SW Richmond

Update: Crude Oil, Priced in Gold

poet1,

Fiat money, backed by nothing, makes no sense and is unworkable.

When the dollar was backed by gold, the US central bank held gold for which dollars could be redeemed. When Nixon made the dollar non-redeemable in gold, oil became the most important commodity in relation to dollars / fiat currency. Since economies run on energy, and since oil is the most BTU-intensive, easily transportable yet reasonably available energy source, it seems apparent that the most valuable "thing" that a nation can buy on the international market with fiat money would be oil. If that is the case, then the perceived value of a fiat currency, especially the world's reserve currency, would be measured by the amount of oil it can buy.

If large oil producing nations (e.g.Saudi Arabia) could be induced to regulate the amount of oil in the markets to maintain a relatively stable oil price, then the buying power of the world's reserve currency could be maintained relatively stable, providing a stable monetary regime for world economic activity. If the world's largest military promised to defend that oil supplier from any attack, to maintain the supply, to maintain the Saud family control of it, and if the Saud family promised to sell oil denominated in dollars, then the dollar could remain supreme and there would be relative monetary stability for the West. The dollar is, in effect, redeemable in oil. Anyone trying to buy oil must first sell things to the US in order to get dollars with which to buy oil. US consumers are guaranteed a steady flow of consumer junk that they buy with dollars.

If oil is the de facto commodity backing of the US Dollar, then, once the US domestic supply of oil is depleted, then the US completely loses control of the value of the dollar. In order to regain some ability to intervene in the ability of the dollar to buy oil, what better way than to stockpile oil? It is a direct play of dollars against oil. If the dollar buys too little oil, the US can buy dollars with oil, increasing the supply of oil and reducing the supply of dollars.

Saudi Arabia is in essence a giant bank, where the world borrows oil, and pays interest in the form of wealth transfer. It makes sense then for the world's most powerful army to guard it.