Mercury Rising 鳯女

Politics, life, and other things that matter

The demise of the dollar and the rise of the Russian petrostate?

Posted by Charles II on January 1, 2015

That’s what Marin Katusa, author of The Colder Cold War: How the Global Energy Trade Slipped from America’s Grasp, believes. Aired a few weeks ago, before the intensification of the ruble crisis, Katusa makes some excellent points (a number of which we have made on this blog year after year):

* Aggressive U.S. policy has had the perverse effect of bringing America’s chief rivals, Russia and China, much closer together
* The failure to push alternative energy has left the U.S. in the unenviable position of being dependent on the oil with some of the highest production costs
* Where alternative energy has been developed, it has in the past been dependent on government subsidies
* Russia directly controls a very large fraction of the low-cost reserves of gas, oil, and uranium in the world
* Russia indirectly controls more energy reserves through Russian companies, notably Gazprom operating in Israel and a uranium company, ARMZ, in North America
* A number of U.S. allies and neutral countries are heavily dependent on Russian energy
* OPEC regards North American energy producers as rivals that need to be driven out of business
* OPEC’s biggest customer is China, so its interests are no longer so deeply entangled with the U.S.
* The sanctions against Russia have accelerated the negotiation of contracts in currencies other than the dollar

Katusa predicts a dollar crisis, in which a number of countries ditch the dollar, the dollar starts to fall, and foreigners dump dollars. Then energy prices in dollars will rise, hurting the poor and middle class. (See here for an article about the dollar’s recent rise)

You can read more about Katusa’s views here.

Noting the usual caveat emptors–Katusa has heavy investment in the Slavic world, and probably some personal loyalty to it–this is still an interesting take on world events. Mercury Rising has repeatedly noted the dysfunctional U.S. approach to alternative energy, unconventional hydrocarbon development (fracking, deepwater drilling, etc.), and places like Ukraine and Venezuela. Certainly the U.S. has played the game badly, alienating allies, consolidating rivals, and baffling the world by its senseless and ineffectual interventions in places like Iraq.

I don’t think his analysis of a dollar crisis is accurate. First off, of course, is the point that Russians keep offshore bank accounts because they don’t trust their government. If they dump dollars, there are no attractive currencies. More broadly, currency crises generally occur when the assets of a country are falling in value, with no foreseeable rise. Now, the asset could be the currency, and the cause of the decline could be speculative outflows. But US assets are much more broadly held. There are $188T in assets, most of them financial. By contrast, M3 is an order of magnitude smaller.

I do, however, think that Katusa could be right for the wrong reason: the incompetence of the U.S. government, and the paralysis caused by Republican control could indeed cause a panic. There is no objective reason why we cannot convert much of our energy supply to alternatives, undermining the use of energy as a means of control by any government, including Russia. This action would be in the interests of the entire planet, as it would slow global warming. But with a government as stupid and paralyzed as the present one, the chances of getting into a fix we can’t handle are actually pretty good.

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