Wednesday, June 4, 2008

Obama and McCain's petroeuro problem

As the US Presidential campaign begins in earnest today (finally!), Sens. John McCain and Barack Obama will have to address a whole series of issues. One of them is the effect the devaluation of the US currency against other benchmarks -- the pound, the euro and the Canadian dollar among others -- have had on the economy. One reason for America's sag is the fact some OPEC members are insisting on payment in euros and not dollars for the oil they export; and since the last recession the common currency of 15 EU and 3 non-EU states has been on a tear. Russia for its part is demanding payment in rubles which is actually becoming a viable currency -- which they then turn into hard currencies such as the pound and the euro; dollars much less so.

In fact, many Americans aware too much that their currency is now on par with the loonie (which may not be too much of a problem for the US since the oil they import from us Canadians is more reliable) may be far less aware that since 9/11 -- when the euro was still just a virtual currency and three months before it became "real" money -- the greenback has lost fully roughly half its value. It's gone from 87 cents to $1.60 against the euro, and euro parity with the pound sterling may just be around the corner which would devalue the US currency even more.

The overall decline was happening before the subprime crisis really hit. But having a barrel to the head of Americans with the double whammy of currency and oil must really be hurting. Traders talk about the "war premium" on oil, about $25 per barrel, but are less open about the fact that throwing in currency wars may be adding another equal amount. Put it another way, 75 cents per gallon of gas can be explained by the fact of demand for payment in euros.

The issue of petroeuros over petrodollars isn't going away any time soon. I'd like to know what both candidates think about this.

The current situation is probably a bubble right now and even Alberta has suggested (in their budget) the price is bound to drop to $78 per barrel by March of next year. But the speculation over money will not end anytime soon. The next president will have to come up with a bold strategy to put some rationality back into the system (not the least of which will mean energy independence) and make the greenback a trusted currency again. Otherwise, any good that could be done will be squandered by ever increasing demands by rogue dictators.

As a side note, the euro becoming a reserve currency may be a boost to the pride of Europeans but they're being slammed unfairly by the substitution of petrodollars for petroeuros as well. Iran is an even greater threat to European security than American, and the next US President will have to take a stand on this as well if he is to be a trusted leader.

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