Wall Street, Iraq and the Declining Dollar

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US oil and gas production peaked in the early '70s, and we are now by far the world's largest energy importer. The largest oilfields in Saudi Arabia, Kuwait, Iran, Syria, Yemen and Oman are in decline, as are most oilfields in the former Soviet Union, Canada, Central and South America, and on-shore Africa. New fields will be discovered and new technologies brought to bear, but costs of production will be higher than in the past and will require more expensive investments in equipment and technology.

Even as existing fields age, the new economies of India and China require more and more oil to fuel their impressive growth. Although a worldwide depression might result in a temporary drop in the price of oil and other commodities, the long-term imbalance between growing demand and declining supply will eventually reassert itself, creating price increases over time.

Contemporaneously with the supply/demand imbalance in oil and other hard commodities, the Bush Administration's response to 9/11 has weakened the position of the dollar in the world. The President's request that Americans continue to spend has struck an all-too-sympathetic chord with the American people. The trade deficits caused by that spending have created a current account deficit equal to 6.2 percent of GDP, sending trillions of dollars into the hands of foreigners.

While we continue to import goods of much greater value than those we export, thus flooding the world with dollars, Bush has pursued a policy of what some have dubbed "military Keynesianism"--that is, the combination of low taxes and high military expenditures. This dynamic forces the Federal Reserve to print money and foster easy credit policies, which will eventually result in higher interest rates, inflation or both.

So the printing presses are spewing out more dollars, which are being collected by China, Japan and others. And those countries are showing signs of concern that they have too much of their foreign exchange reserves tied up in our currency. Likewise, certain other nations are evidencing a declining interest in accepting the dollar as a medium of exchange. It was in October 2000 that Saddam insisted that Iraq's oil be paid for in euros. But now Russia wants payment for the energy it exports in rubles. Venezuela and Iran insist on euros. Kuwait has recently unpegged its dinar from the dollar in favor of a basket of currencies.

The dollar has indeed shown symptoms of its decline in popularity during the Bush years. The dollar has weakened against the euro, gold, copper and other hard assets and currencies. When Bush came in to office, for example, you could get .987 euros for every dollar. Now you can only get .75. You could say that at $65 per barrel, oil is getting more valuable... or you could say the value of the dollar has declined as measured by oil.

Mainstream economists seem to agree that best-case, the dollar will continue a stately decline, but in a world where the United States has lost so much respect, where we continue to flood the world with dollars and borrow to finance our consumer habit, we could find that one of those sharp, depression-inducing discontinuities occurs--like, say, a run on the dollar.

We are continuing to import 60 percent of the 20.6 million barrels of oil we use daily. And though the size and stability of our economy is likely to insure a demand for the dollar at some level, oil that anyone can buy for hard currency may be getting scarcer. Governments have begun to do deals aimed at taking oil off the market for their own account--deals like the ones China has done with Angola, Brazil, Iran, Nigeria, Venezuela and Sudan. South Korea has just announced it will follow suit.

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