According to Thursday’s Wall Street Journal, “petroleum products shipped by the world’s top oil exporters fell 2.5 percent last year, despite a 57 percent increase in prices…” We are told, further, that leading petroleum producers are using more oil for themselves. And yet, at least one expert believes there is a coordinated campaign of supply strangulation underway. Quite obviously, if 
you’re choking off the oil supply of the world’s most powerful country you might be afraid to admit what you’re up to.
Are the Saudi’s really using more oil themselves, or is this a convenient excuse? With the U.S. military poised in neighboring Iraq would you want to admit withholding oil from the world market? Recent huddles between Russian and Saudi leaders crave explanation. What does Moscow have in common with the House of Saud? Both countries export oil. Last month the Wall Street Journal suggested that the rise in food and oil prices was “a monetary phenomenon.” But let us not be fooled by the old chicken-and-egg problem. Interpretation allows many variations on the truth, and many nuanced readings. A commodity boom has been underway. One might even say there’s been a provocation.
In a recent interview with the Telegraph (UK), George Soros told the paper’s economics editor that speculation “is increasingly affecting the price” of oil. He noted, “The price has this parabolic shape which is characteristic of bubbles.” Soros believes that real estate prices are going to plummet further. Stagflation is here. Oil prices are connected with the value of money, the state of productivity, and general economic expectations.
It may be argued that Federal Reserve policy is responsible for a commodity bubble, just as Fed policy previously sparked bubbles in the stock market and real estate. Perhaps we are approaching the hour in which there are no safe havens because every haven has, in turn, been “bubbled.” Is the civilized world about to suffer the greatest, most total “correction” in economic history? As our civilization has lost its sense of reality, its taste for truth, recent economic growth may have been more fictional than real. We think there is money in our pension funds. We imagine that our homes are worth twice their previous value. We believe our stocks and bonds are worth holding onto. But thinking, imagining and believing in wealth doesn’t make it real. Perhaps we are on the brink of the greatest revaluation of economic values in all history. And it’s all connected to oil.
Consider the fate of the dollar: If the dollar is doomed, what will replace it? Perhaps the new global currency is the hydrogen bomb. As the free world is shaken the dictators arise. In their world power isn’t measured in dollars. It is measured in missiles, bombs and guns. Someone recently suggested that the Fed won’t exist in a decade. Perhaps the Fed won’t next year. If oil prices continue to rise, if the recession worsens, if the red flags indicating defaults on car loans, housing loans and credit cards plays out: we will be living in a different world come January 2009.
I cannot help thinking back to the Russian Duma hearings of June-July 2001, when economist Tatyana Koryagina warned that America was about to be attacked by “shadow forces.” She said the dollar would become worthless. Several weeks later, Arab terrorists hijacked planes and flew them into the World Trade Center and the Pentagon. The financial damage was hard to calculate, given the tipsy tipping point in our overvalued stock market. No doubt the Fed was bound to respond with easy money. Here we see the damage done by our own damage control: The real estate bubble began after 9/11 – arguably, in response to 9/11. The problem now metastasizes. To prevent the bursting of one bubble, a new bubble has been created in real estate and now commodities. Food and oil prices have soared. The problem metastasizes further. OPEC chooses its moment for revenge.
Consider the May 22 testimony of Anne Korin before the House Committee on Foreign Affairs, which begins as follows: “Mr. Chairman, Members of the Committee, about ten years ago, Osama bin Laden stated that his target price for oil is $144 a barrel….” Now isn’t that remarkable? “At the time,” noted Korin, “$144 a barrel seemed farfetched to most.” Yet here we are, within $20 of bin Laden’s target figure. Whether owing to our own stupidity or the enemy’s expert calculations, we’re on the verge of defeat. “I would like to impress upon this Committee,” said Korin, “that $144 a barrel oil will be perceived as a victory for the Jihadist movement and a reaffirmation that the economic warfare component of its campaign against the West is a resounding success.”
One may also take into consideration our relations with the Muslim world which contains “more than 70 percent of the world’s proven oil reserves and over a third of production….” As Korin explained to the House Committee on Foreign Affairs: “While the U.S. economy bleeds, oil-producing countries like Saudi Arabia and Iran – sympathetic too, and directly supportive, of radical Islam – are on the receiving end of staggering windfalls.”
The Bush administration has angered the Saudis by installing a Shiite “democracy” in neighboring Iraq. “OPEC, spearheaded by Saudi Arabia, is deliberately keeping oil supply tight to prop up prices,” says Korin. “Not only is Saudi production lower today than it was two years ago, despite the increase in demand, but the cartel has effectively deleted 2.4mbd from the global oil market in what amounts to an accounting scam.”
How quickly we have forgotten, and how quickly we congratulated ourselves at getting out from under the stock market debacle of 2000 and the financial hit of 9/11. What we managed, I suspect, was a postponement. More recently the Fed spent half a trillion in support of teetering financial institutions; and American citizens are losing billions more in higher gasoline prices. To avoid catastrophe we have weakened our currency. And now we’re at the end of the tether.
The addiction to easy money comes to grief, as all addictions do. Yet there’s been no panic, no crash, no Great Depression. Instead, a giant pillow has been applied to the financial sector, smothering the gasping victim quietly. We cannot let the air out of the Great Bubble. We forget that one must exhale as well as inhale. And so we continue to suffocate. The dollar will continue to fall and oil will continue to rise.
