It is widely accepted that the size of the US military, and the ridiculous number of military bases worldwide (according to the Pentagon there are around 5,000 bases in total with around 600 overseas), is to support the petrodollar. Presumably, petrodollar support would also apply to the current wars in the Middle East and the bizarre attack on Russia.

Listen to Alan Greenspan on the last Iraq war:

“I’m saying taking Saddam out was essential,” for the purpose of “making certain that the existing system [of oil markets] continues to work”..

Alan Greenspan
In an interview with Bob Woodward of the Washington Post in September 2007

Read about the history of the petrodollar here, and about reserve currencies here.

Until recently the petrodollar was the only currency which could be used to buy oil. Saddam Hussein was negotiating to accept euros for oil, prior to the 2003 invasion by the US. That did not work out too well for Saddam, or for Iraqi civilians. Iran is demonised and sanctioned for selling oil in alternative currencies.

Russia and China have recently concluded an agreement to price exports and imports in yuan and roubles. The BRICS (Brazil, Russia, India, China and South Africa) are looking at an alternative reserve currency to the US dollar. Russia and China are huge buyers of gold over the last few years that could form part of a new reserve currency.

While the US is producing large quantities of fracked oil, it is not profitable and individual wells show precipitous production declines. Read about the shale “revolution” here, why it consumes more energy than it produces here, and some charts of energy costs here.

Consequently the US will soon return to dependence on OPEC and possibly Russia. Russia has just made a huge sweet crude discovery in the Arctic and will be an important energy supplier for many years.

Energy, and oil in particular, is all that allows a modern industrial economy to function. In recent years the biggest US export has been the US dollar. It is exchanged for real goods and services and only costs a few key strokes, along with a huge military-industrial complex. Pricing oil in other currencies will fundamentally change the US economy.

The US wars in recent years seem to be an attempt to stave off that day until some alternative can be found. In passing it should be noted that being the world’s reserve currency does have downsides. In particular, the export of jobs along with dollars.

Conclusion

We now see two clear sides; US, NATO and Japan (and unfortunately Australia) allied against most of the rest of the world. The fighting is over energy pricing and security. This is not for the first time, it was a huge part of the rationale for WWI. We could be looking at WWIII, instigated by the US to protect its oil supply and the petrodollar.

Things do not look good. The only way the US could win is by going nuclear early. Russia has also said tactical and strategic nuclear weapons will be used if needed. Let’s hope sanity prevails in this nightmare scenario.

02 October 2014 Macro