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Thursday, September 18, 2008

Crude price increase - Uncle Sam is very smart

I had been thinking about this subject for sometime now. However, I was not sure so never voiced my thoughts on this over email/blog. But when I discussed this with some of the friends and shared my logic with them then some of them agreed and some wondered if it's really a case. But everyone was unanimous and encouraged me to post it for comments from others.

In my view/guess(?) crude price movement from $45 to $145 was a conspiracy of Americans and OPEC. Both of them were hand in glove on this subject. Why?

As I explained in my earlier posts (subject: Rupee-Dollar equation) that crude and dollar have a very strong relationship. This very relationship leads us to believe that crude prices were increased by OPEC to save American dollar and thus economy.

When real estate crash and subsequent sub-prime crises hit the American economy, which led to lowest ever consumer confidence, demand slowdown, job losses, and a complete gloomy future, then the American government decided to print more dollars and give it to its citizen to spend. The idea was to artificially increase the demand and keep the confidence level of industry, public and investment community up. They completely believed (policy makers and Fed) that if this had not been done by them then it would have certainly led to an evident economy depression similar to 1929.

Now, what's wrong if they have printed more dollars and decided to give those new dollars to their citizens? This is suicidal.... Because if you are printing more bills and distributing it free of cost then you are depreciating the value of that currency. It's like everyone will be paid without productively contributing anything to the economy.

This act of printing so much currency by any government is certain to depreciate the value of its currency. And the dollar started depreciating against all the major currencies world-wide including INR. Dollar hit a bottom of Rs 37-38 from a high of close to Rs 46-47 with in a span of 18 months.

It could have touched Rs 32, as many were predicting but it did not lost that long.

When dollar was in huge supply because of extra printing by American government then it was made sure that there is an equal or more demand for the dollar worldwide. Americans have the advantage because US dollar is the most dominant currency in world trade. They took advantage of this.... They made it sure that price of crude, value-wise amongst the top listed product worldwide, is increased multi fold. This led to a worldwide rush to catch dollar so that they can buy crude. So on the one hand an extra supply of dollar was created and on the other it was ensured that extra dollar is consumed in the world economy without any problems.

But now the next question, why would OPEC join hands with Americans because it's OPEC which controls majority of oil production world-wide?

OPEC will have to succumb to Americans. Because if Americans were printing the currency which would have depreciated its value and ultimately led to the downfall of the dominance of American currency then OPEC members would have incurred huge losses themselves. Over a period of time, OPEC has accumulated huge dollar reserve. If the currency had been devalued and lost the charm then what they would have done with that pile of reserves? They had to be hand-in-glove with Americans and increase the price of crude so as to keep value of American dollars up and running.

Who is at loss? OPEC members: made windfall profits because they were selling the same crude now at 2-3 times the earlier price. Americans: Everyone got green notes to be spent at the expense of rest of the world which was paying price so that American economy continue to buzz.

Please share your comments to me on this article directly on the blog or over email: niteen.dharmawat@gmail.com

Niteen S Dharmawat
Mobile: +91-9850571857


Siddhartha said...

Sounds pretty rational, and a completely new perspective. Now that the USD is again gaining ground, what does it imply? does it help them with the credit crunch they have been witnessing. or does it make the case worse as demand goes up and hence inflation. ofcourse, it now depends on their policies, but they will do what best suits their pockets, so what can we expect?

Niteen :-) said...

This will be worst thing to happen. Since they are doing it artificially, fundamentals will come to the fore sometime. Once fundamentals come into the picture the situation will be extremely bad for them. The policies should be complete capitalism in the spirit and the letter. One can't pursue the policies of Pseudo Capitalism which unfortunately US is presently pursuing where profits are privatized and losses are socialized. This will lead to a disastrous situation.

They could manage to fling the bubble in early 2000 when the fundamentals came haunting them. However, the bubble became large and today in 2008 we are facing it again, much larger in size They might still be able to fling it for next couple of years. But it is certain to come back and haunt them with much larger size, may be sometime in 2012, and which will be impossible to manage...

arpan said...

Fantastic analysis. Sounds plausible.

A different school of thought, Nitin. But it leaves me with a very baisc question:

Can't anybody smell this? Can't the rest of the world as a group challenge this. It would have been a very risky proposition for US hegemony>>>>>>


Niteen :-) said...

Sunil, thanks for your inputs. They can smell this, but what can they do with that? Nothing, except crying over spilt milk since two things that are affecting them (world), crude and dollar, are beyond their control. The new round of inflation is possibly going to trigger and will affect everone worldover....

Imran Khan said...

I enjoy reading a post that will make people think. Also, thanks for allowing me to comment!Epic Research