The Bezzle, Carbon Taxes and the Global Petro Dollar  

Energy Bulletin has an excellent article up on the international oil market, carbon emissions trading and an energy based monetary unit.

Is oil priced in dollars or are dollars priced in oil?

There has been a growing realisation on the part of major oil producers such as Iran and Saudi Arabia that oil is not priced in dollars but rather that dollars are priced in oil. The reality underpinning this epiphany is the fact that oil has “Value” ie “money’s worth” - in exchange for commodities, goods and services – whereas the financial object we are accustomed to think of as the “dollar” is merely a “claim over value” or IOU issued by the US Federal Reserve Bank.

If we look at the current structure of the global energy market, we are accustomed to think that the “big bad wolf” is a “cartel” of OPEC members. However, the fact of the matter is that while there has been a cartel extracting extraordinary profits from energy markets in recent years this has consisted of intermediary investment banks and energy traders who control the global market platform on which oil is traded and benchmark prices set. In other words, the derivative tail has been wagging the oil market dog.

This is set to get worse, to the extent that a major trading disaster is only a matter of time – possibly as soon as this winter if the prognosis of Goldman Sachs of “super-spikes” to $100/ barrel oil is realised. The reason for this is the fact that the investment banks and oil companies have themselves now lost control of the price-setting process to a wall of hedge fund money under the control of star traders attracted by rewards beyond the dreams of avarice – as opposed to the pittance they were receiving with their former employers.

Hedge funds – as the Long Term Capital Management meltdown showed us in 1998 - are almost entirely unregulated since there is no regulatory body either with access to data in relation to their transactions (particularly “off-exchange”) or with the capability to take enforcement action over off-shore entities typically used by hedge funds.

Due to the lack of transparency in "off-exchange" trading, oil producers and consumers do not even know that they are losing - a phenomenon which J K Galbraith memorably described as the “bezzle”. However, while oil producers and consumers have now woken up to the bezzle, the problem they have is what they can do about it.

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A Money based upon Value?

While an Energy Clearing Union provides the means for a rational energy policy it does not remove the driver for economic growth at all costs at the heart of our malaise: in other words, it would treat the symptom rather than the disease.

In order to do that we need to re-examine the monetary unit itself. It is possible to conceive of a global “petro-dollar” - based upon a set amount of energy - which would be capable of fulfilling a role as a genuine alternative to the dollar as a global means of exchange.

J M Keynes put forward at Bretton Woods 60 years ago an "International Clearing Union" coupled to a new monetary unit he called the "Bancor". Unfortunately, what we got is a "Central Bank - centric" monetary system configured around the World Bank/IMF and the Bank of International Settlements where the monetary units we use are essentially debts created by Central Banks and issued into circulation by banks as loans.

We take for granted that we need Banks to create credit but perhaps do not realise that this bank-created credit constitutes the bulk of our money supply. The effect of a monetary unit created as a debt is that - to take the UK as an example – more than 97% of all money in circulation has come into existence through the creation of loans (two-thirds of them in respect of mortgage loans secured against property) by "credit institutions" such as banks and building societies.

However, when credit institutions create money through a loan they do not create the money necessary to repay the interest on that loan. So the simple and inexorable mathematics of compound interest on the loans backing our money drives the unsustainable imperative for economic growth at the heart of our malaise.

We also take for granted that banks are entitled to charge interest on the credit they create.

The new site www.zopa.com which links would be borrowers together with would-be lenders essentially on a peer-to peer basis does for Banks what Napster did for the music industry – ie it dis-intermediates them.

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An International Energy Clearing Union could provide a platform both for a new and rational energy policy and -in conjunction with new energy investment institutions -for a global monetary system based upon Value rather than its antithesis - the US dollar.

This would literally "reverse the polarity" of Money to base it upon Value, rather than upon a claim over Value created by a Bank out of thin air.

How then might this come to pass? The fact of the matter is that the existing system is approaching a crisis point, and that a new alternative is emerging. A revolution is approaching – albeit a silent one – and when it is over we will wonder how it could ever have been otherwise.