Big Oil Politics, Giveaways, and the Role of the Dollar

I've focused in this blog on the key limitations imposed on the War on Terror by geopolitical, military, legal and public image realities. The US is unable to implement its War on Terror policy.

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Thursday, Iraqi PM al-Maliki spoke alongside Bush, whose rhetoric doggedly pursued themes of what is now a widely perceived failure in the "central front on terror." Prior to meeting Bush, Maliki had been threatened by the potential departure from his government the faction controlled by Iman Muqtada al Sadr, Commandant of the Mahdi Army, Iraq's largest Shia miltia.

Maliki appeared in this blog as a public image disaster during his trip to Washington in July. Maliki's impotence had seemed inconsequential to the Mainstream Media at the time. By persisting in the charade that Maliki and his government could support themselves against the insurgents without US help, I realized the US had created a massive image problem.

Geopolitically and militarily, it was clear then as it is now that the continued occupation meant the insurgency would grow stronger. While appealing to a Bush's supporters eager to see progress, Maliki's appearance in front a Joint Session sent the impression that he was an American puppet.

Public image crises are nothing new. In a mini-scandal ignored by the media, Bush had embezzeler and pre-war intelligence source Akmed Chalabi sit behind his wife in an earlier State of the Union. Chalabi had been discredited by the Department of State and CIA--by no one other than Valerie Plame and her counter-proliferation group--but eagerly accepted as a fountain of truth by war-hungry neo-cons.

Running a stream of Iraqis before the cameras and Congress is a public show of support for Bush's favorite Iraqi-du-jour. Presented alongside the sacrifices of our troops, prominently chaperoning Iraqis of questionable repute and transient power turns the Joint Addresses into way of spooning out credibility for the Iraqi government.

From the outset of the war, when the US accepted without question "intelligence" provided by Chalabi and his Iraqi National Congress, the constantly changing faces of Bush's allies from Iraq undermines the hubristic notion that the US had sided with the right bunch of "folks."

The more often the players in Iraqi government change, the less effective any efforts to build credibility. Eventually, no amount of pomp and circumstance can legitimatize a flawed government incapable of controlling anything beyond Baghdad's Green Zone.

If the Iraqi government is dependent on American help, it can never be independent. Whatever the political games played in Washington, the realities shaped by Anti-American populism in Iraq determines the acceptability and viability of any Iraqi government.

Geopolitical and Military Realities

With troop strength too low to control the situation of chaos, maintaining the course will simply lead to more violence and more dead Americans. As I said im my last post, it's unclear what effect pouring more troops into the situation will have. The pronounced buildup in US forces earlier this year in Baghdad did nothing to combat the insurgency there.

Steering a same course ahead will only produce more of the same, yet the President's ego or other motivation seems to persist indefinitely. He's essentially been saying the same things since the earliest days of the Iraq invasion. This 2005 article in The Progressive describes the President's position essentially unchanged from today's.
See also this piece from Jim Lobe called "Bush Seems Determined to Stay the Course."

Fueled by the monolithic War on Terror, there appears to be no limit in the desire of the US government to destabilize the Middle East, which inflates the cost of oil. Destabilization is in line with the goals of Project for a New American Century neocons, and the Clean Break approach favored by Zionists.

Still, there are limits to the effectiveness of destabilization. At the very least the problems created by anarchy in Iraq show the differences between US and Israeli goals. Clean Break advocated destabilization and regime change of all Israel's enemies, more or less indefinitely. Yet for the US to extend the state of chaos created by its occupation at some point hurts the so-called moderate regimes in the region.

A long-sought neo-con objective--war in Iran--would exacerbate the threat to the supply of oil too greatly. The Iranians are quite capable of lobbing anti-ship missles into the Straits of Hormuz and cutting off 60% or so of the world's oil trade transitting the corridor.

Ironically, the US must depend on the Iranians to contain the Iraq fiasco.

Iraq could not have been made worse through inept Iraqi leadership and its hopeless dependency on an ongoing US military presence.

For at least as long as the bloodshed in Iraq continues the consequence of "breaking Iraq" means "owning it"--to borrow Colin Powell's expression. Why any outside power would dare to intervene in Iraq now is beyond fathoming.

The price of the Iraq intervention has run over $1 trillion. Added to the direct cost of intervention in Iraq and Afghanistan are the costs to the economy of more expensive energy. The rise in the cost of oil accompanies a rise in the geopolitical risk factor.

The US has virtually no control over the situation it has created in Iraq and the larger Muslim world. It's become militarily impossible to impose the will of the US. Continuing the occupation limits broader US foreign policy objectives, which have faltered under Bush's aggressive militarism. With limited multinational cooperation, the War on Terror appears increasingly to be a matter of the US going it alone, unilateralism.

Political Limits

Our best chances for victory in Iraq and a redemption of our international credibility lie in abandoning Bush's policies in Iraq. Unfortunately, Bush is stubbornly wedded to staying the course to the point he is now accused of being in denial, if not insane (see the Frank Rich article "Has He Started Talking to Walls?" here).

In some heated debate Thursday night on CNBC's Scarborough Country[Transcript here], Scarborough at one point shouted to Pat Buchanan that Bush had directly stated he had no intention whatsoever of pulling out of Iraq. Scarborough sqeezed in the fact that Bush's position as commander-in-chief set policy; therefore, judging by Bush's comments in the joint press conference, it was made obvious Bush had no intention of changing anything, unless the Congress stopped funding.

Also telling in the exchange was the hard-trumpeted pseudo-reality that the Democrats would have a hard time voting "against the troops," which has been equivocated with any attempt to cut off funding for the war. We are led to believe that political risk of appearing not to "support the troops" justifies the war's continuance, despite the clear reality that a majority of Americans, who've just now made their political voice heard, want to get out now or within 18 months.

In the last post I alluded to the possible sell-out of the antiwar movement by the incoming Democrats. So far no prominent Democrat (Committee Chairpersons or leadership) has come out in favor of impeachment proceedings (even Conyers of Michigan.) Driving toward the center, Democrats have sentenced themselves to the mediocrity of timidity in managing what may be the Congress' best weapon against Bush and the war: impeachment.

Democrats are at the mercy of whatever fate Iraq may bring in the next election cycle. They risk inheriting the mantle of chaos that Bush has created through his continued policies of under-strength, open-ended occupation and the Vietnamesque certainty of inevitable failure.

The Democrats may lack the necessary conviction to vote down war funding. Theoretically, they could suffer to a wave of anti-incumbency come 2008. It's worth remembering that Bush is not running therefore his policies don't need to meet the ire of the American public, or even necessarily need to change, but for the damage they could do to his fellow Republicans who, if 2006 was any indicator, will be running away from Bush in 2008 as the war's popularity continues to decline.

Theories proliferate that the pre-election cut in gasoline prices may have been arranged by Big Oil and Republican policy-makers in Washington. Intentional or not, the trick seems to have failed to produce any political benefits. Higher oil prices mean more profits, but at a certain point the political costs of higher gas prices is simply too high.

The Democrats are already targetting Big Oil, so the consequences of a Republican loss of control are already impacting future profit projections. One CNN articles discusses Democratic plans here.

The Role of Oil

With WMD unfound, and efforts to establish democracy proving impossible in the absence of security, oil does loom ever larger as the real reason why we are there. Big Oil influence on the White House has been labelled a chief motive for controlling Iraqi oil through the ongoing Occupation. Some have even gone so far as to say that the ongoing crisis has been engineered to increase oil prices through the introduction of an artificially generated risk premium. Others would say Big Oil and the White House simple intended to gain control over Iraqi oil.

On the most cynical level, Big Oil and their political proxies may persist in the notion that Iraq might stabilize to a level which will allow oil production and exports. It's been said that the obviously inadequate number of troops has perpetuated a deteriorating security situation which justifies the ongoing presence. Seen under this light, it's almost as if seeding an open-ended commitment had been the intentional policy, and an ongoing occupation its only possible--and therefore thoroughly anticipated--consequence.

With Iraq oil production down due to the insurgency, it's hard to see any direct benefit to Big Oil other than record profits from escalating oil prices. While the ongoing Occupation may cost the public mightily, Big Oil has profitted, with the exception of the period just prior to the 2006 Elections, where prices dipped.

Even with the election of Democrats, we are seeing the price oil begin to climb and with it the profits of the Big Oil companies. The price of oil has been encouraged by political instability which has been in so many ways the cornerstone of the continued US Occupation.

Whatever the outcome, Big Oil stands to lose big; in itself, Big Oil's success under the Republicans demonstrates the successful implementation of coordinated goals and the presence of deep connections.

Big Oil Ties

In my post on Big Oil, I discussed the Taliban's reluctance to do business with Chevron and a Unocal natural gas pipeline, and the role of now-Secretary of State Rice and now-Afghan President Karzai in the pipeline committee on which they served before ascending within their respective governments. 9/11 provided the perfect opportunity for Afghan regime change; under Karzai, the new Afghan government promptly acquiesced to a pipeline deal. Rice now has a Chevron oil tanker named after her.

One article discusses the pipeline; it's relevant today in understanding the pre-9/11 environment. Whatever appealed to Big Oil was by extension attractive to the White House, so close was the relationship.

Like his predecessor Clinton, Bush used the privileges of his office to achieve pipeline construction in Afghanistan on behalf of Unocal and Chevron. The US had even been willing to support the Taliban in support of Big Oil. According to the 2002 Salon article by Jean-Charles Brisard, the US wanted to create an Afghan government which which it could negotiate. In a Washington Post Op-ed from 2001, it quotes Khalizad, present Ambassador to Iraq and a former Unocal consultant:

"'The Taliban does not practice the anti-U.S. style of fundamentalism practiced by Iran -- it is closer to the Saudi model ...' Khalilzad contended, concluding that 'we should use as a positive incentive the benefits that will accrue to Afghanistan from the construction of oil and gas pipelines across its territory ... These projects will only go forward if Afghanistan has a single authoritative government.'"

See more on Khalizad's former support for the Taliban in this article from The Independent.

This.pdf article brings up some interesting details about Khalizad. Married to its Big Oil, the Bush Administration was trying to force the Taliban to choose Unocal; an Argentine rival for the pipeline was rejected in an oddly coincidental collapse of the Argentine economy, who'd been denied IMF stabilization funds by Bush, according to the article.

Those with sympathies to Big Oil--Khalizad and Rice in particular--have undeniably advanced to the highest positions within the Bush family, so it's no coincidence those who achieve strategic goals on behalf of Big Oil end up in high places.

Sweetheart Deals Behind Closed Doors

I had mentioned the federal government's consistent failure to maximize lease revenues in its dealings with large US energy concerns, with is a major concern when secrecy prevents any outside scrutiny.

Much of the collusion has its roots in sympathetic Senators and Congressmen friendly to oil and energy interests from oil-producing states like Alaska and Texas. Naturally, corporate constituents from these districts want to drill on federally owned land at the lowest cost possible. Their representatives act to lower the costs of production for their energy producing corporate patrons. The result is an absence of oversight by federal regulatory bodies, resulting in ludricrously low lease rates, or perhaps none at all! [See this article, "Chevron, Others May Avoid Oil Royalties".]

The chummy relationship benefits the oil companies at expense to the general public.

In this article by Edmund Andrews, the US drops its pursuit of revenues owed it:

"...Interior Department has dropped claims that the Chevron Corporation systematically underpaid the government for natural gas produced in the Gulf of Mexico, a decision that could allow energy companies to avoid paying hundreds of millions of dollars in royalties."

Edmunds continues:

"In February, the Interior Department acknowledged that oil companies could escape more than $7 billion in payments because of mistakes in leases signed in the 1990s."

"...the Interior Department does not announce that it is accusing companies of underpaying royalties nor does it announce its settlements in these disputes. The government also does not disclose how much money each company pays in royalties."

The article goes on to list some of the murky details which define the shadowy backroom dealings between bureaucrats and energy companies, and the lawsuits which have sought to make companies pay appropriate taxes and fees to public treasuries.

This article discloses investigative findings as to the scope of oil lease "blunders". An article from ABC discusses Interior Department's Inspector General Earl Devaney's discoveries on oil lease infractions in the course of his investigation, see it here.

Secrecy is a hallmark of the Bush Administration, which of course disguises financial dealings and policy coordination between powerful energy interests and their allies like the President and Vice-President. Dating back to Cheney's secret Energy Policy Board meetings in early 2001, where maps of Iraqi oil fields had been reviewed, collusion was virtually assured, with Big Oil shaping Administration's policies towards energy-producing nations.

The result of the energy policies--however designed behind closed doors in the corridors of power--has been a massive rise in the price of oil.

A Primer on Oil

In my previous post on Big Oil, I'd noted that price of oil had been determined primarily by demand for it, which is increasing more rapidly than supply.

The US is dependent on oil. Our car-focused lifestyle predicates itself on ample and cheap energy. If oil were to become too expensive--or our dollar too weak--we could see the collapse of the American way of life, or at least some diminshment of its wonders.

So the US government has an interest in keeping its currency strong. Morever, the US has too much too lose if another currency were used to trade in oil. As it is, oil trades exclusively in dollars, and so all other currencies must be converted to dollars to sell and buy oil.

Oil-producing states amass huge quantities of dollars, called petro-dollars. Typically, these dollars never come into circulation; they remain outside the US, and so they do not contribute to domestic demand and inflation.

Now, for as long as the dollar is needed to buy and trade oil, which is the driving force behind today's global economy, the dollar will be stronger than it would otherwise be, had oil been priced in an alternative currency and dollars out of necessity sold to buy that currency.

Shortly before the Iraqi invasion, Saddam Hussein began selling oil in exchange for Euros. In 2002, William R. Clark wrote:

"...Saddam Hussein sealed his fate when he announced on September 2000 that Iraq was no longer going to accept dollars for oil being sold under the UN's Oil-for-Food program, and decided to switch to the euro as Iraq's oil export currency.[http://www.projectcensored.org/publications/2004/19.html
]"[Source]

Countries like Russia and China--hardly close US allies--have long accepted the dollar's monopoly on oil. At a certain point it may be easier to maintain the status quo than compete to find a replacement for the dollar as the world's currency. And having oil trade in a mixed bag of currency might dramatically complicate international currency flows, invoke conversion transaction costs, and create potential liquidity shortfalls or imbalances.

The cost however, of continued dollar dominance is that other currencies in fact subsidize dollars, by demanding them, making them worth more and their own currencies less. Traditionally, holding dollars has been an advantage for Central Banks, who simply can't afford to maintain enough gold to defend and protect their currencies from fluxuations potentially as severe as that seen in Southeast Asian Financial Crisis of 1997-8. Far easier is the idea of holding dollars, which can produce interest when lent out, and are sufficiently liquid--available--as to be more or less instantly traded and available for conversion into any currency.

The dollar is currently depreciating, which means dollars become cheaper and easier to buy. Hoever, the cheaper dollars become, the more that are needed to buy oil, and the less value they retain as an investment.

Investments in US government-issued securities--arguably the most attractive in the world--may depreciate as higher interest rates are necessary to keep funding US budget and borrowing deficits.

Even in a decline of the dollar there's an opportunity for other nations who must continue to buy dollars. Investing in US assets becomes cheaper; US companies that export make more in dollar terms, and their prices go up. Still, the price of oil will rise and the US gains the benefit of increased demand for its currency.

Necessary for oil, dollars are constantly under demand, which counterbalances damage to its currency which is generated by domestic economy downturns, or the widening trade deficit, or government overspending. In this sense, dollars lose less of their value than other currencies not attached to oil would. The consequence might be that "corrective measures" brought about by a cheaper dollar--like lower demand and increased investment by foreigners in the US--are slower to take hold as the dollar stays artifically higher.

Absent conservation--notorious by its absence in any meaningful way in current Bush policies--demand will continue to spike upward, so steering the status quo forward benefits those who profit from more expensive oil. Economically, the more expensive energy comes at the expense of the US economy and guarantees a lower standard of living for the general population as the higher costs are passed down, impacting disproportionally the less wealthy.

Replacing the Dollar?

Now if the dollar were replaced as the currency used for oil, the US would pay more for oil as its currency weakened realtive to the value of the replacement currency. Dependent on oil, the US economy would be damaged as a result of the higher price. The advantages of trading in dollars would be bestowed on the new currency--presumably the Euro. Euros would be more in demand, dollars less, which would mean the dollar's price would fall. Oil would cost more in dollar times, even if the price of oil as expressed in Euros remained constant.

Replacing the dollar would be a highly politicized process. One of the losers emerging from a switch to Euros would be the Chinese, who would see their massive dollar holdings lose value. What's more, the US economy--facing higher oil prices--would slow down and with it Chinese imports. The strength of the Chinese economy alone--and its reliance on a relatively strong dollar for exporting to the US--is enough to prevent a shift away from the dollar.

China's exports to Europe are rapidly rising. As the Chinese stockpile of Euros increases, they might be willing to look at non-dollar denomiated oil trading. As long as the Chinese aren't investing directly in the US--at least on the scale the Japanese have from the 80's--they need a final destination for the dollars they have amassed--some 1 trillion or so of them. Buying dollar-denominated oil is the perfect way to close the financial loop.

Iran was in the process of creating a bourse trading oil in Euros. See an article on the bourse here. The US is now engaged in a prolonged episode of saber rattling against that country. Some would say that Iran's threat to move away from dollars has precipitated the bellicosity. By intimidating Iran, the argument goes, the US can preserve the dollar's preeminent position.

While the idea of starting wars to prop up one's currency may seem a little brash, it is an undeniable fact that the fate of the US economy is inextricably tied to oil. If the US must buy oil--and our demand for it is increasing--increases in the cost of oil must be restricted as much as possible.

The Cost of Oil

The US cannot, however, set the price of oil. The price of oil cannot be kept low by maintaining production, or perhaps even increasing it; global demand is simply too high. Undeniably, to keep oil prices steady, more capacity must come to market.

In my last foray into Big Oil economics, I brought up the troublesome fact that the massive discovery of an oil field in the Gulf of Mexico was not expected to make any dent in prices. In light of Big Oil's fondness for proclaiming of our need to increase domestic production--to reduce dependence on foreign oil, I found the absence of any impact on prices from such a large discovery to be quite a shock.

No matter how large a discovery we can make, our demand for oil is increasing at a even more rapid rate. And contrary to Big Oil claims of how tapping this or that reserve will reduce dependence on imports, the US imports more and more; Big Oil supplies it.

In this sense, Big Oil wants to oil to increase in price, to increase profits. They are also pursuing an public policy agenda that frames the benefit of domestic exploration and extraction in terms of lower costs, when the truth remains quite different: we will always need more no matter how much we find. By creating dependency on oil, Big Oil simply needs to prolong the addiction.

It's clear the oil that we find is increasingly harder to extract, located in geographically isolated or politically unstable regions. As the cost of extraction and transport grow, so too will the cost of oil to the end consumer. So the consumer can never really win, even if their government caves in to ridicuously defeatist lease terms in order to placate their strong loyalties to Big Oil.

With oil and the selling-off and leasing-away of public lands, it's clear that government is not representing the interest of the people, but rather a narrow constituency that profits from subsidized leases and increased oil dependency. In the cycle of campaign contributions, politicians depend on Big Oil money; once in office, their patrons are entitled to the full benefits of reciprocity.

Ultimately, it will take a massive effort by the people to demand fair value for the oil pumped from land which is really theirs. Change may be achieved through political action, as we see in the case of Venezuala's Chavez, who has de-privatized oil to the point it's virtually free for the citizens of that country. People may also get fed up if the cost of gas increases to rapdily, so the US and Big Oil are both motivated to bring more supply on line (knowing this, the insurgents in Iraq are dictating otherwise.)

And perhaps the best instrument of change will be a push towards conservation and alternative energy sources. As it is, Big Oil and their sympathizers in government have little reason to push for lower oil demand. Windfall profits hardly encourage change. Yet even traditional energy producers and wise politicians may at some point urge demand reduction, if they recognize that demand is unsustainable and that oil will at some point grow prohibitively expensive and restrict economic growth.

Climate Change

The White House has stonewalled efforts proving the existence of the Global Warming phenomena. One article on Bush Administration efforts to de-link global warming's role in more frequent and more powerful hurricanes is here.

Globally, there is limited agreement on the urgency of limiting carbon emissions so continued fossil fuel dependency will lead to massive ecological destruction. The US is not alone in neglecting standards, despite the fact it consumes 25% of world energy needs despite constituting less than 5% of its population. China, Australia, and other countries appear unwilling to enforce the Kyoto Accords.

The more fossil fuels that are burnt, the more rapidly the problems caused by heating will emerge. As coastal areas are deluged, and drought or floods coupled with shifting climate patterns become more obvious, so too will be the need to move away from dependence on greenhouse gas-producing sources of energy. The economic costs of a changeover to a petroleum alternative will be unprecedented, yet increasingly necessary to stem further heating and ecological damage.

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