Alex Wallenwein
On
January 18, 2004, Reuters reported that former Malaysian Prime Minister,
Mahatir Mohamed, advised Saudi Arabia to demand gold for its oil.
For a couple of days, the Internet was all abuzz about the statement,
but nothing was written to analyze in depth the possible ramifications
of the Saudis actually making that move.
That's probably because nobody thinks for a second that the Saudis
might actually do such a thing. But just imagine for a moment that
Saudi Islamists stage a coup and gain control of the Saudi's oil
empire. Demanding that the US pay gold for oil could indeed be
their much-desired "weapon
of mass destruction." It would be the economic equivalent to setting
off a neutron bomb in downtown Manhattan.
In simple, straightforward economic terms, not even taking into account
the financial and political ripple-effect of such an action, it would
eventually force the world into either a quasi gold-standard, or a
situation where only specie is accepted in international trade.
It is, of course, no secret that Mahatir wants exactly that for his
gold dinar. The impact on the United States alone would be nothing
short of devastating - and that is without doubt is his intended result.
So, what's the immediate effect if OPEC "goes gold"?
The Effect:
For simplicity's sake, let's for the moment disregard the enormous
upward-pressure on gold prices such an action would set off. Let's
take a look at the situation in terms of how long US gold supplies
would last if neither the gold nor oil prices were to change over the
period in question.
According to the New York Fed, the US national gold stock is nearly
262 million ounces (overlooking for the moment the possibility that
the US no longer owns much of its former gold). At the current market
price near $405/oz, these ounces represent slightly over $106 billion
worth of gold buying-power.
It is hard to conceive a situation where, if the world's largest oil
exporter and holder of proven oil reserves should start demanding gold
for its oil, the other OPEC countries will not immediately follow suit.
Other members would not sit idly by and watch Saudi Arabia alone drain
the world central banks' gold reserves. They would most certainly want
in on the action (and so would Russia, Canada, and Mexico, as a matter
of fact). We therefore look at the total US import figures from all
of OPEC together (but excluding the other major producers) in figuring
out the immediate effect.
In 2003, daily US oil imports from OPEC countries averaged slightly
in excess of 5 million barrels a day, which amounts to 1.8 billion
barrels per year. At current market prices for crude oil (near $31/bbl
at the time of this writing), OPEC imports cost the US about $56 billion
per year.
If the US had to pay for its OPEC oil in gold, it would have to ship
about 138 million ounces of gold per year at current prices ($405 gold,
and $31 per barrel of oil). Since there are only 262 million ounces
of gold (at best), that means the entire US gold stock would be gone
in a little under two years!
(As an aside, it is worth noting that the EU could outlast the US almost
ten times in that situation. EU imports just under one million barrels
a day from OPEC [one-fifth of US imports], and it roughly has a cumulative
384 million ounces of gold reserves compared to the US' 262 million.
That would give it about twelve years of OPEC oil imports.)
At current market prices, one ounce of gold (at $405 an ounce)
buys 11.57 barrels of crude oil (at $35 per barrel), or 0.086 ounces
of
gold per barrel of oil. Let's just say its close to a tenth of
an ounce per barrel. In order to make the transition a bit more
palatable
to
the US and thereby avoid another outright invasion, OPEC might
set the gold price of crude at far lower levels, say at 0.01 ounces
per
barrel. That way, the US could "live" on its gold stock for almost
15 years or so. If OPEC were to single-mindedly and inflexibly
pursued an oil-for-gold policy, it would on the one hand certainly
end up
with all of US gold stock in a very short time while, on the other
hand,
it would lose its biggest customer. After the US spent all of its
gold, there would be no one left to fill the void.
Claiming Iraqi Oil
The US, of course, doesn't have to go the invasion route. It currently
occupies Iraq, which has the world's second largest proven oil reserves.
If OPEC made this policy change, the US could easily reverse its present
course of turning over government authority to the Iraqis, and could
actually start behaving like a full-fledged conqueror.
Iraq has 115 billion barrels of proven reserves. At a rate of 1.8 billion
barrels per year of oil imports from OPEC, the US can satisfy its entire
current OPEC import demand from Iraq alone for more than 50 years -
once it brings sufficient production capacity online. There are of
course terrorist attacks on pipelines, facilities, etc. to take into
account. Nevertheless, it's better than having to spend all of its
gold on oil.
For the US, this would constitute the least expensive solution from
a purely economic cost/benefit standpoint. But this is where we need
to consider the inevitability of a gold price explosion that will result
from the enormous added demand from OPEC demanding gold for its oil.
That price explosion alone would immediately doom the dollar, and therefore
the entire US economic machinery.
So, even if the US can avoid paying for oil with gold, which is
not entirely certain, (consider the political fallout from totally
claiming
Iraq) gold would shoot so high that the dollar, due to existing
trade deficit/debt load problems, would be pulverized - ahead of
all the
other fiats. Think, "US of A" as in "United States of Argentina"
Universal Gold-Settlement?
Whatever the complexities and strategic contingencies of such a move
by OPEC, one thing is immediately clear: If the oil consuming countries
of the world don't want to end up with dwindling buying power and disappearing
public stocks of gold, they'll be forced to demand gold settlement
for all of their exports to OPEC countries. That, in turn would eventually
cause the entire world economy to get back to gold settlement, at the
very least for international trade purposes.
The question arises: once most international trade is settled in gold
(and maybe silver, especially after its imminent price-adjustment)
can individual transactions within countries remain far behind?
What is "trade" between countries, really? Trade is not primarily
something the governments of different countries do with each other.
Trade is
mostly conducted between different countries' private corporations
and individuals.
So, if corporation "A" sells a shipment of Mercedes to a wholesaler
in Saudi Arabia, it can demand gold in payment. What will "A" do
with that gold in its home country? It may sell it for cash and
use the
cash to pay expenses, save, invest, or buy whatever it needs. But
in an economic environment where gold is demanded by OPEC for oil
payments,
all paper currencies will rapidly depreciate against gold due to
an unbelievable increase in gold demand world wide.
Under that scenario, "A" would be worse than stupid to sell its ultimate
value-retainer - gold - for an ultimate value-loser - cash. So it will
keep its gold. Corporation B, which does business with "A" at home,
sees its own "stash of cash" losing purchasing power by the minute,
so it wants gold, too. It will demand payment in gold from "A" for
its services.
In turn, A's and B's employees (at least upper management with enough
clout) may demand their pay in gold as well ... and so on, and so on.
Maybe in the US, legal tender laws and the abrogation of gold clauses
will prevent such a scenario, but there is probably little in other
countries that would prevent this from happening.
The more instances of this process take place, the more fiat would
lose value, in turn accelerating the entire process. Very soon, nobody
will take cash for anything except at tremendously discounted values,
and everyone and their brother will demand gold for literally everything.
We will have a pure-specie currency system in no time.
And that, dear reader, is Mahatir's plan. Could this actually happen?
Just ask yourself if the Wahabis could overthrow the Saudi dynasty,
and you have the answer staring you right in the face..
The "seeds" have been planted in the minds of OPEC leaders. If
they grow, their harvest will be in gold - and cash will be trash.
Got gold?
Alex Wallenwein
Editor, Publisher
The EURO VS DOLLAR CURRENCY WAR MONITOR
Helping investors prepare for, survive, and prosper during the ongoing
dollar-collapse.
26 January 2004 |
