate small and medium-size
enterprises. Such a Clearing Union would be
operated by a neutral consortium of service
providers within a true partnership arrangement,
with funding provided by the stakeholders
themselves without recourse to outside investors.
The Clearing Union concept is not a new idea
within the oil market - at least one OPEC member
has been advocating an OPEC Clearing Bank and
associated investment institution for almost 20
years.
A rational energy
policy It was instructive to hear the
response at an industry event last June of both a
panel of senior energy traders and their audience
when asked for an assessment of the likely success
of emissions trading. "Slim to zero" was the
consensus of both, and even more telling was the
analogy from the floor: "If you want to keep a
donkey healthy you don't take care of what comes
out of it, you take care of what goes in."
We do not have to look beyond the
structure of the limited liability company to
realize what the problem is with emissions
trading. It is not necessary to make any ethical
or moral judgment with respect to "the
Corporation", merely to observe that the managers
of GasCo Inc or Oilco Plc are likely to be held to
account by their shareholders if they fail to
minimize costs and maximize shareholder value.
A levy on non-renewable energy would
affect the costs of global intermediaries in a way
that they would find more difficult to pass on and
is therefore not in the interest of investors.
This "externalization" of costs is the reason why
the more canny oil companies and conglomerates
have been assiduously promoting and lobbying for
the emissions trading concept. The embarrassing
fact is that if emissions trading could actually
work, energy intermediaries would not support it.
An "Energy Clearing Union", on the other
hand, while not necessarily in the interests of
investors is certainly in the interests of the
planet. In particular, it could form the
cornerstone of a rational global energy policy as
an alternative to fundamentally unworkable
emissions trading schemes. Since all energy
transactions would be registered, it would be easy
to apply a suitable levy that could then form the
basis of an "Energy Investment Fund" that would
fund investment in:
Existing and future non-renewable
infrastructure, to ensure the most efficient
possible utilization of these finite resources
Renewable energy
Energy-efficient and eco-friendly housing and
infrastructure
IETA would increase the oil
price with a levy of (say) $20/barrel above the
market clearing level, and with the excess,
acquire and develop the capital assets of all
existing oil intermediaries while utilizing their
expertise as development partners with incentives
made up of a share in any gains in energy
efficiency for which they are responsible.
A money based upon value While
an "Energy Clearing Union" provides the means for
a rational energy policy, it still treats the
symptom rather than the disease. In order to
address the real problem, we need to re-examine
the monetary unit itself. It is possible to
conceive of a global "petro-dollar" - based upon a
set amount of energy - which would be capable of
fulfilling a role as a genuine alternative to the
dollar as a global means of exchange.
J M
Keynes put forward at Bretton Woods 60 years ago
an "International Clearing Union" coupled with a
new monetary unit he called the "Bancor".
Unfortunately, what we got is a "central
bank-centric" monetary system configured around
the World Bank/IMF and the Bank of International
Settlements where the monetary units we use are
essentially debts created by central banks and
issued into circulation by banks as loans.
We take for granted that we need banks to
create credit but perhaps do not realize that this
bank-created credit constitutes the bulk of our
money supply. The effect of a monetary unit
created as a debt is that - to take the UK as an
example - more than 97% of all money in
circulation has come into existence through the
creation of loans (two-thirds of them in respect
of mortgage loans secured against property) by
"credit institutions" such as banks and building
societies.
However, when credit
institutions create money through a loan, they do
not create the money necessary to repay the
interest on that loan. So the simple and
inexorable mathematics of compound interest on the
loans backing our money drives the unsustainable
imperative for economic growth at the heart of our
malaise. We also take for granted that banks are
entitled to charge interest on the credit they
create.
A new website, www.zopa.com, which
links would-be borrowers together with would-be
lenders essentially on a peer-to-peer basis, does
for banks what Napster did for the music industry
- it dis-intermediates them. But the Guarantee
Society or Clearing Union goes further than this:
credit is granted bilaterally and interest-free,
and the only costs to the system user are the
administration/accounting costs and a share of any
defaults. Furthermore, there is no reason why
transactions in a "Clearing Union" need be settled
in central bank-issued money, since users may
quite simply agree that they will accept "money's
worth" in (say) energy or commodities instead by
reference to a value unit.
While banks,
credit unions or ratings agencies may be the
managers of the system and credit creation in this
model, banks would no longer be able to charge us
for their use of our credit. Some commentators,
notably Susan George and George Monbiot, are
advocates of an "International Clearing Union" as
a solution. However, while an "International
Clearing Union" is undoubtedly capable of being
part of the solution, it is also necessary to
address the nature of the monetary unit itself so
that we may achieve a global monetary unit based
upon "value" - such as an absolute amount of
energy - rather than its antithesis - the
Fed-issued Dollar.
An International Energy
Clearing Union could provide a platform both for a
new and rational energy policy and - in
conjunction with new energy investment
institutions - for a global monetary system based
upon value rather than the US dollar. This would
literally "reverse the polarity" of money to base
it upon value, rather than upon a claim over value
created by a bank out of thin air.
The
existing system is approaching a crisis point, and
a new alternative is emerging. A revolution is
approaching - albeit a silent one - and when it is
over we will wonder how it could ever have been
otherwise.
A former director of the
International Petroleum Exchange, Chris
Cook is now a strategic market consultant,
entrepreneur and commentator. Reprinted with
permission from www.energybulletin.net.
(Copyright Chris Cook 2005)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
