This article explains why the dollar is the strongest currency as well. Energy markets have also given us a huge advantage, but if nations ever go back to private long-term contracts, that would have profound consequences.
Confederation, Nationalization & the New Oil Order. Jim Puplava. Financialsense. The BIG Picture Transcript February 24, 2007
Before 1973, oil contracts lasting 10 to 20 years between a producing country and a customer were made. A price was agreed on between two states, and the contract could last for 10 to 20 years.
Then the OPEC oil embargo hit so hard that the USA and Britain were planning to seize Middle East oil fields. The oil shock woke America up to how vulnerable we were. To counteract that, the government sought diversity of supply, and created a spot market for oil centered in New York and London. Instead of long-term contracts between two states, oil was sold on the open market. It made embargos impossible, since everyone had to sell their oil into this vast pool.
Energy futures emerged from this vast commodity market, and the “paper” market grew to be larger than the actual physical oil that was to be delivered. That’s how the paper market, after the Goldman Sachs Commodity Index changed, could take the physical price of oil from $80 to $50 per barrel. This has really pissed off the countries producing raw minerals, because the paper market has manipulated commodity prices to the West’s advantage.
This virtual pool of oil, and also gold, copper, and other minerals, used the dollar as the medium of exchange, so banks involved in oil transfers needed to have large reserves of dollars on hand, which boosted the value of the dollar.
An ominous trend back to the long-term contracts between states, led by Russian and China, has begun. This is taking oil out of the oil pool. Within the next few years, nearly one-third of oil will be in private long-term contracts. What remains could fall short of demand.
Worse yet, because these contracts will not be conducted in US dollars, the strength of the US dollar may decline. And already, Middle Eastern countries are increasingly investing their oil money in Russia and Asia, and lowering their investment in America, because some of the corrupt rulers, especially in Saudi Arabia, stay in power by buying off their people.
Eventually “as new contracts are put in place over the next couple of years, you’re going to see the rise of new oil exchanges in the Middle East, Russia and Latin America where oil will not be denominated in dollars any more; it will be denominated in different currencies. And what that means, this is really what brings the dollar’s hegemony to an end. What brings about the collapse of the dollar will be oil, because since we broke off from Bretton Woods, and went off the gold standard, oil became the new standard underlying the dollar. If you wanted to buy oil, you had to have dollars.
In retrospect, many of Puplava’s predictions in the full article were wrong (at least as of now in 2014), but the history of how we came to have energy futures and a strong dollar based on oil rather than gold, are important concepts for understanding what may lie ahead (we’ll be lucky if we get a “Bretton Woods” and don’t devolve into too much social unrest to fix the financial system at a global level).