Letter Re: Peak Oil and the Real Value of the Dollar

Dear Jim,  
For the last 70 years, the dollar’s value has evffectively been pegged to oil. We can thank FDR for that, since he removed Gold from backing the dollar. I suppose it worked out okay, but now we have a problem. The oil is running out. You’ve seen it at the gas stations, and the price of Brent crude is $124 per barrel, and domestic USA crude is $112 per barrel. The USA only produces 5.5 million barrels per day (mbpd). The balance of the 19 mbpd is imported, mostly from Canada, Mexico, Venezuela, and Nigeria (not Saudi Arabia or North Africa. Those go to Europe and China). Mexico is running out of oil. Venezuela is running out of oil but wants to sell it exclusively to China. Canada sells oil to the USA under a NAFTA agreement (which is why the USA can’t do without NAFTA). And Nigeria just had another fraud election which has resulted in renewed rebellion so expect supplies to be shaky there. Most of what Nigeria sells will probably end up replacing what is lost in North Africa and the Middle East going to Europe and China.  

This means the USA will have to conserve another 20% of its oil demand, dropping from 19 mbpd to around 15 mpbd. Cue economic contraction and further jobs lost, more wage erosion (lower wages and no raises and no benefits). However you feel about Socialism, it is not fun working in the USA today. Some regulation will have to come about or revolution pressures will increase, and its much easier for a semi-Democracy like the USA to just mandate benefit requirements for employers than suffer the consequences of an increased turnover rate in leadership positions (vote the bums out).  

Still, this is the unpleasant bit, not only are we undergoing economic contraction but we also are seeing foreign holdings of T-bills dumped in favor of other currencies, and oil is starting to trade in Yuan, Euros, and other currencies because they’re stronger than the Dollar. A tipping point is highly probable, leading to a panic and the dollar will drop like a stone. How low can it go?  

Think Weimar? No, probably not. The USA would impose trade tariffs before that, messing up FOREX markets completely and causing the common man to shrug, preventing panic as far as he’s concerned. Irritation over the cost of imported goods will be interesting though. There’s likely to see a huge surge in demand for domestic copies of replacement parts for imported goods (cars, electronics, everything made in China, Japan, EU nations) because Tariffs change manufacturing and ends globalism as far as we’re concerned.  

Lest ye worry that it would incite war, China is already selling to everyone else. They know as they dump our bonds that they’ve decided they can accept the loss. It won’t be a surprise as they de-couple from the USA economy while we stew like Brazil in the 1970s. The big difference between us and Brazil is the USA can readily adapt to manufacturing and doing so does not require a 5 year lead time for higher education. Assembly line jobs can be taught in hours or days. And we’re going to need full employment to accomplish these things, to keep our stuff working. Even the minimal pioneering survival stuff like cast iron cookware and plates and silverware and water heaters and all sorts of things which are best mass-produced.  

The rest of the world can easily block out the “information economy” nonsense since so much of that is being done in India and elsewhere anyway. What they can’t ban is USA’s food exports, largely because the USA feeds a third of the world’s population. They can’t adjust immediately without invoking massive civil war over starvation. So they’ll pay to keep things under control while they frantically plow their fields, plant their crops, and pay their farmers enough to care. In the years it will take to get their own farming going, the hard currency from USA’s agricultural exports (rice, wheat, corn, soybeans) will pay for the critical imports and the more important domestic manufacturing plants, with all the implied jobs. And its going to be a lots of jobs. Everything we use that’s imported now will need to be made here in the USA. The USA has 300 million residents. That’s plenty of demand, in housewares alone. Exporting anything else is unnecessary, and the insistence that the USA “must export to survive” is nonsense. Beyond agriculture we don’t need to.  

That gets back to the original issue: how much is the dollar really worth? Approximately 20% of its value in 2006, the peak value of the dollar before the crash started hurting everything, including other currencies. It will probably drop below that at some point, but fluctuations in the commodities market will stabilize it again. The big industrial agriculture organizations farming all that wheat and rice and soy demand a certain amount of return on investment, and they’ll want it in hard currency. Expect the US government to tax those exports, which the foreign governments will pay because they literally can’t do without the food or stop being governments and start being in the middle of revolutions. They have to pay.  

It is worth pointing out that the USA’s other big export is arms. That’s likely to be counter-tariffed so competing nations (Britain, France, China) can sell arms for less. All those arms manufacturing jobs in the USA will probably evaporate, but the machinist and assembly line workers will find work making scooter engines and water pumps and Blue-ray players. Same skills, different products, and we actually need them.  

I believe that Trade Tariffs are just as inevitable as the Dollar Crash. They are the only practical way out of this disaster. Believe it. Even if you disagree its going to be what the politicians in the USA will grab for. The Cult of America can’t survive otherwise and insulation is just a step short of cultural marginalization (blame that other guy) and drinking the Kool Aid (implosion, probably at the Federal level freeing the States to govern themselves, something Kalifornia is already doing with its responsibilities and revenues dumped onto Counties). Assuming we survive those particular steps, rebuilding is possible. Keep a handy copy of the Constitution in your safe, and remember that State-Level government is far more accessible.  

[Consider life at 20% of] 2006’s Dollar value. No more imports. Export agriculture only. Bootstrapping our manufacturing post cheap-oil. Bicycle to work. That’s our future.   Best, – InyoKern