Over the past month, world economic leaders have begun calling for a new world currency to replace the dollar. The world financial crisis has led to worries about the stability of the dollar, which, in turn, has led other countries to feel the need for a new world reserve currency.
For decades, the dollar has been the standard international currency. Many governments maintain a large reserve of dollars as part of their treasuries, such as the $1 trillion in US government debt and securities held by China. International commodities such as crude oil are bought and sold in dollars and international business is typically conducted in dollars.
President Obama’s attempts to stimulate the economy are leading to massive increases in government spending and federal deficits. Creditor nations such as China worry that the ballooning federal debt will lead to inflation and a devalued dollar, which would have almost the same effect on foreign creditors as if the US defaulted on its debt.
In late March, a United Nations panel released a report which recommended that the world create a new reserve currency based on a hard traded, basket of currencies similar to the old European currency unit (Ecu) or an accounting unit called the Special Drawing Right (SDR). The Ecu and the SDR are weighted combinations of currencies that can be traded in financial markets. The Euro had a similar start as a combination of European currencies.
Prior to the April G20 economic summit, both Russia and China indicated their support for world reserve currency. Arkady Dvorkovich, a Kremlin economic advisor, said that Russia would call for discussions of a “supra-national reserve currency.”
Zhou Xiaochuan, governor of China’s central bank, wrote that a new currency would help “to achieve the objective of safeguarding global economic and financial stability.” He worries that there are “inherent vulnerabilities and systemic risks in the existing international monetary system” based on the dollar. He would like the new currency to be used for international trade, commodities pricing, and accounting, unlike current SDRs, which are only used for government finance.
At one point, US Treasury Secretary appeared to agree with the Chinese proposal, saying, “We’re actually quite open to that.”
Within ten minutes of Geithner’s comment, the value of the dollar started to drop sharply. The Secretary quickly recanted his statement and noted that he had not actually read the Chinese proposal.
President Obama, Secretary Geithner, and Federal Reserve Chairman Ben Bernanke all downplayed the proposals for a new currency. “I don’t believe there is a need for a global currency,” President Obama said. He added “the reason the dollar is strong right now is because investors consider the United States the strongest economy in the world with the most stable political system in the world.”
Nevertheless, just a few days later, the G20 did decide to create $250 billion in special drawing rights for the International Monetary Fund (IMF) in what the international financial press described as a “surprising” move. The SDR is an accounting tool used by governments and is not a currency itself, but is made up of a basket of values of four currencies: the dollar, the euro, the British pound sterling, and the Japanese yen. The SDRs would be allocated to governments based on their contributions to the IMF for lending to poorer countries. In essence, SDRs are a form of foreign aid in which wealthy nations borrow to loan money to poor nations.
While the creation of the SDRs is not the creation of a worldwide currency, it seems to be a step toward a global economic system, especially in light of the recent Russian and Chinese proposals. It is also similar to the creation of the euro. The European Community had its roots in the 1951 Treaty of Paris between Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands that created the European Coal and Steel Community. In 1957, the Treaty of Rome between the same nations expanded that cooperation to create the European Economic Community.
It wasn’t until 1979 that the European nations took the next step toward creating a common currency. That year the European Monetary System was created, and, with it, the Ecu, a common currency unit similar to the new SDR.
In 1986, the Single European Act extended the jurisdiction of the European Community to monetary policy. In 1992, the Treaty of Maastricht created the European Union and set a deadline of January 1999 to establish a common currency, as well as a single monetary and economic policy.
In January 1999, the European Union, by then eleven nations, pegged their exchange rates to the euro. At the same time, the euro began to be used for non-cash transactions and accounting. The euro was also used in stock markets and was used on bank statements and corporate bond offerings.
Three years later, in January 2002, the euro went into circulation. A few months later, the old national currencies were phased out.
The creation of the euro was a gradual process that took fifty years. The new Russian and Chinese proposals go beyond the creation of Special Drawing Rights, and may very well eventually lead to the creation of a worldwide version of the euro. There is a possibility that the world financial crisis will accelerate the timetable for the creation of this world currency, especially if the dollar becomes unstable under staggering mountains of US federal debt.
Until recently, the idea of a world currency has been the province of conspiracy theorists and Bible prophecy scholars. It is somewhat shocking to find the idea meeting with widespread acceptance from world leaders.
For many years, theologians have believed that the Biblical Book of Revelation has held an implicit prophecy of a single world currency. Revelation 13:16-17 says “He also forced everyone, small and great, rich and poor, free and slave, to receive a mark on his right hand or on his forehead, so that no one could buy or sell unless he had the mark, which is the name of the beast or the number of his name.”
The implication here is that the latter day world ruler, the beast or Antichrist, has total control over the world economy and financial system. Scholars believe that, at that point, the entire world economy will be tied together with a single cashless currency system. Using the system requires a mark of loyalty that, when applied to the right hand or forehead, is easily visible.
One possibility, explored in Tim LaHaye’s Left Behind series, is that when the mark is applied, a RFID (radio frequency identification) chip is implanted under the skin. This chip would be tied to the user’s bank and financial accounts, so that when a purchase is made, the transaction would be completed by simply scanning the buyer’s hand or face. Essentially, it would be like having a debit card in your body.
Interestingly, this technology is already available. In 2003, Applied Digital Solutions (now called Digital Angel) announced the development of a system called VeriPay, which used microchips half the size of a grain of sand to identify consumers to ATM machines in lieu of an ATM or debit card. The technology did not catch on, but the company changed its focus to market biochips to pet owners. A chip with an identification number is implanted between the pet’s shoulders. If the animal is found, the chip is scanned and the owner’s information is retrieved from a database. The chips have already been implanted into some humans as well.
A cashless economy based on electronic funds transfers would enable a world leader to exercise unprecedented control over world finances. Without cash, it would be impossible for an underground “black” market to thrive. Similarly, dissidents could find themselves with no access to their financial accounts.
The greater danger for those who participate in the beast’s economy is the loss of their souls. Revelation further indicates (20:4, 11-15) that those who take the beast’s mark, showing allegiance to the Antichrist, will be judged and cast into the lake of fire. The only way to escape this fate is accept Jesus Christ as Lord and believe that He rose from the dead (Romans 10:9).
The creation of a single world currency is most likely still a long way off. Recent events show that many world leaders would like to move in that direction, however. These steps are yet another positive indication that the Bible accurately foretells the future and that it is a reliable source of information from God. We can be assured that its prophecies of the return of Jesus are not only accurate; they are drawing nearer.
Sources:
http://www.reuters.com/article/newsOne/idUSTRE52H2CY20090318
http://www.russianews.net/story/483953
http://news.yahoo.com/s/ap/20090325/ap_on_re_as/as_china_global_currency
http://www.washingtontimes.com/news/2009/mar/26/geithner-gaffe-on-dollar-roils-stock-bond-markets/
http://www.telegraph.co.uk/finance/economics/5051075/A-world-currency-moves-nearer-after-Tim-Geithners-slip.html
http://online.wsj.com/article/SB123854148528775677.html
http://www.ft.com/cms/s/0/0afa92e4-21f5-11de-8380-00144feabdc0,dwp_uuid=60a3db68-b177-11dd-b97a-0000779fd18c.html?nclick_check=1
http://www.cbc.ca/news/background/euro/history.html
http://news.cnet.com/2100-1041_3-5111637.html
NOTE: This may seem like a strange topic for an Easter blog, but if Jesus was able to rise from the dead, then it follows that He will be able to return as He said He would. The signs that He gave to signify His return bear a striking resemblance to today's headlines.
Jesus is risen indeed.
Happy Easter!
Dulles VA
Showing posts with label dollar. Show all posts
Showing posts with label dollar. Show all posts
Sunday, April 12, 2009
Monday, September 15, 2008
The Economics of Oil Prices
This past weekend oil prices shot to near-record highs again after several months of decline. While on a weekend trip to visit the grandparents, we were unpleasantly surprised to see gas prices climbing as quickly as the gas station attendants could change their signs. Even at high prices, many stations were selling completely out of gasoline.
To understand the reason for the fluctuations, we must first see the big picture. Oil prices have been increasing over the last few years for a number of reasons. More demand is one of the most important factors. The United States has been using more oil every year. The demand of other countries is increasing as well. China and India are both becoming industrialized nations. As they industrialize, they use vastly more oil than they did in the past.
Additionally, much of the easily tapped oil has already been drilled. Oil fields are increasingly difficult and expensive to tap. Even nations like Saudi Arabia have already pumped much of their easily accessible reserves. New oil fields are often found far out to sea or in very inhospitable areas, such as the arctic. There are new sources of oil, such as Colorado’s oil shale, but many of these are also more expensive to produce. Many oil-rich areas are also politically unstable, which makes the supply of oil uncertain.
Furthermore, oil prices have also been affected by the weak US dollar over the last few years. When the dollar is weak relative to other currencies, it takes more dollars to pay for the same barrel of oil.
Over the summer, oil prices have been driven down by several factors. First, high oil prices did what global warming alarmists were unable to accomplish: They persuaded people around the world to use less oil. Oil demand declined in the first half of 2008 and is forecast to continue falling in 2009.
Basic economic theory is that as prices rise, demand will fall. This has been true in other oil spikes as well. When oil prices increased sharply in the 1970s and 1980s, they led to economic slowdowns, which, in turn, caused the price of oil to drop. In the 1980s, the price of oil not only dropped, it collapsed and didn’t recover for about twenty years.
The dollar also gained over the summer of 2008. As the dollar grew stronger, the relative price of oil decreased. As the dollar increased in its value, it took fewer dollars to buy each barrel of oil.
A final factor in the oil price decline was President Bush’s decision to repeal the presidential ban on offshore oil drilling in mid-July 2008. Conservative estimates are that there are at least 18 billion barrels of oil off the coasts of the United States that are currently off limits to oil companies. Drilling will still not be allowed unless the congressional ban is allowed to expire, but President Bush sent a clear message to oil producers that the supply of oil might increase dramatically in the next few years. The effect was an almost immediate decline in the price of oil.
Many people place the blame for high oil prices squarely at the feet of the oil companies. While the oil companies once had the ability to set prices, that is no longer true. Most producing countries nationalized their oil fields and facilities in the 1960s and 1970s. They then formed OPEC, a cartel tasked with organizing oil production and stabilizing prices. Currently oil-producing countries set the price for their oil and buyers simply choose whether to buy or not. Given the high demand for oil, usually the choice is to buy regardless of price.
There are few cures for high oil prices. One is to reduce demand. This can be accomplished through alternative energy sources. One of the most practical solutions is to shift to electrical power. Electricity could be supplied cheaply through nuclear, wind, and solar power. All of these energy sources require large capital investments to start, however. Costs to consumers for new cars and home heating systems would also be significant. Conservation is promising way of reducing demand as well.
Increasing oil supplies is the other way to reduce oil prices. Billions of barrels of domestic oil reserves are going unused because of environmentalist-inspired bans on drilling. These oil reserves could be used to buy time to shift to other energy sources. Because much of the pre-production work has already been done, these oil reserves could be brought to market in as little as two years.
Supply could also be increased by new sources of oil. A process to turn coal into gasoline was invented by the Germans in WWII. Since the US has some of the world’s largest reserves of coal, this process holds much promise. Due to large investments for facilities to process the coal, this is not cost effective when oil is cheap, but is being considered now.
A common question is why retail gasoline prices rise faster than oil prices. The answer can be found in how gas stations are supplied. Over the past few years, gas stations have only been making a few cents profit on each gallon of gasoline. When gas prices rise, the station owner knows that his next shipment of gasoline is going to be more expensive. He raises prices so that he will be able to pay for the next shipment of gasoline. If he doesn’t increase the price immediately, he knows that he will lose money.
Conversely, when prices fall, the gas station owner sees an opportunity to make a little more profit for a short time. As he loses customers to gas stations with lower prices, he will eventually have to lower his own prices or be stuck with a large inventory of gasoline.
Last weekend, the run on gas stations had several factors. One is that the newest refinery in the US is over thirty years old. Due to government restrictions and costs, refinery capacity has not kept pace with increasing demand. As a result, US refineries are operating at about 97% capacity. When there is any interruption, such as that caused by Hurricane Ike, there is the possibility of an interruption of supply and a resulting shortage.
Another factor is that the public was panicking. Even though news reports were saying that there was no possibility of a shortage, as prices rose, the word went out among friends and families that it was time to fill up, before prices rose further. This created an artificial surge in demand. As economic law tells us, when demand rises, price follows. As station owners saw that they were going to sell out, it was obvious that it was better for them to sell out at a higher price than a lower one.
This may strike some as price gouging, but it can actually be a good thing. Rising prices prevent hoarding by those who don’t need the product. If someone doesn’t need gas, they won’t pay the higher price. Therefore the gas will be available for someone who does need it and is willing to pay the higher price. If the price stayed low, then hoarders would quickly snap up all available supplies.
Oil prices will probably decline again in the next few weeks, but $100 per barrel oil is likely here to stay. As long as demand remains high and supplies are constrained with no slack available at the production facilities, we should prepare for price spikes every time there is an interruption, whether real or perceived. The only real answers are to reduce demand through conservation and alternative energy sources, while simultaneously boosting supply and production in the short term.
Sources:
The Prize, Daniel Yergin, Simon & Schuster, New York, 1991
http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/demand_text.htm
http://www.dailyreckoning.com.au/future-oil-production/2008/05/22/
http://www.api.org/Newsroom/us_june08_oil_demand.cfm?renderforprint=1
http://www.ogj.com/display_article/339235/7/ONART/none/GenIn/1/IEA-cuts-2008,-2009-oil-demand-forecasts/
http://www.cnn.com/2008/POLITICS/07/14/bush.offshore/index.html
To understand the reason for the fluctuations, we must first see the big picture. Oil prices have been increasing over the last few years for a number of reasons. More demand is one of the most important factors. The United States has been using more oil every year. The demand of other countries is increasing as well. China and India are both becoming industrialized nations. As they industrialize, they use vastly more oil than they did in the past.
Additionally, much of the easily tapped oil has already been drilled. Oil fields are increasingly difficult and expensive to tap. Even nations like Saudi Arabia have already pumped much of their easily accessible reserves. New oil fields are often found far out to sea or in very inhospitable areas, such as the arctic. There are new sources of oil, such as Colorado’s oil shale, but many of these are also more expensive to produce. Many oil-rich areas are also politically unstable, which makes the supply of oil uncertain.
Furthermore, oil prices have also been affected by the weak US dollar over the last few years. When the dollar is weak relative to other currencies, it takes more dollars to pay for the same barrel of oil.
Over the summer, oil prices have been driven down by several factors. First, high oil prices did what global warming alarmists were unable to accomplish: They persuaded people around the world to use less oil. Oil demand declined in the first half of 2008 and is forecast to continue falling in 2009.
Basic economic theory is that as prices rise, demand will fall. This has been true in other oil spikes as well. When oil prices increased sharply in the 1970s and 1980s, they led to economic slowdowns, which, in turn, caused the price of oil to drop. In the 1980s, the price of oil not only dropped, it collapsed and didn’t recover for about twenty years.
The dollar also gained over the summer of 2008. As the dollar grew stronger, the relative price of oil decreased. As the dollar increased in its value, it took fewer dollars to buy each barrel of oil.
A final factor in the oil price decline was President Bush’s decision to repeal the presidential ban on offshore oil drilling in mid-July 2008. Conservative estimates are that there are at least 18 billion barrels of oil off the coasts of the United States that are currently off limits to oil companies. Drilling will still not be allowed unless the congressional ban is allowed to expire, but President Bush sent a clear message to oil producers that the supply of oil might increase dramatically in the next few years. The effect was an almost immediate decline in the price of oil.
Many people place the blame for high oil prices squarely at the feet of the oil companies. While the oil companies once had the ability to set prices, that is no longer true. Most producing countries nationalized their oil fields and facilities in the 1960s and 1970s. They then formed OPEC, a cartel tasked with organizing oil production and stabilizing prices. Currently oil-producing countries set the price for their oil and buyers simply choose whether to buy or not. Given the high demand for oil, usually the choice is to buy regardless of price.
There are few cures for high oil prices. One is to reduce demand. This can be accomplished through alternative energy sources. One of the most practical solutions is to shift to electrical power. Electricity could be supplied cheaply through nuclear, wind, and solar power. All of these energy sources require large capital investments to start, however. Costs to consumers for new cars and home heating systems would also be significant. Conservation is promising way of reducing demand as well.
Increasing oil supplies is the other way to reduce oil prices. Billions of barrels of domestic oil reserves are going unused because of environmentalist-inspired bans on drilling. These oil reserves could be used to buy time to shift to other energy sources. Because much of the pre-production work has already been done, these oil reserves could be brought to market in as little as two years.
Supply could also be increased by new sources of oil. A process to turn coal into gasoline was invented by the Germans in WWII. Since the US has some of the world’s largest reserves of coal, this process holds much promise. Due to large investments for facilities to process the coal, this is not cost effective when oil is cheap, but is being considered now.
A common question is why retail gasoline prices rise faster than oil prices. The answer can be found in how gas stations are supplied. Over the past few years, gas stations have only been making a few cents profit on each gallon of gasoline. When gas prices rise, the station owner knows that his next shipment of gasoline is going to be more expensive. He raises prices so that he will be able to pay for the next shipment of gasoline. If he doesn’t increase the price immediately, he knows that he will lose money.
Conversely, when prices fall, the gas station owner sees an opportunity to make a little more profit for a short time. As he loses customers to gas stations with lower prices, he will eventually have to lower his own prices or be stuck with a large inventory of gasoline.
Last weekend, the run on gas stations had several factors. One is that the newest refinery in the US is over thirty years old. Due to government restrictions and costs, refinery capacity has not kept pace with increasing demand. As a result, US refineries are operating at about 97% capacity. When there is any interruption, such as that caused by Hurricane Ike, there is the possibility of an interruption of supply and a resulting shortage.
Another factor is that the public was panicking. Even though news reports were saying that there was no possibility of a shortage, as prices rose, the word went out among friends and families that it was time to fill up, before prices rose further. This created an artificial surge in demand. As economic law tells us, when demand rises, price follows. As station owners saw that they were going to sell out, it was obvious that it was better for them to sell out at a higher price than a lower one.
This may strike some as price gouging, but it can actually be a good thing. Rising prices prevent hoarding by those who don’t need the product. If someone doesn’t need gas, they won’t pay the higher price. Therefore the gas will be available for someone who does need it and is willing to pay the higher price. If the price stayed low, then hoarders would quickly snap up all available supplies.
Oil prices will probably decline again in the next few weeks, but $100 per barrel oil is likely here to stay. As long as demand remains high and supplies are constrained with no slack available at the production facilities, we should prepare for price spikes every time there is an interruption, whether real or perceived. The only real answers are to reduce demand through conservation and alternative energy sources, while simultaneously boosting supply and production in the short term.
Sources:
The Prize, Daniel Yergin, Simon & Schuster, New York, 1991
http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/demand_text.htm
http://www.dailyreckoning.com.au/future-oil-production/2008/05/22/
http://www.api.org/Newsroom/us_june08_oil_demand.cfm?renderforprint=1
http://www.ogj.com/display_article/339235/7/ONART/none/GenIn/1/IEA-cuts-2008,-2009-oil-demand-forecasts/
http://www.cnn.com/2008/POLITICS/07/14/bush.offshore/index.html
Subscribe to:
Posts (Atom)