Oil As Currency

This week the focus is on how oil is really the driving force to many economic moves, and has even farther reaching affects than most people realize. We will begin to explore the affect that oil is the world currency, a resource that every country craves.

First, we all know that oil is used to make gasoline, diesel, heating oil, jet fuel, and even plastics. But let's take a look at what other products are made from oil. Here are just some of the products listed alphabetically - ammonia, anesthetics, antihistamines, artificial limbs, artificial turf, antiseptics, asphalt, aspirin, auto parts, awnings, balloons, ballpoint pens, bandages, beach umbrellas, boats, cameras, candles, car battery cases, carpets, caulking, combs, computers, cortisones, cosmetics, crayons, credit cards, curtains, deodorants, detergents, dice, disposable diapers, dolls, dyes, eye glasses, electrical wiring insulation, golf balls, faucet washers, fertilizers, fishing rods, fishing line, fishing lures, food preservatives, food packaging, garden hose, glue, hair coloring, hair curlers, hand lotion, hearing aids, heart valves, ink, insect repellant, insecticides, insolation, linoleum, lip stick, movie film, medicines, milk jugs, nail polish, oil filters, panty hose, perfume, petroleum jelly, rubber cement, rubbing alcohol, shampoo, shaving cream, shoes, shower curtains, solvents, telephones, toilet seats, toothpaste, trash bags, upholstery, vitamin capsules, water pipes, and yarn. Needless to say, oil products touch our lives on a daily basis.

So, naturally, when the price of oil goes up, all of these consumer goods cost more and their prices raise, plus the increased transportation costs of getting the products to market. Thus, all of these prices that go up add to the overall inflation, both core and real inflation (these were discussed again in Saturday's post).

Considering the economic impact oil has on us, it also drives the politically agenda of most countries. The key fact is whether the country is an oil importer or exporter. Most oil sales throughout the world are denominated in United States dollars (USD). This gives the US economy a distinct advantage throughout the world.

Because most countries rely on oil imports, they are forced to maintain large stockpiles of dollars in order to continue imports. This causes demand for USDs to remain high, regardless of economic conditions in the United States. This allows the US government to gain revenues through seignorage (net revenue derived from issuing currency calculated as the difference between the face value of a coin or paper notes and the cost of producing, distributing and eventually retiring it from circulation) and by issuing bonds and other US government securities at lower interest rates than they otherwise would be able to. As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries.

This has introduced the dominance of the "Petrodollar". Since 1975, the United States has officially benefited from the global use of petrodollars, owing to the fact that oil-importing countries must pay for oil in dollars. Oil exporters invest the dollars received in large amounts of U.S. securities in order to avoid currency fluctuation risks. Oil importers also have to buy dollars and U.S. treasuries in huge amounts to be able to pay their oil bills. This global demand for dollars has helped the United States not only to keep its currency strong, but also to allow American consumers to import goods for less than would otherwise be possible. Moreover, it has allowed each U.S. administration to borrow massively abroad to sustain larger and larger trade deficits. This situation has kept U.S. inflation down but has created a fiscal nightmare. The current "dollar arrangement," however, is eroding with the growing power of the euro in international finance.

Whatever happened to the Graham-Rudman balance budget idea to reduce federal budget deficits? The truth is that no one cares anymore. The debt is so high that it can not be paid back, so we continue to spend, spend, spend. What happens when the credit runs out? I guess we are starting to find out.

Tomorrow, we will look further into the role of the euro at changing world politics. Stay tuned ...

In the house of the wise are stores of choice food and oil,
but a foolish man devours all he has. Proverbs 21:20 (NIV)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com