Oil………………………………….

Declaration of interest: The Editor owns 1,736 Royal Dutch Shell “B” shares.
Today’s article is in response to a comment on yesterday’s article. Stephen commented;
“Am I missing something? Why is no one saying “I told you so” when they look at oil prices………poor Scots would surely be stuffed at these prices……or is it more complicated than that, probably…?”
Stephen’s brief comment is correct. The Scots would indeed “be stuffed” as an independent state at this moment in time. Stephen is also correct in his assumption that the situation is more complicated than it may appear.
There are certain things that need to be understood about Oil.
The first of these is that oil is traded in the US $. Irrespective of where in the world the oil is, irrespective of who owns that oil, irrespective of the oil company getting the oil from the ground, irrespective of the refinery it is going to, irrespective of the oil tanker or pipeline that is being used, irrespective of whoever or wherever is the customer for the oil and irrespective of whoever or wherever is the supplier of that oil. Thus North Sea Oil (owned by the UK) extracted by BP (or “British Petroleum” as President Obama insists on calling it) supplied to the Grangemouth Refinery on the Firth of Forth, turned into petrol and sold to you Dear Reader at one of BP’s petrol stations is traded in the US $. This means that such trades – and there are a lot of them – counts as a foreign exchange transaction for the UK economy (and every other economy save one). The one economy where oil trading is NOT a foreign exchange transaction is the US economy.
It is hard to overestimate the economic and therefore the geopolitical importance of this one aspect to the world’s oil market.
You will recall Dear Reader how those many protesters marching against the UK’s involvement in the 2003 Iraq adventure claimed that oil and not “weapons of mass destruction” the claims of which which were about as real as the European Union’s (unaudited) books of account. They were right, although not in the way they may have thought. The reason why President Bush toppled the late and unlamented Saddam Hussain was that Iraq’s dictator began to sell Iraq’s oil in Euros. This not only was a challenge to the US economy but the the entire world’s.
Of course, Bush and Blair could not say this for the illusion that this arrangement is not important MUST be maintained. At ALL costs. Why? Why is it so important? And why did Blair feel it necessary to spill the blood of young British service people?
Well for that we must go back in time: To Tuesday 28th October, 1919, when the United States Congress passed the Volstead Act, the popular name for the National Prohibition Act. We will not delve into the politics, there where’s and wherefores of what has been called “the noble experiment”, suffice to sate that the absence of alcohol duty revenues put the USA on the road to accumulating the deficit it now has.
The USA emerged from World War One with its sovereign debt transformed. From being debtor nation in 1914 it was a large creditor nation in 1919. It was this happy state of affairs which propelled Prohibition into law. Since that time the fact that oil has been traded in the US $ is one of the principal reasons why the USA has managed to sustain its near one hundred years of deficit financing. That is right Dear Reader – on 28th October 2019 we will “celebrate” (that cannot be the right word! Ed.) the centenary of deficit financing to beat all deficit financing! Or as the late President of Iraq would have said, “the Mother of all Deficits!”
Now we think you will see the importance of not destabilising the status quo!
The second of these is China. The USA was once called the “engine” of the world economy. That when the US economy caught a cold, the rest of the economies caught pneumonia. This is no longer the case. The US economy is a very important economic engine but it is now supplemented by another: China’s. China’s economy is currently in a bit of a down turn. The economies of Communist (we now use the term advisedly) China and the Capitalist USA are inextricably linked in a now symbiotic relationship. China has literally invested so much of its national wealth into propping up the US economy that the collapse of one will bring about the collapse of other. We therefore have two VERY strange bedfellows: the President of the United States of America and the President of the People’s Republic of China! So much for the 1960’s refrain of “Down with Capitalist Roaders!” then.
In order to minimise the depth and duration of Chinese downturn Saudi Arabia (number three below) is pumping oil out of the ground like there is no tomorrow, thus keeping the oil price on the floor.
This brings us to the third. The Kingdom of Saudi Arabia is the world’s dominant oil producer and exporter, and controls the world’s second largest hydrocarbon reserves. Its oil is also (in terms of getting it out of the ground) the world’s cheapest. This is VERY important. This absolutist Islamic state (that shuns democracy, pluralism and human rights) is a key ally of the USA and “the west.” This is direct opposition to the wishes of the vast majority of it’s inhabitants. Thus calls for democracy will always fall on deaf ears.
Now we turn our attention to the fourth, fifth and sixth. Russia, the Ukraine and the EU (aka Der Großdeutsches Reich).
The ethnic Ukrainians want to join the European Union and to become a province of the Großdeutsches Reich.
The ethnic Russians (understandably!) do not.
President Vladimir Putin (who has poll ratings David Cameron, Nick Clegg and Ed Miliband fantasise about) and the People of Russia have sought to come to the aid of their kith and kin.
As a result, Führend in Europa (The Leader of Europe) Angela Merkel, has sought to apply pressure on Russia where it most hurts – the oil price. The Russian economy has but three pillars: One is oil. Another is Gas. The third is Russia’s arms industry. Russia’s military hardware is much cheaper than the military hardware of the USA, France, Italy and the UK. The low oil prices are hitting the Russian People hard. However the Russian People are used to bearing up under hardship and Mr Putin knows this. The Russian People do not lay the blame for their travails at the Kremlin’s door but at Der Bundeskanzleramt, Berlin (Frau Merkel’s official residence).
So there you have it Dear Reader. The oil price will go back up to “normal levels” (and with it the RDS share price!) when two things have happened: The Chinese economy recovers and Ukraine is partitioned with the Western Ukraine put on the path to becoming part of the EU and Eastern Ukraine and Crimea becoming part of Russia.
These two things should occur before 2020. Scotland is not going to become independent before then. NB: Alex Salmond was an economist in the oil industry. As for Scotland’s economy, even with a high oil price, Scotland will have difficulty in maintaining its high living standards without English or European (aka German) subsidy. The hard pressed German taxpayers are complaining about supporting the Greeks. It is unlikely they will warm to a suggestion that they should take over from the English and subsidise Scotland.