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Will the collapse of US shale end the Petrodollar?

I’ve just read through another impossible long comment thread at Moon of Alabama (146 comments and counting) in response to Bernhard’s essay MoA – Negative Prices Mark The End Of U.S. Shale. There’s about ten interesting comments there which I’ve abridged for you here. The core subject quickly switched from the price of petroleum to what effect low oil prices would have on the petrodollar and the US economy.

The intelligent consensus was that the petrodollars is now finished as there won’t be enough trade volume in oil to require maintaining large US reserves, while many suppliers (Venezuela, Iran, Russia and perhaps even Saudi Arabia) will trade oil mostly or at least significantly in other currencies.

The usual trolls attempted their nonsensical and anti-fact drive-by attacks on China, with the main theme coronavirus reparations again. Disabuser tried to steer the conversation off-topic by asserting that China’s economy would implode and Silk Road initiative would flounder due to an astronomical 300% debt to GDP ratio. The real debt to GDP ratio figures for several large countries are as follows:

  • Japan 237%
  • US 106%
  • Canada 84%
  • China 52%
  • Slovakia 54%
  • Czechia 31%
  • Russia 19%

Disabuser supported his strange position with allegations that China hides a huge portion of its debt in its state-owned enterprises. As China is a socialist country it makes sense that much corporate debt is in SOE. As the US is an a corporatist plutocracy it makes sense much of its debt is hidden in nominally private and multinational companies.

Other posters quickly noted that China’s debt was built building infrastructure like spanking new cities with affordable apartments, bullet trains and massive new factories while recent US debt was accumulated in financial ponzi schemes and absurdly over-priced military hardward, while core civilian infrastructure rotted. Debt is certainly not a stick with which the USA can afford to beat China.

Here are the more insightful and thought-provoking comments in order. DFC wondered why the Asian countries have done so much better in addressing the COVID-19 crisis in terms of both restricting the spread and treating the infected. William Gruff blames a lack of competence among the Western population, requiring hiring other nationals to do the hard work:

DFC @31: “…compare [fatality trends in Asian countries] with the terrible, dramatic trends in every western country, and I cannot find an easy, convincing, explanation for that…We and our governments are all much more stupid, conceited and clumsy than the asians, but… so much?

Yes, the level of incompetence in western societies, not just governments but whole societies, is obscene. Auto mechanics who cannot fix cars, plumbers who cannot join pipes, burger flippers who cannot flip burgers, aerospace engineers who cannot design airliners that do not auto-crash. From top to bottom western societies are filled with incompetent clods who cannot perform the functions that they presumably trained for.

Fortunately for westerners it is not politically correct to draw attention to other people’s stupidity and incompetence, so as long as we can hire Asians to do the mental heavy lifting and Mexicans to do the manual labor that requires having an attention span, then we’re good.
Posted by: William Gruff | Apr 21 2020 14:26 utc | 38

Stonebird sees the emperor without any clothes at this point. Who wants to even buy treasury bonds?

To add to William Gruff’s comment:
The use of the dollar meant that it was useful to have somewhere to put them. ie Treasury Bonds (US debt.), or keep them in their own Banking system. The TBonds market has fallen through. For 2020 there are no more “Official” buyers and ion fact they are sellers only. $2 trillion of the 3trillion issued has been bought by the Federal “reserve” (The Private bank that “issues” electonic bits laughingly called “money”), the rest is bought by money managers and Banks (mainly short term – to make a fast buck). No other country now wants to back up the US debt pile of over $23 trillion and counting.
I’d say that they have already left, rather than “the Countries can choose to walk away now” that William Gruff thinks – but the end result is the same.

Posted by: Stonebird | Apr 21 2020 14:54 utc | 47

Kadath wonders what countries will accept USD in exchange for valuable core assets at this point.

Money can only buy what people are willing to sell and only if they accept the currency. US & Western Finance might have all the fiat currency in the world, infinite money even. But China, Russia, India & even Africa are increasingly telling the US to get stuffed when they come around trying to buy key assets. I believe the US and the “West” will become increasingly isolated, big finance will probably succeed in buying every key asset in the US, but an Impoverished people ruled by an out of touch elite playing at world ambitions while their people starve, that sounds like Tsarist Russia and how did that turn out for the Russian nobility?

Posted by: Kadath | Apr 21 2020 15:13 utc | 53

Schadenfreude concerning the bankruptcy of the US shale fracking companies raised its ugly head. J Swift is slow to rejoice as he still sees them enjoying a bailout for which the average citizen will have to pay.

I disagree…that the financiers of fracking will take it on the chin. They won’t. They’ll be the first to be bailed out. Banks in the West haven’t had to suffer because of an unwise investment for many, many years. Ultimately there will be a price to be paid, but it will likely be paid by Western bankers, hedge funds, and the like last. It’s an upside down world.

Posted by: J Swift | Apr 21 2020 15:31 utc | 57

VK rejoins that Peter AU that President Trump will just be throwing good money after bad. Knowing vk’s socialist mindesteI’m not sure if he’s being ironical or not when he posits “that’s not how capitalism should work”.

If he really do that, then he’s entering very dangerous territory.

A fund with taxpayer’s money dedicated to keep bankrupt shale oil businesses will only make the agony last longer. It’s literally using money-capital to prop up attested unprofitable businesses.

That’s not how capitalism should work.

Posted by: vk | Apr 21 2020 15:43 utc | 60

jayc suggested that the incredible US failure in the face of COVID-19 is that trying to organise a private enterprise response to a national health epidemic is hopelessly inefficient:

#58 – “That’s true but the real reason we are screwed is why they wouldn’t use the available test and felt they had to make one themselves: it was a nonprofit test; their buddies couldn’t make money on it!”

A major focus of Event 201 was enhancing private sector participation in pandemic preparations. Senior CDC officials were part of these panels. The testing kits produced by CDC through the month of February were flawed via some form of contamination. Recent reporting about this (Wash Post) blamed the CDC’s own lab, and suggested the problem was resolved by private sector involvement. I suspect the opposite occurred – i.e. a private sector actor botched the tests. Lack of testing kits in February / March exploded the pandemic in USA, as infected persons were not properly identified.

US capitalism rejects the public sector. The health system, education system, post office, etc must be controlled by private interests. The model is a neo-feudal system, as discussed by Keiser/ Hudson last week. But this system has no means to respond to a public emergency.

Posted by: jayc | Apr 21 2020 17:53 utc | 91

Oriental Voice still doesn’t understand how the Asians and specifically the Chinese have gotten off so light vis à vis the USA. William Gruff succinctly makes it clear. Americans are hopelessly overweight while COVID-19 specifically attacks respiration. Laboured breathing is normal among the heavy.

Dan @31:

The average Asian weighs 150lb. The average westerner weighs, what, 250+lb plus half a kilo of sugar in her/his blood? Would that be a crucial factor in how these people breathe to garner enough oxygen?

Posted by: Oriental Voice | Apr 21 2020 18:22 utc | 102/

JasonT cuts deeper than just the price of oil. The current economic crisis is handing another huge portion of our economy to the corporations and Wall Street. Main Street and small business go bankrupt while Treasury and Federal Reserve subsidised banks and corporations buy up distressed assets. He sees a war ahead:

William Gruff @54

It matters not to me who owns oil assets as long as I can live a free life.

But, you are missing the big picture. This is about the desire of a few people at the top of Big Finance to control everything and everyone else. These people wish to institute a completely totalitarian world society where they control everything, even at the micro level. That will result in the inability of everyone else to live a free life. That is what matters to me.

People who want everything most certainly want oil wells too. Taking control over all oil production will control the cheapest and most ubiquitous useable energy source, which will make taking control over everything else that much easier.

The biggest glitch in the plan is Russia and China, who are strong enough to push back successfully. This is why the corrupt Western media has been hyperventilating over Russia and China. All part of the propaganda effort to get the plebs to agree to sacrifice themselves in a war so that the people at the top of Big Finance can control everything and everyone in Russia and China too.

David F @59

The control over the last 107 years has been more diffuse than the few people at the top of Big Finance. Other oligarchs in industry also had a measure of control, and all of the oligarchs still feared a popular uprising. Big Finance is now in the process of concentrating their control even more by breaking the other oligarchs, and they no longer fear a popular uprising in the West because the ordinary people West has become complacent sheep. As I said above, the people at the top of Big Finance want control of everything and everyone, even ultimately to the point of controlling when and where you and I can take a bowel movement. That is the depth of desire for control these few people have.

Posted by: JasonT | Apr 21 2020 18:37 utc | 108/

Agreeing with JasonT, karlof1 feels the US Empire has finally over-extended itself:

JasonT @108–

Yes, you just regurgitated the Outlaw US Empire’s #1 policy goal since it was announced in 1997, Full Spectrum Domination, which will fail as it’s impossible to implement given the impediments. As the analyst in the video I linked illustrated, the recent thrust in tactics was to try and upset what is now a five-legged table: Russia, China, Iran, Venezuela, and the newest leg, Saudi Arabia. Seven legged when we include Iraq and Qatar. Yet as we’ve seen, the Outlaw US Empire has destabilized itself via Trump’s Trade War against the world, which was mostly aimed at China, and began the genuine undermining of what constitutes the real economy, not the fraudulent. (Recall the war against Russia restarted in 2008 and has never ended against Iran.) It’s rather hard to determine at the moment, but it seems rather likely that the Oligarchs/Kelptocrats greatly over estimated their abilities and ended up shooting themselves in the head.

Posted by: karlof1 | Apr 21 2020 19:05 utc | 112//

Likklemore mocks those suggesting that China’s national debt is an issue: unlike the US, China received substantial longer terms benefits and infrastructure while accumulating that debt.

I am amused at those commenters discussing China’s debt to GDP without including the other side of the ledger. savings; over 20,000 tonnes of gold; shiny new cities and infrastructure while overlooking the US debt, its financial frailty, rotted infrastructure and unfunded liabilities. Oh, btw. China is the world’s largest gold producer.

Btw, global debt is $265 Trillion which does not include the quadrillion in derivatives. Unsustainable.

Posted by: Likklemore | Apr 21 2020 19:35 utc | 117/

Grieved supports Likklemore’s thesis and goes into more detail about how the Chinese system works and how he believes Chinese billionaires will react if their country finds itself heavily stressed financially.

China’s “empty cities” fill up fast. It’s called future planning, and on a China scale. It’s a huge success, and no kind of failure.


As to the notion that China’s debt is similar to the debt of the US and the west…

China’s massive internal debt has fueled the production of new assets. This contrasts dramatically with the US, where debt has only provided more money to chase the same assets (which drove up the price of those assets, mainly stocks). When you issue debt to create new wealth, there is no price inflation. **

Furthermore, China owns many of the banks and the means of production, and controls everything else that is privately held. All the billionaires know they will take a haircut if China’s governance decides this is a necessary thing for Chinese society.

As always, we see that attempting to parse China through western experience leads to getting the picture completely wrong.

** see professor Werner for the illustration on debt chasing new versus existing assets. See Godfree Roberts, Martin Jacques or Jeff Brown for a better understanding of China’s socio-economic structures.


And leaving economics aside, if one wishes to continue seeking a true understanding of the Chinese civilization, see Zhang Weiwei for multiple explanations of how China’s government represents and benefits its people vastly better than the “democracy” of the west represents and benefits its own people.

Posted by: Grieved | Apr 21 2020 19:35 utc | 118//

karlof1 correctly calls out Disabuser for his earnest simpleton act as a mask “meant to disrupt the thread”. karlof1 neatly expresses the underlying and unsolvable corruption of US political life and economy.

arby asks Disabuser @114, “Other than that what is the point here?”

The answer is it’s clearly meant to disrupt the thread as “the point here” is completely off topic being completely unrelated to oil production, oil price, or the underlying topic of the Outlaw US Empire’s fraudulent economy that’s in the process of implosion.

Related to the underlying topic is today’s Keiser Report that begins with Stacy reciting a very famous if now swept under the rug maxim of France’s Frederic Bastiat that I also recently posted in a comment earlier this year:

“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.”

A subsequent chart revealed in the program showing US private sector assets as a percentage of GDP show them peaking first in 1968, rising briefly in 1971 when Nixon went off Gold, then rapidly dropping with Watergate, only to begin their relentless rise with Volker’s enforced recession in 1978, and finally taking off thanks to Clinton’s policy changes in 1995. So, in that one chart we can see Bastiat’s maxim operating: The system’s created in 1971, then modified in 1978, 1995, and 2008, while in the interim its moral code–Greed is Good–is announced by Ronald Reagan and recounted in this 2011 Robert Parry essay. Another revealing chart depicts the S&P 500’s real valuation in gold terms since 1971–it’s now lower and only rose above 1971 for a few years at century’s end over the almost 50 years since that choice was made.

The further discussion between Max and Stacy regarding savings and its lack by the majority of the USA’s populace would likely provoke very lively discussion particularly regarding the efficacy of deficit spending to jolt an economy into moving again in the absence of accumulated savings–the problem is a lack of liquidity because the potential savings have all been plundered, which was the case in 1929 and now in 2020, while what money that’s being produced isn’t being spent into the general economy as Hudson and others have noted since 2008. Again, take a good look at real GDP% growth particularly since the Reagan admin figure fudging that began in 1985. The truth is the USA’s economy’s been shrinking in value since roughly 2000 at a rate of @2%/yr or close to 40% since 2000. That’s the real crime that’s now being uncovered because there’s no more room for it to be swept under the rug.

karlof1 | Apr 21 2020 20:23 utc

Williamm Gruff points out that China does not measure its economy in pure monetary profit but in productive capacity, while the US economy is focused on creating paper profit, backed by nothing. I.e. China will be in a position to service and pay off its debt while the US will not be:

Profits are not a big priority for the CCP. Infrastructure and productive capacity are more their concerns, with profits only of interest where they help drive economic growth. There is this tendency in the West, the USA in particular, to think of “profit growth” = “economic growth”, which is why so much effort is put into the unproductive circle-jerk of stock markets, which in turn becomes particularly ludicrous when corporations start buying their own stock. It’s all about portfolio profits in the US. When we consider that the larger part of the USA’s GDP is just financial masturbation then that debt/GDP ratio starts looking truly monstrous. Cut that denominator to a third and what do you see…?

Unlike America’s radically overstated GDP, China’s is understated… you know “currency manipulation” and undervalued RMB and all of that?

How much of the US GDP will be left when the US$ finishes shedding its GRC status? My guess is that if we’re very lucky it will bottom out at about 30% of its current level, and that is if America’s real economy doesn’t take any further damage in the process; an unlikely assumption.

Posted by: William Gruff | Apr 21 2020 20:34 utc | 124

JasonT doesn’t think the US Empire is itself the king but rather a rook on the geopolitical chessboard for an unseen king:

karlof1 @112

The US empire is the weapon, not the wielder of the weapon. Weapons can and will be discarded once they are of no use anymore. This is not a conflict between countries, but between the exceedingly rich oligarchs of Big Finance and the rest of us.

Posted by: JasonT | Apr 21 2020 20:58 utc | 127

ADKC reminds us that the Western system cannot feed its citizens while farmers destroy food: the absurdity of destroying food in the face of famine reared its ugly head in the Great Depression. The stories of rivers of fresh milk being poured away deeply shocked me when my grandmother told me about it. I couldn’t believe it would happen again in my life time. Well it has.

The oil price – what a larf! But, it is much more than just oil. Food is being ploughed back into the fields while Americans are queuing up for food handouts because they can’t afford food. Jobs are disappearing and the full impact won’t hit people for a couple of months and then it will be like a sledgehammer. Smug people (sorry but it’s true) are isolating themselves (abstracting themselves from reality) and not giving a thought to those still working and at risk.

America is facing a depression that will be far worse than 1929 and if it emerges that it was the US that launched a bioweapon against China (that has blown-back) I dread to think of the consequences.

Will Americans use this an opportunity too take control and make a change or will you indulge in an orgy of self-destruction?

Posted by: ADKC | Apr 21 2020 22:15 utc | 132

A long discussion of peak oil suggested that oil will never run out (wrong) and that it would always be so weakly priced. Not even the markets trading oil at negative numbers believe that. Bearish long term projections count on $20/barrel or $40/barrel. Inflation will drive the price much higher asserts Bevin.

“There is no reason to expect crude oil to ever again reach its previous peak price of more than $100/bl.” Blue Dotterel@68

On the contrary. It is very likely that, in the not too distant future oil will be at $100 a barrel, on its way to $200 or more. Macdonalds will be selling hamburgers too, for $50 each. The faith that some have in the US dollar is peculiar. Had the Treasury and Wall Street combined set out to sabotage the dollar’s reserve currency position and to incentivise the rest of the world to come up with an alternative to the dollar they could not have done much better than successive administrations have done.

The current attempts by states and politicians to freeze Chinese assets, treating Beijing the way that Tehran (found guilty of the destruction of the Twin Towers in 2001, by a US “Law” court) has been treated, and Venezuela is being served, is the height of fiscal folly. The US is serving notice on the world that it uses dollars at its own peril: at any moment dollar deposits are likely to be stolen and disposed of in accordance with US interests.

Anyone not mesmerised by the conservatism that teaches them that the world never changes, must see that the dollar is going to be replaced sooner rather than later.

Could there be a better time than one in which international trade is slowing almost to a standstill and export commodity producers are going to be under intense pressure to switch to food production for the local markets?
Posted by: bevin | Apr 21 2020 22:16 utc | 133

Bevin is quite right that the US have put the entire world on notice that any asset in USD is at risk of confiscation by the US government or their agents. Indeed not just dollar denominated assets, the UK has even confiscated Venezuelan gold in London at the prompting of the USA.

I’m sure Mike Pompeo thinks he’s very clever cheating Venezuela, Syria and Iran out of their assets. He’s forgotten the world is watching and judging. US sanctions are like the boy who cries wolf. No one believes him any more and the smart players won’t allow

China’s position in relation to US confiscation of their US holdings (China owns more than a trillion dollars of US Treasury bills) is not as hopeless as the US patriots would like to suggest. If the US confiscated Chinese state assets despite sovereign immunity, China can retaliate by confiscating all US property in China. Moreover, the Chinese can move from a position of trying to work around IP, both patents and design copyright, and stop paying royalties altogether and take whatever they like. The US market would be closed to China but I’m far from certain that the rest of the world would close up to China.


Photo by Erick Gustafson, Fracking LA, licensed under Creative Commons.

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