The Hickory Hound: Economic Stories of Relevance in Today's World -- March 25, 2012

Gas could hit $8 on Iran showdown, experts say - USA Today - Tim Mullaney - March 21, 2012 - Gas prices could double if Iran acts to close the Strait of Hormuz to oil-tanker traffic near the beginning of next year, cutting global economic growth by more than 25%, a leading energy-consulting firm says.             Iran lacks the military might to close the strait for long, but it may be able to disrupt global oil supplies for up to three months by laying mines in the 6-mile-wide shipping passage that the U.S. and its allies would have to find and remove, analysts at IHS Global Insight said on a conference call with reporters Wednesday. About 17 million barrels of oil a day pass through the strait, or nearly 20% of the global market.                   Brent crude oil prices could briefly hit $240 a barrel in the first quarter of 2013, said Sara Johnson, senior research director for Global Economics at IHS. Brent, the benchmark European oil, which IHS uses as a proxy for global prices, closed at $123.07 in London Thursday. In the U.S., West Texas Intermediate, the benchmark U.S. crude oil, closed at $105.35 a barrel.             Prices could stay as high as $160 in the second quarter before reverting to somewhere around $120, she said. The firm forecast that such an oil shock could bring back gas lines in much of the world, and shave global economic growth next year to 2.6% from a current forecast of 3.6%.                  "If it did hit $240, you're looking at about a doubling of where gas prices are now," said Jim Burkhard, managing director of the global oil group at IHS CERA, the firm's energy-research arm. "And the U.S. is at $4."

Saudi Arabia And China Team Up To Build A Gigantic New Oil Refinery - Is This The Beginning Of The End For The Petrodollar? - The Economic Collapse Blog - The largest oil exporter in the Middle East has teamed up with the second largest consumer of oil in the world (China) to build a gigantic new oil refinery and the mainstream media in the United States has barely even noticed it. This mammoth new refinery is scheduled to be fully operational in the Red Sea port city of Yanbu by 2014. Over the past several years, China has sought to aggressively expand trade with Saudi Arabia, and China now actually imports more oil from Saudi Arabia than the United States does. In February, China imported 1.39 million barrels of oil per day from Saudi Arabia. That was 39 percent higher than last February. So why is this important? Well, back in 1973 the United States and Saudi Arabia agreed that all oil sold by Saudi Arabia would be denominated in U.S. dollars. This petrodollar system was adopted by almost the entire world and it has had great benefits for the U.S. economy. But if China becomes Saudi Arabia's most important trading partner, then why should Saudi Arabia continue to only sell oil in U.S. dollars? And if the petrodollar system collapses, what is that going to mean for the U.S. economy?    Those are very important questions, and they will be addressed later on in this article. First of all, let's take a closer look at the agreement reached between Saudi Arabia and China recently.                     The following is how the deal was described in a recent China Daily article....        So what happens if the petrodollar system collapses?                Well, for one thing the value of the U.S. dollar would plummet big time.
U.S. consumers would suddenly find that all of those "cheap imported goods" would rise in price dramatically as would the price of gasoline.                         If you think the price of gas is high now, you just wait until the petrodollar system collapses.
In addition, there would be much less of a demand for U.S. government debt since countries would not have so many excess U.S. dollars lying around.                       So needless to say, the U.S. government really needs the petrodollar system to continue.                    But in the end, it is Saudi Arabia that is holding the cards.                              If Saudi Arabia chooses to sell oil in a currency other than the U.S. dollar, most of the rest of the oil producing countries in the Middle East would surely do the same rather quickly.                      And we have already seen countries in other parts of the world start to move away from using the U.S. dollar in global trade.                  For example, Russia and China have agreed to now use their own national currencies when trading with each other rather than the U.S. dollar.                    That got virtually no attention in the U.S. media, but it really was a big deal when it was announced.                    A recent article by Graham Summers summarized some of the other moves away from the U.S. dollar in international trade that we have seen recently....        Yes, the days of the U.S. dollar being the primary reserve currency of the world are definitely numbered.                       It will not happen overnight, but as the U.S. economy continues to get weaker it is inevitable that the rest of the world will continue to question why the U.S. dollar should automatically have such a dominant position in international trade.             Over the next few years, keep a close eye on Saudi Arabia.                 When Saudi Arabia announces a move away from the petrodollar system, that will be a major trigger event for the global financial system and it will be a really, really bad sign for the U.S. economy.                The level of prosperity that we are enjoying today would not be possible without the petrodollar system. Once the petrodollar system collapses, a lot of our underlying economic vulnerabilities will be exposed and it will not be pretty.                     Tough times are on the horizon. It is imperative that we all get informed and that we all get prepared.

Forget Keystone, The US Desperately Needs An East-West Pipeline - The Business Insider - Keith Schaefer, Oil and Gas Investments Bulletin | March 14, 2012 - In the debate over rising gas prices, one largely overlooked issue is the lack of US oil pipeline distribution to the East Coast, where refineries that must import higher priced Brent crude are being shut down.                     America has more than enough cheap domestic oil, thanks to the North Dakota Bakken and the Canadian oilsands. And it doesn’t face a refinery crisis in terms of capacity - after all, even though the US hasn’t built a new refinery since 1976, oil refining has actually increased by 2 million bopd to 17.7 million bopd since 1985 (and US refinery demand has been steady at 14.8 million bopd since 2005).                Instead, the real problem is that coastal refineries can't source the cheaper North American crude. The Brent oil price fluctuates widely with geopolitical news. A stable, nationwide refinery system—well connected with pipelines—is one area where the US can help control price surges in local markets. Few things affect local gas prices like the shutting down of an oil refinery - and right now, the East Coast is at risk of losing three.....

Chris Martenson And Marc Faber: The Perils of Money Printing's Unintended Consequences - Zero Hedge - Chris Martneson - March 24, 2012 - Marc Faber does not mince words. He believes the money printing policies of the Federal Reserve and its sister central banks around the globe have put the world's currencies on an inexorable, accelerating inflationary down slope. The dangers of money printing are many in his eyes. But in particular, he worries about the unintended consequences it subjects the populace to. Beyond currency devaluation, it creates malinvestment that leads to asset bubbles that wreak havoc when they burst. And even more nefarious, money printing disproportionately punishes the lower classes, resulting in volatile social and political tensions. It's no surprise then that he's feeling particularly defensive these days. While he generally advises those looking to protect their purchasing power to invest capital in precious metals and the equity markets (the rationale being inflation should hurt equity prices less than bond prices), he warns that equities appear overbought at this time.

On The Unintended Consequences of Money Printing - In the short term, it has been working to some extent in the sense that equity prices are up and interest rates are down. And, so companies can issue bonds at extremely low rates. But every money printing exercise in the world leads to unintended consequences at a later point. And, this is the important issue to remember. We don’t know yet for sure what the unintended consequences are.

We know one unintended consequence, and this is that the middle class and the lower classes of society, say 50% of the U.S. has rather been hurt by the increase in the quantity of money in the sense that commodity prices in particular food and energy have gone up very substantially. And, since below 50% of income recipients in the U.S. spend a lot, a much larger portion of their income on food and energy than to say the 10% richest people in America and highest income earners, they have been hurt by monetary policy. In addition, the lower income groups, if they have savings, traditionally they keep them in safe deposits and in cash because they don’t have much money to invest in the first place. So the increase in the value of the S&P hasn’t helped them, but it helped the 5% or 10% or 1% of the population that owns equities. So it's created a wider wealth inequality and that is a negative from a society point of view.

No Inflation? General Mills Begs to Differ - Zero hedge - Crown Thomas - 03/23/2012 - Repeatedly, all we hear is that Zero Hedge is just some wing nut website. Always stretching the truth about the economy's woes, and constantly claiming hyperinflation is just around the corner. Ya, about that... General Mills came out Wednesday with their Q3 earnings, and what do you suppose was one of the top points they wanted to make to their investors? Just that they were experiencing significantly higher input costs year-over-year. As a matter of fact, they say that YOY inflation input costs were actually higher by 2% 3% 5% 8% ... 10%-11% So is it deflationary for the consumer if the 3rd biggest food company in America is experiencing double digit inflation? But then again what do I know, I'm just a contributor to a blog. And I don't even have a Phd.