Petrodollars and Gold

A friend of mine sent me a red meat Powerpoint slide show the other day.  It gave the history of the Petrodollar…or the dollars that used to buy Mideast oil.  It went off on a tangent becoming a very bad joke and off the wall.  Unfortunately, there was more truth to the joke than most would care to admit, as I had read several serious articles on the topic of Petrodollars over the past few weeks by coincidence. 

Up until recently, barrels of oil had to be traded in dollars.  But as of late, the European Union, China, Russia, and whomever, have been cutting separate deals with OPEC to purchase oil in other currencies.  China has been making noise that it wants its currency to become the currency of oil, and is making strides in attaining its goal.

What caused movement away from the dollar?  All that Quantitative Easing done by the Federal Reserve.  In laymen’s terms, the Fed started up the printing press and has flooded the market with dollars.  That devalues the dollar, and OPEC did not want to see its oil devalued along with the dollar.  The result has been higher oil prices.

That being said, for all of the noise of other nations, their currencies aren’t much better.  The Euro is in shambles, and the only reason it is valued higher than the dollar is because countries like France and Germany…the driving forces in the Euro Zone…pay about 4.0% on their ten year note as opposed to about 2% or less here in the states.  China does not allow its currency to “float”, or fluctuate, with other currencies tying it in part to the dollar.  But in its effort to jack up its currency to international standards, China has slowly begun to allow its currency to move apart from the dollar, albeit in baby steps.

So now we are faced with $4.00 gas and rising prices for everything that is transported in anything that moves.  Of course, the government simply tells us there is no inflation.  But there is inflation, and those of us who go to the grocery store or the gas pump know it.

At the center of this mess is energy.  Energy is the cornerstone of our economy.  America has endless supplies of energy, but Obama has pretty much squelched oil and coal, and now is on the road to squelch natural gas.  He doesn’t like fossil fuels.  He wants electricity.  He said he was going to let prices rise, and he has.  Wait until you see your electric bill beginning in about a year.

But there are other reasons for our problems besides environmental extremism.  Up until the early 1970’s, America was on the gold standard.  Our government guaranteed that each dollar bill was backed by gold or silver.  Then Richard Nixon decided, along with the rest of the economic powerhouses, to go off of the gold standard.   That meant the government could print money at will, unfettered by such miniscule concerns like is the money worth anything.

America was the biggest customer of OPEC oil, and the Arabs went bonkers.  They didn’t want worthless dollars.  They wanted dollars backed by gold.  In 1972, gold was worth about $53.00 /oz. and oil was selling for $3.55/barrel.  In other words, one ounce of gold bought about 16 barrels of oil. 

There has been a lot of unhappy history between now and then, much of it rooted in the Arab effort to keep the real value of its oil.  Dig beneath the surface, and you will find many of the problems we have had with the Arab world are due to these fluctuating currencies, and nations, particularly the United States, printing money.

Now…forty years later…gold is selling for $1660.00/oz and OPEC oil is selling for $103.00/barrel.  Do the math.  After all we have been through...one ounce of gold still buys 16 barrels of oil.

That is inflation.  And that ought to tell you something about why we have problems in America today.