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Sunday, November 25, 2007

OPEC Currency Advice

I saw a news story that OPEC was considering trading oil using a currency other than dollars. The most commonly mentioned candidate is the euro.

The problem is that OPEC countries sell their oil in advance for a fixed price in dollars. Suppose an OPEC country sells a 2 year oil future for $110/barrel. Two years from now, it turns out that the price of oil really is $165/barrel, due to inflation. The OPEC member country wound up selling oil for only 2/3 of its actual value. Where does the rest of that money go? The benefits of inflation, as usual, proceed to the US financial industry.

Switching from the dollar to the euro is merely switching from one unbacked paper currency to another unbacked paper currency. Instead of the US receiving a massive seignorage subsidy, the EU instead would receive a massive seignorage subsidy. If OPEC switched from dollars to euros, the OPEC member countries themselves would not benefit. All that would mean is that the EU instead of the USA would receive a massive seignorage subsidy by printing the paper money that others use to trade.

Most OPEC member countries are reluctant to switch away from dollars. Either the government already is the recipient of US military support, or the government fears a US invasion.

If OPEC really and sincerely wanted to sell oil for a hard currency, there's already a time-tested model. OPEC should sell oil for gold! (or silver)

Of course, no leader of an OPEC member country would dare suggest selling oil for real actual money (gold). He would be assassinated faster than you could say "Why was Kennedy killed?"

OPEC could even agree to sell oil for gold without switching away from the dollar. All OPEC would need to do is start inserting "gold clauses" into their oil sale contracts. Instead of agreeing to sell oil for $100/barrel or 80 euros/barrel, they could agree to sell oil for 0.1 ounces of gold per barrel. OPEC wouldn't even need to accept physical gold. They could accept the fiat-money equivalent in dollars or euros, based on the spot price of gold in that fiat currency on the delivery date. OPEC member countries could then immediately spend that fiat money on hard assets, before inflation steals the value. People who use oil would then buy gold futures to hedge their oil purchases.

If OPEC really wanted to annoy the rest of the world, they could accept either gold or fiat money, and charge a premium to people who pay in fiat money instead of physical gold!

OPEC could achieve the same result by simultaneously selling oil futures and buying gold futures. This way, they would be hedged against inflation.

Also, any government that has reserves in a foreign fiat currency is run by fools. The only valid reserves are gold, silver, or other hard assets. Accepting any fiat currency as a reserve means your reserves will be eroded by inflation. Foreign central banks who hold dollars earn around 5% on their Treasury Bonds, while the Federal Reserve increases the money supply at a rate of over 6% (according to M2) or over 15% (according to reconstructed M3). That means that foreign holders of dollars earn a negative real return of -1% to -10%, depending on what measure of inflation you use.

My advice to OPEC is very simple. They should start quoting the price of oil in gold or silver. Foreign central banks should convert their dollar reserves and fiat money reserves to actual gold or silver. Unfortunately, no leader of an OPEC member country could suggest such a possibility and expect to live much longer.


Anonymous said...

Makes a change seeing the truth so clearly when compared to mainstream media, where 'serious' current affairs programs avoid such simple and obvious 'news'.

Lexx said...

The European Central Bank only has 500 bil reserves so you are right about the backing of the money.

But with oil prices rising and a dropping dollar the Euro is the stronger currency stronger at the moment.

Switching to the Euro by the OPEC would only make the Euro stronger imho.

I like your blog, keep up the good work.


redpillguy said...

The books "A Century of War", "Tragedy and Hope", and "The Naked Capitalist", explain that the oil supply is controlled by the "Seven Sisters" (world oil cartel) and not OPEC. Therefore they don't have the power to choose to price oil in ounces of gold/silver.

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