The Quiet Road

I’m on an email discussion list that includes a bunch of people in the oil industry. On an average day the ratio of shop-talk to global conspiracy stuff is 10:1… and really, there’s only so many times you can read the same impassioned arguments about the merits of different fluid injection methodologies. But every now and then a discussion about a wider political issue gains traction. By and large these are sober, conservative (small ‘c’) engineers not taken to flights of fancy. So when they start saying things like “there’s only a 60% chance the US dollar will still be a viable currency in 18 months”, it piques my interest.

For the past couple of months there has been an almost complete consensus among these people that the Gulf States are driving down the price of oil in order to destabilise Iran. There’s even a guy who – having spent some time chatting with a staffer in the UAE oil ministry – claims that Saudi Arabia, Kuwait and the UAE are targeting $40 per barrel by the middle of 2015 and they intend to keep it there for a year.

As an aside, I read a message from a guy who said he expects 5 year oil futures to drop below $85 any day now. That there… that’s as close to a sure thing investment as the modern financial industry is capable of. What’s more, given the short-sightedness of the financial industry, I wouldn’t be surprised if you could buy November 2020 oil futures for less than $70 by this time next year. Pretty crazy.

Anyway, there’s no doubt that Iran’s economy is utterly buggered if this continues for much longer. Even if the $40 for a year thing is exaggeration, this is presenting Tehran with very serious problems.

Thing is, Iran isn’t the only place this is hitting hard. The Gulf States can weather this storm, but almost no other major oil exporter can. And while oil importers are quite enjoying this period of temporary price-fixing, places like Venezuela and Nigeria are suffering. The fracking industry in the United States is also in trouble (though this price drop is only one of the reasons for that) but America isn’t too worried about that because they like seeing the squeeze put on Iran, while the damage being done to the Russian economy is being seen – curiously enough – through the lens of Ukraine, the Malaysia Airliner disaster and what’s being viewed as Putin’s increasingly aggressive stance towards the west. So the Americans are offering their explicit support to the Gulf States in order to put Russia under pressure.

Now, let’s be under no illusions here… Putin is a dangerous man. I’ve noticed more and more western liberals buying into the Russia Today narrative and viewing Putin with a kind of grudging, “enemy of my enemy” respect. Which is madness, because this guy should be viewed as at least as big an enemy as western capitalist imperialism. Anyway, it’s simply inconceivable that Russia won’t respond dramatically to this very real threat to their national economy. And what response will that be?

Well, according to the mailing list people, Putin is getting ready to announce a major shift in policy. Early next year he will be switching all of Russia’s petroleum trading to roubles. That’s what they’re saying on the grapevine anyway.

A lot of people – even economically literate ones – don’t fully understand the important link between the US dollar and the global oil trade. The pricing of oil in dollars isn’t just a matter of convenience. All trade in oil actually takes place in dollars. Dollars get exchanged for oil. Not euro, or roubles or yen. This ensures a constant demand for dollars as anyone who wants oil… i.e. everyone… needs to buy dollars before they can buy that oil.

Not sure if you’ve noticed the huge collapse in the value of the rouble in the past week? And the huge Russian interest rate hike? Well, according to some people Russia has deliberately torpedoed their currency in order to buy back roubles, from anyone who has them, at a bargain price. Because if Putin goes through with this and demands roubles in exchange for oil and gas? He will instantly make the rouble into a European reserve currency. Demand will rocket and the dollar flight will begin.

Unlike other countries, the US will not be able to intimidate Russia into backing down on this. Especially given the huge hardship being caused to Russia by this US-supported Gulf strategy. And if it turns out to be a success for Putin (which I think it will do) then there’s really nothing to prevent other countries doing the same.

The Saudis, with the support of the US, are playing a very risky game right now. And one that could result in the end of the dollar as global reserve currency. Sleep tight.