Posted on 08/09/2005 7:51:31 PM PDT by Jomini
Google's share price is now well into dot.com valuations at more than 80 times earnings _ and this for a company that most of the world could probably live without. So how much would you pay for the last barrel of oil?
Commodities in the 21st century. The benchmark index for tracking commodity prices is the RJ CRB, the Reuters-Jefferies Commodity Research Bureau Index. In its latest revision as of last month, it now contains 19 core commodities that best reflect the world as it is today. Its components can be broadly divided into energy, metals and agricultural.
Significantly, the former practice of equal weighting has ended, so that the index values of these commodities are now based on their significance to the global economy as well as their price, making this a much improved and more relevant barometer.
Crude oil is the largest single component, with 23% of the new index. The combined energy commodities now contribute a total of 39%. Metals weigh in at 20%, including gold at 6%, the second highest weighting after crude oil.
The king of commodities. Although oil has received a considerable promotion in the CRB Index, this has only confirmed what has been a fact for some time. Oil forms the foundation of the entire world economy. Without oil and the other energy commodities, there is no transport, no heating, no mining and simply no developed industrial base. The world as we know it would grind to a halt.
The battle for commodities. Throughout history, commodities have been the prized treasures that have been sought after and fought over by all the great empires. Rubies, diamonds and precious stones brought back from Africa and the Indian subcontinent. Highly prized spices from Southeast Asia and the Caribbean and of course gold and silver.
Dollar-priced commodities. One of the most significant geopolitical developments for commodities was to denominate their prices in US dollars. For those countries that use the US dollar or whose currency is pegged to it, this provides a degree of currency risk management not enjoyed by other countries and which would be extremely painful to give up.
Around the time of its invasion in 2003, Iraq was seeking to exercise its sovereignty by pricing its oil exports in euros. Iran is currently looking at exercising its sovereignty in a similar way against a backdrop of rhetoric that is eerily familiar.
Safeguarding the oil. More than half of the world's proven oil reserves exist in four countries in the Middle East. Iran has the second highest reserves and is currently the only one of the four without foreign troops on its soil.
The recent attempted takeover of California-based Unocal by the Chinese oil company CNOOC highlights the growing concerns of developed countries over energy supply. The fact that Unocal contributes insignificantly to US energy demand did not prevent certain sections of the US Congress from calling for the Chinese investor to be blocked, in the interests of ``national security''.
Oil-producing countries in the developing world are also looking at their production structures. Recognising both the global importance of oil as well as the dependency of their economies on oil revenues, some countries have even raised the spectre of the nationalisation of all energy production assets, with some levying discretionary tax surcharges.
The military coup in oil-producing Mauritania last week further highlights the fragility of the global energy industry.
It isn't just oil. Argentina has just passed an environmental law banning the use of cyanide and mercury in the mining and mineral refining. This will add to production costs as well as slowing supply.
Recent strikes in Zambia, Chile and the US have pushed up copper prices while striking workers at a British Columbian zinc and lead smelting company have helped support prices of those metals.
Commodity-based economies. Those developed countries whose industries are commodity-based are shining examples of the strength and stability of intrinsic-value based economies, despite the existence of real social welfare structures. Australia has the largest uranium deposits of any country, while Australia and Canada delivered more than half of the mined uranium in 2004. Both countries mine gold and Australia has large coal deposits. Canada also boasts more than half of the world's available potable fresh water.
Being commodity-based also helped the Australian equity markets to march straight through the dot.com collapse, while hardly pausing to blink.
The day after tomorrow. The supply and demand balance is found at both its most delicate and most complex with commodities.
The real question is not when do commodities become exhausted but when will global demand exceed the supply of the natural resources that the developed world cannot, or at least will not, live without?
And that hurts if dollars are the currency of choice you enjoy each day in the life.
This type of discourse is difficult for Joe Six-Pack to understand even as gasoline prices approach three dollars a gallon. However nuclear weapons, long range missiles and uranium processing rings a bell with him.
DING! DING! DING!
Can you say Osirak 05?
J
If Tehran is contemplating selling oil in Euros, then this may undermine any working relationship we have with the Continental European countries which are betting on the Euro.
It is a fat carrot to dangle in front of an already corrupt and unreliable European hegemony. Chances are they'll chase the carrot, and find themselves in a predicament that will require U.S. intervention to rescue them.
Naturally, we would do so for free, because we're the evil American Empire...
Two words.
Julian Simon.
Instead of engaging in these idiotic wars over this kind of sh!t, wouldn't it be easier (and far more practical) for us to simply get our own house in order so our dollar doesn't face a potential collapse against other currencies?
Code for adjusting the index to reflect the lowest rate of inflation possible. Oops, copper is up 50%.... time to drop it's weighting. Ahhhh.... lumber is down 20%... it deserves a higher weighting.
Americans get a rather considerable free ride by having the dollar as the world's central reserve currency. That is one brick that cannot come out of the wall.
Going to war with Iran is a very tough call. Clearing the Straits of Sunburn missiles, eliminating Tehran's nuclear program and drying up jihadist infiltration into Iraq would be a nice bonus while defending the dollar's role as the central reserve currency. When Saddam started selling oil for Euros he sealed his fate, so we know the precedent.
Part of the difficulty rests in Iran's immense capacity to strike at the West around the world. Tehran's intelligence capacity far exceeds Baghdad's prewar ability as is seen with the mounting American casualties in Iraq. Should the Iranian government survive a tactical nuclear first strike by America, then the West will take hits around the globe for a long time.
Then again, if the Islamic Entente succeeds in collapsing the Western economic structure (and it is very fragile now) they indeed may have launched their own successful first strike. Difficult decisions ahead for DC on many fronts, however they cannot permit oil to be sold for Euros in Tehran.
With next year's oil bourse opening, Tehran now controls the tempo and has found the round table...
J
Excellent and informative article. And while we are busy worrying about what Iran is doing we had better keep a close eye on Hugo (el Loco) Chavez. He's capable of anything.
de for adjusting the index to reflect the lowest rate of inflation possible.>>>>>>>>>>>>
I have no doubt this is being done. A couple of days ago someone on this forum actually tried to tell me that the price of bread was the same now as in 1963! I don't know what his problem was but inflation is real. Yesterday I was informed that my pay is rising by fifty cents an hour, the first thought that struck me was that I remember when people got five cent an hour raises and that would buy a cup of coffee. Fifty cents will not buy the cheapest cup of coffee available in this low wage state now, and yet we are told that we are better paid than ever. We now have tremendous numbers of working people in this state who are being paid a wage that buys less than the minimum wage of 1963 and this is using official figures which I believe understate the case by a large margin. I would say a large number of people are wearing blinders where inflation is concerned.
"Tehran plans next year to begin selling oil in Euros which cannot be permitted. When crude hits $75, the option of buying it for 60 Euros weakens the dollar's long term role as the world's central reserve currency."
ROFL!!!
Oil is traded freely.
The Euro and $ are independent currencies, trading freely.
It doesnt matter a whit whether the oil price is denominated in dollars or Euros.
You can think of oil as its own currency.
And he would be correct!
Adjusting for inflation, the $2.55 you spend for a large Wonder Bread today would cost $0.40 in 1963.
The link below has a calculator to compare prices. For this comparison, I entered the data like so:
| $2.55 |
| 2005 |
| has the same buying power as |
| $ |
| in 1963 |
Pressing the Calculate button will display the price in 1963 in the third box.
CPI Inflation Calculator: http://data.bls.gov/cgi-bin/cpicalc.pl
For more background on inflation see this link:
The Consumer Price Index: Measuring the Changing Value of Money http://qrc.depaul.edu/djabon/cpi.htm
Yes and no.
Since oil is denominated in dollars, if there is a greater demand for oil, there will be a concurrent greater demand for dollars. This has the effect of artificially increasing the value of the dollar. If oil is priced in Euros, the need for dollars would decrease, thus causing an even steeper decline in the value of the dollar relative to other currencies and oil itself making it even more expensive than it is today.
However, we should look at what country has a preponderance of US dollars and a significantly increased need for oil. That of course would be China. If China had to convert it's quickly declining US dollars to Euros to buy ever more oil, they wouldn't be so inclined to keep their currency pegged to the dollar (yes, they loosened up a little bit recently but it was practically meaningless). The combination of dramatically rising oil prices and dramatically rising manufactured goods prices would throw the US economy into a tailspin. The short term result would be disastrous but in the longer term, we would be a low wage country that could eventually return to being a manufacturing powerhouse the way China has been doing the past few decades. Sort of like what we were post Civil War.
The powers that be are not inclined to let this happen however. Let's hope those computer models on nuclear decay being used at Los Alamos and Lawrence Livermore are accurate least we drop some duds on Tehran.
Mr. Fusion, a former sage of FreeRepublic, predicted years ago that the war on the Islamic Entente would result in millions to die in a third world war. Let us hope this is one prediction that does not come true.
It attempts to use anecdotal events in place of trends, which, by definition are documented by statistics gathered over time.
The only consistent thing about these bozos is that they're consistently wrong.
"Since oil is denominated in dollars, if there is a greater demand for oil, there will be a concurrent greater demand for dollars. "
Not really. I assure you, if all you have is Euros in your pocket, you can buy oil. Oil, Euros and dollars trade freely on the London exchange, after all.
The concept of "reserve currency" is a completely separate matter, which has more to do with the trust in the currency, irrespective of supply/demand for oil.
Correct. But you have to change those euros for dollars first. Now, you can certainly do that in one transaction that is transparent to the person buying the oil with euros but behind the scenes, someone is demanding dollars to purchase that oil. Thus the "artificial" demand for dollars.
You are also correct that being a reserve currency is a separate matter.
BUMP. From your post, the stakes are high enough to warrant risking the wrath of Teheran -
-Increased Hizbullah activity - perhaps even in the US
-Efforts to deny the Persian Gulf for oil shipments
-Increasing agitation and unrest, if not rebellion, by the Shia minorities of the Sheikhdoms of Araby
-Turning Basra, Faw and Southern Iraq into a warzone - perhaps even a push into Kuwait.
-Use Iranian Azeris to stir things up in Azerbaijan.
-Move into Herat, Afghanistan
One of W's first acts on entering office was to "devalue" the dollar,i.e. the US is creating money at a much faster rate. The official "inflation rate" is a fraud because the government now talks about "core" inflation, which is the CPI after removing those things which are going up, like oil and housing.
If housing prices "collapse" then we will either see oil rise much higher and faster or prices of everything will finally get caught up in the wind as all those dollars are reallocated. Actually, in real terms, the prices of most goods and services are declining now even as they look to be staying flat or rising a little. That's because the inflation is largely being expressed in oil and housing.The dollar is continually declining in value so the stable number of dollars with which you buy groceries represents a declining actual value.
You didn't follow me, this nut tried to tell me that the actual price was the same, there was no inflation adjustment involved.
And when the dollar plunges, George Soros and Warren Buffet will dance in the street.
So this is where Georgie boy has been lately.
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