Tribute paid in oil

Thursday, 19 June 2008

Hugo Salinas Price

According to the data presented by David Galland in his article “Turning off the Taps”, recently published at www.financialsense.com , México is exporting 184,000 barrels of oil less than its programmed quota of sales to the U.S. The article says the deficit amounts to 11%. Therefore, the daily quota must be about 1,673,000 barrels of oil daily, but the actual net export of oil is approximately 1,489,000 barrels a day.

If we multiply 1,489,000 barrels a day by 360 and by $112 dollars, the present price of Mexican oil, we get the amount of some $60 billion dollars of annual exports of Mexican oil to the US .

Mexico 's oil production is in decline due to the on-going exhaustion of the oil fields being exploited.

In 2004, Mexico exported 50% of the oil extracted. Some years ago, Mexico reached its peak production and if we estimate very conservatively that production is declining at a rate of 5% a year, in four years – from 2004 to the present - production must have declined by 20%.

In the meantime, Mexico 's own consumption of oil has increased. So that by 2014, Mexico will have no excess oil production available for export. Galland conjectures that by 2014, not a single barrel of Mexican oil will be exported.

The whole world is presently feeling the first effects of the general exhaustion of world oil fields: “Peak Oil”. Unless “Peak Oil” is an imaginary problem, the price of oil is therefore going to continue rising with brutal effects upon the world economy. Not only Mexican oil production is declining; we are dealing with a decline in world production of oil.

For this reason, there will perhaps be no reduction in the amount of dollars entering the Mexican economy for the remaining years during which there will be exports of oil. The price of oil will go to $200, to $300, to $400 hundred dollars a barrel and more, as the economies of the world struggle to obtain the oil required for their industries.

Today, there are at least two world centers which will be able to pay those prices; they will have no option but to pay them, because without oil, the lights will literally go out.

Those centers are the US and the Eurozone. They will be able to pay the necessary price to get their oil, because both the US and the Eurozone can manufacture digital dollars and digital euros at will. Iran is willing to accept Japanese yen in exchange for its oil.

The rest of the world, which needs the oil but does not have the advantage of having a currency accepted as a “reserve currency”, will have a terrible time obtaining the dollars or euros necessary to purchase oil. Their economies will be strangled for lack of fuel.

We must note something that is of fundamental importance: neither the US nor the Eurozone are actually paying for their oil with exports of goods and services to the oil producing countries. They “pay” with bank digits , created by computers; these payments are registered in the form of credits in the computer memories of banks in the US and in the Eurozone. We should have to include Japan among the countries which are able to purchase oil with their own currency.

These bank digits are not credit instruments in favor of those who receive them, as for instance dollars were, when they were formerly redeemable in gold; they are simply numbers, because they do not incorporate a promise to deliver something to the beneficiary, the oil exporter. A credit instrument is the promise to deliver something, and a bank digit is not “something”. It is just a number and nothing more.

So we can quite correctly say that the US and the Eurozone – and other countries whose currencies are considered “reserve currencies” – are “paying” for their oil imports with nothing at all. The Romans called such an operation “Collection of Tribute from the Conquered”.

This is what Mexico is doing; it is exporting precious oil from its oil fields in relentless decline in exchange for – nothing.

It is true, of course, that dollars and euros can be used (for the time being) to purchase things in the rest of the world. They are good for that, because they are accepted as a means of exchange. However, those means of exchange are most certainly not a means of payment. Payment is the delivery of something in exchange for something. Bank digits are not something. They are simple numbers.

This fact is glaringly evident when we contemplate the gigantic “monetary reserves” of China , which has recently accumulated $1.68 Trillion in reserves which include dollars, euros and some other digital currencies. The Chinese really do not have the faintest idea of what to do with this monstrous amount of digits and they, like the Arabs, have formed financial entities which are called “Sovereign Wealth Funds”. The purpose of these funds is to find unsuspecting countries upon which to unload these bank digits in return for tangible resources.

The bank digits in the Chinese reserves are only means of exchange. The Chinese are going around the world trying to find places to deliver these digits, for which they otherwise have no use at all. Now, if the Chinese reserves were gold , they would be in no hurry to get rid of them nor would they consider them excessive. But the reserves are not gold; they are simply bank digits which live in the computers of the countries that issue those digits.

For Mexico , what are the consequences of delivering oil from Mexican territory in exchange for bank digits?

I shall not go into detail on how Mexico distributes the digital income from the “sale” – properly speaking, tribute – of oil to the US .

We are talking about some $60 billion digital dollars which are available to various Mexican entities every year. Part of those digits are applied to the importation of merchandise for consumption. Part to pay for imports of machinery and services by PEMEX, the oil company. Part of that income is used by PEMEX to pay salaries and expenses in Mexico , for which it needs to sell its dollars in exchange for pesos with which to effect payments. Part of the oil income goes to the Federal Government, which also exchanges dollars for pesos. When dollar digits are exchanged for pesos, the dollar digits wind up as Reserves in the Bank of Mexico, and increase the total reserves of bank digits held by the Bank.

Net – net – net: What left the country was oil; what came in was bank digits. Part of the bank digits left the country for importation of goods. But a good part remained here. As a reflection of that, the reserves of the Bank of Mexico now stand at a record.

The result of exporting oil is that every day we have more money in circulation. 27% of that money is nothing more than paper bills or metal coins; the remaining 73% is only bank digits called “pesos”. This is imaginary money which Mexicans have in the banking system of the country.

Thus the dollar digits coming into Mexico cause monetary inflation , a constant increase in the mass of money in circulation which makes each unit of pre-existing money less valuable. Of course, the most common and inevitable result of this is rising prices.

We are importing inflation from the US because the oil we export is not paid for with goods and services coming from the US to Mexico ; we are given a simulated payment, which is payment in bank digits. This imported inflation is contributing to the general rise in prices taking place in the country. On June 18, the Mexican government decreed an emergency freeze in prices of 150 food products to last until the end of 2008.

The high price of oil is not a blessing for Mexico because it does not mean that we get more things of value from the rest of the world; it means that we receive now, and shall receive in the future, quantities of bank digits which are going to cause an increase in the price of things which Mexicans have to purchase in order to live.

What we are suffering is happening in all the countries of the world which have export surpluses. They are all importing monetary inflation and local prices are going up.

China , the great manufacturing power and exporter, is an example: too much digital money is entering China and thus prices in China are on a tear; both their internal prices and now their exports will be rising in price. Chinese products have to go up in price and soon they will be sold for higher prices both in the US and in Mexico : digital monetary inflation originates in NY City, passes on to China and from there, it returns to the US and to Mexico in the form of higher prices for Chinese products.

When oil reaches $200 dollars a barrel the situation will be even worse. Prices in Mexico will be forced to rise, including wages, for workers will be shortly demanding higher and higher wages. The higher oil goes, the higher prices will rise within Mexico and the higher the prices that imports will cost.

Now we are entering a period in which prices are going to rise for two different reasons.

The first cause will be the growing scarcity of oil in the world. The Central Banks cannot do anything about this rise in prices caused by a greater and greater scarcity of oil. From here on, oil will be subject to a rationing due to scarcity, but the countries which have the advantage of issuing reserve currencies can “jump the waiting line” for their ration and simply issue more banking digits to ensure their supply. When they “jump the waiting line” and create more digital money to get their oil, they are creating a world inflation of prices.

The second cause will originate in the world's financial system which is terribly damaged by bad investments made in recent years. The main Central Banks will create gigantic quantities of money in an attempt to save the busted banks. This tsunami of digital money intended to save the banks – bankers are always saved – will destroy the value of the dollar and consequently the value of the Mexican peso.

Suddenly, in 2014 there will be a great fall in the number of digits entering Mexico , because there will be no more oil to export. The social and political trauma will be enormous. The kind of government to which we have become accustomed will not survive the huge financial hole caused by the absence of $60 billion dollars of annual oil sales, or whatever tens of billions future exports may amount to.

I see an endless number of articles by experts on our present day problems, but I think I am the first, or among the first, to point out that we are in a huge mess in this world, because the world has disregarded the fundamental change in the nature of the dollar, on August 15, 1971. On that date, the dollar was no longer both a means of exchange and a means of payment. It became only a means of exchange. No one seems to have noticed the difference!

It is because the world has not taken notice of this fundamental change in the nature of the dollar, that we have the present mess. I need only refer to the explosion in Central Bank reserves which has taken place in recent years, as “means of exchange” accumulate in Central Bank computers (not vaults!). The amount stands today, at close to $7 TRILLION (valued in dollar digits), which is a sum utterly unnecessary for handling trade and other international so-called “payments”.