Money, Hegemony And Oil Prices 

April 1st, 2015 | R. Rados 

There has been a lot of speculation about the sudden and drastic drop in oil prices that began in late 2014. Canadians, and Albertans in particular, have a very self-centric view of the world. Many of them believe that they're the only ones being made to suffer under low oil prices. A glance at the bigger geopolitical picture tells a very different story. A story with a much more complex plot and more complex characters.

A large amount of US oil is imported from Canada and Saudi Arabia, so on a more shallow economic level there will always be a rivalry between countries who want Americans to buy more of their oil. There will also be wealthy American industrialists who want Americans to consume more American oil and natural gas. I wrote about this and the amount of American and foreign money being funnelled into Canada by the Tides Foundation – and its several offshoots – to protest Canadian oil production. However, that's only a small part of the story. The United States and Saudi Arabia's energy partnership stretches back to the Nixon administration and the US-Saudi Arabian Joint Commission On Economic Cooperation. The recent slump in oil prices, which is being caused mostly by Saudi Arabia refusing to cut oil production, is the result of a larger geopolitical strategy to undermine and weaken countries that have been deemed a threat to US interests around the world. 

The Commission has a system of parallel command in which the Unites States Secretary of the Treasury and the Saudi Minister of Finance and Economy serve as co-chairmen and the US Assistant Secretary of Treasury for International Affairs and the Saudi Deputy of Finance serve as coordinators.”  – US Accountability Office, highlight of the US-Saudi Arabian Joint Commission On Economic Cooperation.

The Nixon administration accomplished two very important things that have allowed the United States to exercise control in the Middle East and around the world. First, Nixon made the USD a floating fiat currency, meaning it could no longer be converted into gold and vice versa. Second, he created a new partnership with Saudi Arabia in which the Saudis agreed to sell their oil on the global market in US dollars. Today, all oil is bought and sold only in US dollars. This essentially means that the USD went from being backed by gold to being backed by oil. Furthermore, the US-Saudi Arabian Joint Commission allows (or requires) Saudi Arabia to invest its excess petrodollars into US securities and trusts. Many other OPEC countries have since recycled their own excess US petrodollars by investing them into US, European and Arab banks and securities.

Before all of this, oil was traded globally in USD because the United States was the largest oil producing and consuming country in the world, but there was nothing stopping other countries from buying and selling oil in other currencies. It was an embargo by OPEC nations during the 1970s that provoked the new deal between the US and Saudi Arabia out of fear that the USD would lose significant value if it was no longer used in oil trade. Ever since, the US has been consistently trying to keep its currency in demand.

A strong USD means continued economic and military growth. In 2000, Saddam Hussein began selling Iraqi oil in Euros. In 2003, Saddam Hussein was removed and Iraq went back to selling its oil in US dollars. The more oil the United States can control, the easier it becomes to control global supply and demand for its own dollar.

Fast forward to today. The recent crash in oil prices can be largely attributed to Saudi Arabia and the US. In December, Iranian president, Hassan Rouhani, called the oil crash a coordinated conspiracy by the United States and Saudi Arabia to undermine the Muslim world. “The fall in crude prices is not merely an economic issue. Iran and people of the region won't forget such conspiracies or treachery against the interests of the Muslim world,” he said. Saudi Arabia denied the allegations, claiming it had only refused to cut production to zap the life out of US shale production.

There's no doubt that zapping life out of US shale production is a good strategy for Saudi Arabia, but the strategy as a whole won't permanently kill shale production. The strategy also hurts Saudi Arabia's own profit margins. Another important fact to recognize is that US oil production has nearly doubled in the last decade. More importantly, just like in Saudi Arabia, oil production in the US hasn't slowed at all since the collapse in prices. In fact, US output is on the rise.

Through all of this, it's important to keep in mind that demand for oil hasn't decreased and the US economy is not solely dependent on the oil industry. Oil demand is expected to rise continuously over the next two decades as the global population grows. As long as there is a demand for oil, there will be a demand for US dollars and an increased capacity for US economic and military growth.

This year, Barack Obama declared Venezuela a national security threat. Venezuela, like Iran, is a member of OPEC. Both Iran and Venezuela expressed their anger and outrage toward Saudi Arabia for purposely flooding the global market and driving down the price of oil. The crash in oil prices has diminished the economies of both oil dependent nations. In November, a Venezuelan representative stormed out of an OPEC meeting when his calls to drastically cut production were ignored by the Saudis. Venezuela probably isn't a significant military threat. However, the country is a key player in global oil trade and the United States has historically failed at controlling the country's leaders, so it does pose an overall danger to the United States' long term goals. 

Besides Venezuela and Iran, other geopolitical adversaries are also suffering from low oil prices. Such adversaries include Russia and ISIL.

Just before the collapse in oil prices, it was reported that ISIS had been making millions of dollars to finance its terror operations by selling oil from captured oil fields on the black market. The Islamic State had been selling its oil at prices slightly below market value to Kurds in Iraq, who then sold it to traders in Turkey, Jordan and Iran. Between July and October of 2014, the Islamic State was making millions of dollars per week by smuggling Iraqi oil. Of course, after the drastic slump in prices, the Islamic State's finances have taken a massive hit.

In March of 2014, Russia annexed Crimea. By winter of 2014, oil prices had plunged to rock bottom. It's not difficult to do the math in this situation either. Russia is one of the world's largest oil exporters. In March of last year, Russia overstepped its boundaries and tried to expand its own power in the region. Today Russia's oil industry and economy are getting crushed. The nation's three major producers, Gazprom, Lukoil and Rosneft have been forced to cancel projects and the country's production estimates for 2020 have dropped by half a million barrels per day. As a result, the Russian Ruble has tanked and the economy is in serious decline.

Unfortunately, Vladimir Putin isn't the type to go down without a fight. He knows how the game is played and he won't be beaten so easily. Russia has the world's second largest military and one of the biggest nuclear arsenals on Earth, which is why Putin knows he can get away with doing things that Saddam Hussein couldn't. Last month, one full year after Crimea, Vladimir Putin was in Kazakhstan calling for a new Eurasian currency. Russia has also joined China's new development bank.

The economic relationship between the United States and China is complex. China currently depends on exports to the United States and on fossil fuels, but that's bound to change eventually. Evidence has been pointing at China making preparations to relieve itself of US dependency. In order for this to happen, China would have to secure its own currency.

The US has long been opposed to the birth of a Chinese development bank. The Asian Infrastructure Investment Bank, or AIIB, just added Russia to its membership list. The bank directly competes with the American backed World Bank and International Monetary Fund. Before adding Russia, the AIIB added the United Kingdom – much to the dismay of the United States.

The UK angered Washington when it became the first major Western country to join the Chinese-led bank, but a string of nations have since put their names to the $5B organization.”  – James Titcomb,The Telegraph, “US Isolated As Australia And Russia Join China's Development Bank

Analysts have also observed what they believe is “clandestine buying” of gold by China's own central bank. Many believe that China's central bank has been stockpiling gold for over a decade. This comes partly from noticing large troves of gold missing from the international market.

Speculation abounds about a large trove of gold that seems to be missing from the global market. Analysts calculate that up to 500 tons or more are stashed away, based on the difference between China's domestic gold production of 428 tons in 2013 plus its estimated gold imports of at least 1158 tons, and its annual demand of about 1066 tons. The Chinese government does not release an import figure, so this number is disputed.”  – Shu-Ching Jean Chen, Forbes, “China's Secret Vaults: Where Is All The Missing Gold?

The US dollar and oil keep US hegemony intact. Russia knows it, Iran knows it and China knows it. Being backed by oil gives the US and its dollar unquestionable power. Keeping that in mind helps us understand current events. By watching who challenges the US dollar, we can predict who will pose a threat to US interests around the world. When in doubt about most international events, we can usually find answers by following the money.