What’s Going on with Oil? The Answer is Hidden in the Global Monetary Crisis

18 February, 2009

If we look at the below graph of the USO (US Oil Fund), at first glance, it appears that the deflationists have been correct about their assumptions of a worldwide slowdown causing demand for oil to plummet. However, if we recognize deflation for what it is, an appreciation of the currency, given the most recent 12% figures of US monetary supply growth (as determined by www.shadowstats.com ), the conclusion of US dollar heading for sustainable appreciation seems downright foolish. Thus if deflation has little or nothing to do with oil prices being so low at less than $35 a barrel right now, what is the real reason for the oil price collapse? Investigating the battle behind the scenes of this growing monetary crisis will yield the answers.

crude oil continuous contract

At the end of last year, Bloomberg reported that “Gulf Arab leaders approved an agreement to create a central bank and single currency for the region to boost trade and strengthen monetary policy. The accord must now be endorsed by the national governments of the Gulf Cooperation Council, the group said in a statement after its leaders met today in Muscat, Oman’s capital. Within the six-nation GCC, Oman has pulled out of the process.”

Throughout history, Central Banks have done nothing but create massive distortions in real estate markets and stock markets. It is a total myth that Central Banks contribute to the stability of economies. Just because the majority of people hold a certain belief does not make it a fact. The overwhelming majority of investors that put their money in Madoff’s investment fund and now Stanford’s investment fund believed at the time that these funds were legitimate. Their beliefs did not make it so. Perception is only king until reality surfaces and crushes an erroneous perception. Likewise, today, the overwhelming majority of people believe that Central Banks play a key role in ensuring economic stability and in contributing to a sound monetary system. Such a belief, even if it is still held by the majority of people today, is the furthest thing from the truth, and when the monetary crisis deepens in 2009 and 2010, this myth will crumble as did Madoff and Stanford.

The majority of Central Bank policies enact more harm than good the majority of time, but here is why the development of a singular Persian Gulf Central Bank is so important. For the past couple of years, the Persian Gulf nations have publicly declared their loyalty to the US dollar, with key government figures even stating that no finance minister should ever make any public declarations of a loss of faith and confidence in the US dollar due to the grave negative ramifications of that such comments could possibly trigger. However, their announcement to form a regional currency signals a significant change in their public stance even if their private stance has been drastically different for some time now. The Persian Gulf nations have now publicly made it known that they collectively wish “to stop pegging their currencies to the dollar and implement independent monetary policy.” All of the GCC (Gulf Cooperation Council) states except Kuwait still currently peg their currencies to the dollar and still let the U.S. Federal Reserve lead their interest rate policies. However, this is set to change.

The Gulf Nations plan to form a Monetary Council by December 12, 2009, and then a Gulf Central Bank that would include Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman. Their goal is to form a unified regional currency by 2010. Last year, five of these six countries reported inflationary rates higher than 10%. Besides the fact that these inflation rates seem to indicate that the GCC states calculate an inflation rate that is much more accurate than the Alice in Wonderland fantasy inflation rates the US Government continually publishes, these rates more importantly indicate how significantly their economies are affected by their maintenance of a peg to the US dollar.

Though there is much skepticism on whether the Gulf Nations can indeed accomplish a Central Bank by 2010, I 100% guarantee you that their desire to form a unified regional Gulf currency with the prime purpose of enabling them to “stop pegging their currencies to the dollar” fully and immediately garnered the attention of the US Federal Reserve, the US Treasury and the US government.

Such decisions can never be made in a vacuum and they can only be made with enormous political consequences. Such is the nature of the political game. Qatari Prime Minister Sheikh Hamad Bin Jassim Al Thani said that the emirate is “studying all options” in relation to the dollar-peg. “As a small country we cannot float our currency… it has to be tied,” he said. But the question is this, “Tied to what?” If they don’t want to be tied to the US dollar, the Euro, the Pound Sterling and the Yen, the other three major world currencies, certainly offer no more attractive options as pegs.

A logical alternative then would be to peg their regional currency to gold. If this alternative is being considered, certainly the Gulf Nations could have quietly been converting their massive holdings of hundreds of billions of petrodollars held in their Sovereign Wealth Funds to hard assets such as gold. The nature of holdings in Sovereign Wealth Funds are not publicly reported, and for this reason, GCC states tend to hold the bulk of their country’s surpluses in Sovereign Wealth Funds and not on the balance sheets of their Central Banks. If this is indeed happening, what would be the most likely US retaliation for considering such a scheme? To collapse oil prices, as these nations surpluses and economic well being depend upon their oil profits. Though these links will never be made in stories reported in the mainstream media, I guarantee you that there is a direct link between the monetary directives of Gulf Nations and the price of crude oil in the Nymex futures markets that determine the price of crude oil to a much higher degree than anything that has to do with the level of oil inventories and the level of global demand.

For two years now, the origins of this economic crisis have been reported incorrectly. Though certainly big banking institutions and Wall Street firms acted fraudulently and unethically for many years, they were only enablers of an unsound monetary system. For almost three years now, I warned of almost every major downturn in global stock markets on my blog due to my understanding of this as a monetary crisis. In three months, when the next wave of mortgage resets afflicts not only the subprime sector, but Alt-A and prime mortgages in the US and housing problems resurface, a new “housing crisis” will be reported. Understanding all of these extreme price movements in real estate and commodity markets, however, can be accomplished by first studying and understanding the deepening monetary crisis.

[tags]oil, WTIC,US dollar crisis[/tags]

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