Monday, September 17, 2007

It's About the Oil Money

The web is ablaze with talk about Iraq, oil and the latest passing comment from Alan Greenspan. Let’s be clear:

The Iraq war is not about controlling oil. There is a global market in the gunk, and if the US or anyone else has difficulty getting it from country A it can always turn to country B. Also, no otherwise poor country would ever, ever refuse to sell oil for any prolonged period of time. It’s the difference between being important and having some leverage, and being a nobody. Quite aside from whatever you think about Hugo Chavez’ policies, where would he be if he stopped pumping and selling oil? So, no, there is no threat that any oil producing country will cause chaos by dismantling its industry or even reshuffling its sales contracts.



It could be about setting OPEC quotas, maybe. The countries the US hates and tries to undermine tend to be OPEC hawks (Iran and Venezuela). But it is not clear that those who set US priorities are so in favor of cheap oil either. There are also less expensive ways to influence OPEC.

Then what’s it about? The oil money. It’s big, one of the primary forces in the global economy. If Everett Dirksen had been a sheik, he might have said, “a few hundred billion here, a few hundred billion there, and soon you’re talking about real money.” Who gets this moolah and what they do with it is what it’s all about.

Washington has two overriding imperatives. First, the money should not be used to fund political movements the US opposes. This includes Chavismo, Islamicism or any other attack on liberal capitalism from the left or right. Second, the money should be recycled to banks with the appropriate dollar and euro portfolios, lest financial imbalances lead to a run on the hegemonic currencies. (OK, maybe there is no alternative if you have to put an unimaginably large sum somewhere, but it remains an imperative.) The blog folk wisdom about “the war was because Saddam wanted to price oil in euros” is technically wrong but gropes after the right answer: those who are allowed to rake in the oil billions must be counted on to send them back to the proper address.

Follow the money.


13 comments:

Anonymous said...

i suspect you are right about this, but there is another reason..

in the event of war an empire wants to be in a position to assure supply

rosserjb@jmu.edu said...

Well, I upon reading WaPo page 2 this morning, which reported in more detail on Greenspan's remarks in the book and on TV, he comes across as amazingly out of it on this one. Sure, he gave the line I have about this Iraq war being an extension of the first one, which was All About Oil, both the money and the security angle. He even admits that the administration did not have oil as a top motive. But he does. Gave as the ridiculous argument that in 2003 somehow Saddam was threatening to go for the Straits of Hormuz to cut off oil. This is just nonsense. Saddam was in a box and largely disarmed at that point.

Now, Greenspan does differ from what juan agrees is the real interest of Big Oil. He reported in comments on my earlier post on an interview with Shell CEO Carroll, who said the oil men were totally out of synch with the neocon fantasists and were completely uninterested in various privatization schemes the Bushies were proposing for Iraq. They were Big Oil and they wanted high oil prices, not all this increased production.

For Greenspan, however, he did not want high oil prices. Higher oil prices make life more difficult for a Fed Chair, pushing out the Phillipps Curve and worsening the short-run inflation-unemployment tradeoff. So, Big Al may have been rational in wanting Iraq to increase oil production and to worry about any oil cutoffs. But in this he was way out of synch with the wishes of the Big Oil megacorpstate, whether he was (or is) aware of it or not.

Anonymous said...

I'm a bit perplexed. Why are Mr. Greenspan's comments of any importance at this late date? Here is a man who occupied a position of significant importance throughout Georgie Boy's term in office. He never had a bad word to say about Bushonomics in all that time. Now he's out of the game and the best he can do is an I told them so book after the fact. A little too late with a lot too little.

Anonymous said...

As Fed chair for 19 years, most of which are associated with the long post-1983 stock price run and more general prominance of finance, I don't think it wrong to say that Greenspan became an icon, and one which refuses to leave but continues with public pronouncements.

He may not have wanted high oil prices but, through reflationary policies, did facilitate these.

Unintended consequence or, as helpful to Big Oil profits and oil exporting nations surplus as well as U.S. debt sales, a "win/win" which has contributed to greater emphasis on 'green'?

Your Correspondent said...

Oil or Oil Money?

Halfway there. The trouble with oil money is that it's enough to fund a war machine. A nuclear war machine; In the hands of psychopaths (Saddam) and fanatics (the Ayatollahs).

If the US just wanted to steal oil it would have invaded Saudi Arabia, they have more of it than Iraq.

Once you have a good war machine, you can use it to conquer the neighboring oil fields (like Saddam conquering Kuwait). This gives you more oil, more money, and you can get even more weapons. Pretty soon you're a world class imperialist conquerer holding the bulk of the planet hostage to your oil.

Get it?

The solution is to stop giving them money for their oil. Internationalize the oil fields in the name of the people of the world to create global prosperity.

Econoclast said...

Peter, don't you think that it's about oil _rents_ more than oil _revenues_? (i.e., if a country's oil is expensive to extract compared to the revenues it received, then it's not that important to the US or anyone else.)
Jim

Anonymous said...

juan,
Associating Greenspan's term in office with "the long post-1983 stock price run and more general prominace of finance" as though there were a cause and effect relationship ignores other more significant factors that were operative during the same time period. The correlation of two events does not a causative relationship make.

Starting in the early part of the 1980s many corporations that had been providing defined retirement plans for their employees began the public relatins effort to make such plans seem like welfare and a drag on their balance sheets, rather than the deffered compensation that they were in fact. Add to that the systematic under funding of such plans, the "bankrupting" of some of those corporations and their retirement plans and you had a full court press to make the average worker believe that they would be better off "controlling" their own retirement funds. Aha!! Welcome the IRA and 401K bonanza. A bonanza not for the working stiff, but for the financial industry. Lots of fresh capital rolling into the stock markets set off that wave of stock price appreciation which of its own assord periodically ebbed, wiping out much of the gains that workers were promised. Only the management fees were certain to be paid. Stocks go up and down. Fees are steady cash flow. Mutual funds blossomed. Brokerage firms needed a wheel barrow to get the earnings into the bank. Is social security next? Privatize and enjoy the benefits of capital participation. No, nothing's guaranteed, but long term appreciation is almost assured. Emphasis on the almost.

So it is not Mr. Greenspan we have to thank for the machinations of the stock market. Lots of new cash is always a boon to the cognocenti. It comes in. It goes out. The skim is off the top.

Anonymous said...

jack,

my point in that sentence was not that greenspan was 'causal' but that, as fed chair, he came to be associated with the long bull market in the u.s., came to be seen as its representation, 'greenspan put' and all.

sure, no doubt that change in form of pensions played a part but i would not, if you are, take that as 'the' cause. the booming up in credit money and asset price inflation was fed and developed by a few more things such as the de facto sharp reduction in reserve ratios, a great expansion of non-bank banks, govt sponsored enterprises, forex differentials, carry trades, bailouts, structured finance and imagined ending of risk, tech changes, etc,,,,,all interacting to create 'nuclear credit fission' and facilitate upwards redistribution even as the real struggled to hold its head above water, or, as from mexico in '94 to asia in '97 to lat am and russia in '98 and u.s. shortly after, drowning.

neoliberalism dictated that old regs be tossed overboard in favor of free capital flows and the benefits these 'guaranteed', while monetary policies and tax cuts would provide for the general welfare... a worldwide process of some duration,,,
then as well, long run overstating of corp earnings, development of a djia = the economy mythos, continuance of wrong headed belief that central banks control the economy and a 'new economy' at that.

Anonymous said...

juan,
You took the words right out of my mouth.

Bruce Webb said...

'Internationalize the oil fields in the name of the people of the world to create global prosperity.'

Hmm. Who bell's the cat?

Or since that may be too old-fashioned a reference for the internet age;

And a Pony!

rosserjb@jmu.edu said...

Regarding what should have been done with oil in Iraq, I still support what JD Econoclast put forward in an earlier posting, which is also supported by Nobelist Vernon Smith, basically what Alaska does. Let everybody in Iraq have effectively a share of the oil in the country and a right to a portion of its revenues.

Barkley

Anonymous said...

might as well come clean
since i've never known
that correlation is not
causation i've always
believed everything
friedman wrote

but now i find it
may not be
correct

and am left
with nothing

nothing

other than internal
relations and a
note left long
ago

a finding

real contraction
can bloat
fictitious
cap

specially with
right prop
and hype
is taken

as real savings
wealth on
parade

nothing

Myrtle Blackwood said...

A financial war makes sense. Not just in relation to the flows of oil dollars though. (See the second part of this post).

Oil dollars:
In late 2003 – Reported that US ‘real money’ (insurance corps, pension funds etc) stopped purchasing mezzanine tranches of US subprime debt. CDOs were then used to export the riskiest tranches of subprime debt to nations with massive trade surpluses with the US (in USD) as well as to petrodollar recyclers.

Excerpt:
“..The Greatest “Bait and Switch” of ALL TIME
I recently spent some time with a senior executive in the structured product marketing group (Collateralized Debt Obligations, Collateralized Loan Obligations, Etc.) of one of the largest brokerage firms in the world. .. This individual proceeded to tell me how and why the Subprime Mezzanine CDO business existed. Subprime Mezzanine CDOs are 10-20X levered vehicles that contain only the BBB and BBB- tranches of Subprime debt. He told me that the “real money” (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003 and that they needed a mechanism that could enable them to “mark up” these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!! He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of Subprime debt. Interestingly enough, these buyers (mainland Chinese Banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, UK banks) possess the “excess” pools of liquidity around the globe. These pools are basically derived from two sources:
1) massive trade surpluses with the US in USD,
2) petrodollar recyclers.
These two pools of excess capital are US dollar denominated and have had a virtually insatiable demand for US dollar denominated debt…until now. They have had orders on the various desks of Wall St. to buy any US debt rated “AAA” by the rating agencies in the US. How do BBB and BBB-tranches become AAA? Through the alchemy of Mezzanine-CDOs. With the help of the ratings agencies the Mezzanine CDO managers collect a series of BBB and BBB- tranches and repackage them with a cascading cash waterfall so that the top tiers are paid out first on all the tranches – thus allowing them to be rated AAA. Well, when you lever ONLY mezzanine tranches of Subprime RMBS 10-20X, POOF…you magically have 80% of the structure rated “AAA” by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets... This will go down as one of the biggest financial illusions the world has EVER seen. These institutions have these investments marked at PAR or 100 cents on the dollar for the most part. Now that the underlying collateral has begun to be downgraded, it is only a matter of time (weeks, days, or maybe just hours) before the ratings agencies (or what is left of them) downgrade the actual tranches of these various CDO structures. When they are downgraded, these foreign buyers will most likely have to sell them due to the fact that they are only permitted to own “super-senior” risk in the US. I predict that these tranches of mezzanine CDOs will fetch bids of around 10 cents on the dollar. The ensuing HORROR SHOW will be worth the price of admission and some popcorn. Consequently, when I hear people like Kudlow on CNBC tell their viewers that the Subprime problem is “contained”, I can hardly bear to watch…”
Source:
Letter to Investors, written by J. Kyle Bass, Managing Partner,
Hayman Capital 2626 Cole Avenue, Suite 200. Dallas, TX 75204
July 30th, 2007
http://www.dealbreaker.com/images/pdf/HaymanJuly07.pdf

Drug dollars:

"..In late June 1999, numerous news services, including Associated Press, reported that Richard Grasso, Chairman of the New York Stock Exchange flew to Colombia to meet with a spokesperson for Raul Reyes of the Revolutionary Armed Forces of Columbia (FARC), the supposed "narco terrorists" with whom we are now at war.

The purpose of the trip was "to bring a message of cooperation from U.S. financial services" and to discuss foreign investment and the future role of U.S. businesses in Colombia.

Some reading in between the lines said to me that Grasso's mission related to the continued circulation of cocaine capital through the US financial system. FARC, the Colombian rebels, were circulating their profits back into local development without the assistance of the American banking and investment system. Worse yet for the outlook for the US stock market's strength from $500 billion - $1 trillion in annual money laundering - FARC was calling for the decriminalization of cocaine.

To understand the threat of decriminalization of the drug trade, just go back to your Sam and Dave estimate and recalculate the numbers given what decriminalization does to drive BIG PERCENT back to SLIM PERCENT and what that means to Wall Street and Washington's cash flows. No narco dollars, no reinvestment into the stock markets, no campaign contributions..."
Source:
The Real Deal: The Ultimate New Business Cold Call
Monday, 18 February 2002, 10:13 am
Column: Catherine Austin Fitts
Narco-Dollars For Dummies (Part 3)
How The Money Works In The Illicit Drug Trade
Part 3 in a 13 Part Series
By Catherine Austin Fitts
First published in the Narco News Bulletin
http://www.scoop.co.nz/stories/HL0202/S00069.htm