(Newswire.net — December 16, 2014) — Cheap gas spread across the US faster than holiday cheer. Only a few weeks ago, $2 per gallon of gas was still a myth, something heard of, but not seen in a very long time. Over the weekend gas prices fell below the $2 per gallon mark in thirteen states.
Cheaper gas means less money spent for most of the people. Americans also expect other prices, such as the cost for transportation, to go down. Less money for transportation will create a type of wave effect, where other products will become cheaper. More money for people, less for oil giants, at first glance, no one should really have problem with that; however, the truth behind why the oil prices are dropping is a bit scary.
There is dark side to this significant drop in gas prices. When oil companies start to lose money, they have to lay off workers. Their share prices drop due to the drop of the market value, which leads to market instability and eventually putting the entire economy risk. It all has to do with the fact that the Petrodollar is slowly becoming nothing more than a dollar.
To understand this, we need to get back to Nixon era, when in an effort to prop up the value of the dollar, former US president Richard Nixon negotiated a historic deal with Saudi Arabia. This deal stated that in exchange for arms and protection they would denominate all future oil sales in US dollars.
Other OPEC countries soon followed Saudi Arabia and started to trade oil in Petrodollar. Even Russia and China agreed to buy and sell oil using the dollar as a currency.
Because the United States was the largest producer and consumer of oil in the world, the global oil market has been priced in United States dollars. The effect on a global financial market was that the dollar was in much more in demand, and the dollar skyrocketed.
The very basic principle in the economy is that demands will dictate the value. Therefore, decades of high demand for the dollar boosted its value and made US the greatest economy in the world; however, it comes with a price.
The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, the capitol of Iraq, with the signing of an agreement in September 1960 by five countries namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members of the Organization.
These countries were later joined by Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007).
Some geo-political experts say the ”spark” that ignited the oil business happened in October 1973, when OPEC declared an oil embargo in response to the United States and Western Europe’s support of Israel in the Yom Kippur War. Experts say that was the first time US realized its vulnerability, and in fact all Middle East wars ever since, were actually an effort to eliminate threats to the dollar.
Nonetheless, these efforts have failed.
While OPEC countries constantly lower the prices, they are slowly abandoning the Petrodollar as the only currency, and are starting to trade in their own currencies, accepting others as well. The final blow was an agreement between Russia and China to accept the Yen and Rouble in bilateral oil trade, which additionally strengthened their currencies and weakened the dollar.
Since China grew too fast and too strong, the only thing US could do to buy some time was to try to destabilize Russia and bring down the Rubble. The Ukraine scenario was actually the same scenario that destroyed Yugoslavia; however, the lessons from 90’s have been learned and Russia grew much stronger since. The US succeeded in pressuring EU countries to impose an embargo to Russia; however, the Russian economy turned out able to withstand much more pressure under these sanctions than EU countries.
Meanwhile, the US economy is suffering a large amount of pressure, and the drop in gas prices is the sign that the ‘barrel started to leak’. The US has narrow timeframe left to plug the holes in this economic barrel. For starters, it needs joint forces of the Republicans and Democrats in Congress to lead the country out of this mess and preserve the value of dollar.
Unfortunately, the unity that the country desperately needs is highly unlikely amid the current ‘enhanced interrogation’ scandal and the fact the Republicans control the ‘arms’ and the Democrats the ‘head’ of the United States. The US seems to be acting more like a zombie than the well-oiled machine it should be.