The big news this week on the financial front was the Independent’s claim that Gulf Arabs and France, Japan, Russia and Japan were planning to move from buying oil in dollars to buying it in a basket of currencies, including gold and a new universal currency shared by the Gulf nations.

Buying oil in dollars is one of the foundations of the dollar’s role as the world’s primary reserve currency. Because the the dollar is the world’s primary reserve currency Americans have been able to borrow money for significantly less than other countries are able to. This has both made America more prosperous, and through the perverse incentives of cheap money, helped lead to the high indebtedness of American citizens and the financial crisis.

In addition, buying oil in dollars is one of the things which allowed strong dollar policies to drive the price of oil down. Making dollars extremely scarce in the 80’s and nineties was one key factor leading to a price per barrel under $20. Oil prices started their rise upwards after Greenspan’s Federal Reserve let loose the money spigot in the Asian crisis and the Long Term Capital fiasco. Greenspan essentially never took his foot off the pedal from that point onwards, and oil prices soared, until last year at one point they were over $150/barrel.

So one consequence of going off the dollar is that a major benefit of the strong dollar play is taken off the table, and the US loses its ability to control the price of oil. Since at this time, contrary to what the Feds are saying, a strong dollar play isn’t in the cards (the US needs to borrow way too much money) that’s not a big deal in the short run—in the long run it is.

But buying oil in dollars isn’t the only thing that underpins the dollar as the world’s reserve currency and to understand what buying oil in something other than dollars would mean we need to understand what else makes, or perhaps more accurately, made, the dollar so important.

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I've been following this for a while, and it's encouraging news if the commodities regulators follow through. These guys have been driving up the cost of oil with the same sort of shady tactics used in the financial markets. Good for the Obama administration if they take this aggressive approach:

WASHINGTON — Reacting to the violent swings in oil prices in recent months, federal regulators announced on Tuesday that they were considering new restrictions on “speculative” traders in markets for oil, natural gas and other energy products.

The move is a big departure from the hands-off approach to market regulation of the last two decades. It also highlights a broader shift toward tougher government oversight under President Obama.

Since Mr. Obama took office, the Justice Department has stepped up antitrust enforcement activities, abandoning many legal doctrines adopted by the Bush administration.

The Obama administration is also proposing an overhaul of financial regulation that would include tougher capital requirements for big banks, tighter regulation of hedge funds and a new consumer protection agency with broad power to regulate credit cards, mortgages and other consumer lending.

In the case of oil and gas trading, regulators made it clear that they were willing to move, without waiting for Congress to act on Mr. Obama’s overhaul, invoking their existing powers.

Nate over at fivethirtyeight.com has a great post about a proposed energy plan that he argues -- quite persuasively -- Barack Obama would be wise to sign on to. The bipartisan legislation includes:

* Opens additional drilling areas in the Gulf of Mexico, and allows Virginia, North Carolina, South Carolina and Georgia to elect to permit drilling off their coasts. Existing bans on drilling off the West Coast, including in the ANWR, would be preserved.

* Dedicates $20 billion to R&D on alternative fuels for motor vehicles.

* Extends a series of tax credits and incentives, such as for the purchase of hybrid vehicles.

* Funds the above -- at total cost of about $84 billion -- by closing tax loopholes for petroleum companies, in conjunction with licensing fees. 

This is a compromise I would definitely be willing to consider. Although I am strongly opposed to offshore drilling because of its limited short-term impact and failure to address the larger issue of dependence on fossil fuels, the tax incentives, investment in alternative fuels, and closure of tax loopholes for oil companies are well worth the trade off. As Nate notes, McCain opposes the bill because of those tax loopholes. By supporting the legislation, Obama can show he is willing to tackle the energy crisis in a bipartisan fashion that ensures investment in future technologies, all the while showing how McCain is beholden to Big Oil. Sounds like a winning strategy to me.

Be sure to read the entire post, as it breaks down precisely why this would be a huge, perhaps election-sealing, gain for Obama, and catastrophic loss for McCain.

Benen adds his thoughts.

After all the stupidity and charade surrounding the GOP's attack on Obama --including this lampooning by Stephen Colbert -- for proposing a common sense approach to increasing fuel efficiency, McCain is forced to admit that it's a pretty good idea.

Reuters:

The surprise came during a telephone town hall meeting McCain held on Tuesday with voters in Pennsylvania.
    
“Obama said a couple of days ago says we all should inflate our tires. I don’t disagree with that. The American Automobile Association strongly recommends it,” McCain said.

But he kept up his broad criticism of Obama on energy: "I ... don't think that that (inflating tires) is a way to become energy independent."

Would that be another flip-flop, McSame?  Contrary to the Team McCain attacks, Obama never suggested that properly inflating your tires and keeping your engine tuned alone will make us energy independent. But as is always true with the Republican distortion machine, facts and context never get in the way of a good smear... even when the attacker admits that the target of the smear was right all along. 

There are more Colbert/Stewart videos on the campaign available at Indecision '08.

  Who knew Nancy Pelosi was such a straight-shooter? When Wolf Blitzer tries to pin part of the blame for the current energy crisis on the Democratic Congress, Pelosi shoots back by saying her House did everything it could to institute a sensible energy policy, only to have "run into a brick wall" in the form of Senate Republicans -- you know, the ones who broke the filibuster record for a full term last year.

Download | play   Download | play  

"The price of oil is... is attributed to two oil men in the White House and their protectors in the United States Senate."

While it might be easy (and typically accurate) to blame everything on President Bush and Vice President Cheney, I don't think it's unreasonable to lay the current crisis at the White House's doorstep. Sure, there are some uncontrollable market forces at work, but both Cheney and Bush are oil patch guys; it would be the height of naivete to assume that they would have an energy policy that didn't benefit Big Oil.

From Day One, Dick Cheney was plotting how to take over Iraq oil fields. Before the war, it was obvious to everyone that the invasion or Iraq, and the instability it would caused in the region, would only drive prices up further. For all the lip service President Bush pays to his commitment to renewable energy, the fact is spending has been on the stagnant since the mid-1990's.

What we really need is a leader with the wisdom to acknowledge the magnitude of the problem and the courage to tackle it head on. "Green Screen" John McCain is clearly not that leader.

John McCain admits that his energy policy consists of nothing other than mind games.

"I don’t see an immediate relief,. But I do see that exploitation of existing reserves that may exist, and in the view of many experts that do exist off our coasts, is also a way that we need to provide relief. Even though it may take some years, the fact that we are exploiting those reserves would have a psychological impact that I think is beneficial."

McCain's argument is that speculators will magically drive the price of oil down when they learn that the federal government has opened up ANWR and other offshore drilling sites; in other words, treat the market like a crap shoot and hope things fix themselves. Here's an idea: Why don't we go after these irresponsible crooks and bring the price of oil down to it's legitimate supply and demand level?  In fact, according to experts, these people are directly responsible for artificially inflating gas prices to the extent that it's costing Americans a half trillion dollars a year.

Salt Lake Tribune:

Gasoline should cost about $2.25 a gallon, and everything above that is ''funny money'' largely tacked on by and manipulation, testified Mark Cooper of the Consumer Federation of America.

    ''The speculative bubble in energy commodities has cost households about $1,500 over the past two years in increased costs for gasoline and natural gas,'' said Cooper, estimating that the total cost to the U.S. economy has been more than half a trillion dollars.

$500,000,000,000 and all John McCain has to offer is "psychological" relief.

Chart depicting the cost of crude oil, from 2004 to today.

The thread is now open. Today marks the one year anniversary of the passing of blogger Steve Gilliard. He was a great friend to C&L. We miss him.