How Shale-Oil Is Protecting the US Dollar For Now

Let’s see what the French are whining about. It turns out they have a legitimate complaint. French finance minister Michel Sapin has called for a ‘rebalancing’ of the currencies used in the global payments system. This came after the US government slapped a $9 billion fine on French bank BNP Paribas for helping countries out of favour with US foreign policy avoid sanctions.

Can anyone say ‘currency wars’? This is an example of the rise of financial warfare and the decline of US military power. The US reserves the right to impose fines on international banks for business relationships they have that don’t even involve America. Financial warfare (and preserving the US dollar as the world’s reserve currency) are just as (if not more) important than Nimitz-class aircraft carriers and strategic bombers.

No wonder the French are angry. ‘We are selling to ourselves in dollars, for instance when we sell planes. Is that necessary? I don’t think so. I think a rebalancing is possible and necessary, not just regarding the euro but also for the big currencies of the emerging countries, which account for more and more of global trade.’

Are you listening, China? Are you listening, emerging-anti-dollar-global-alliance? The French are on your side, or are at least willing to discuss terms. I’m not sure that’s a positive sign, if you want to win. But it’s a sign.

Why doesn’t the US care that the anti-dollar alliance is slowly organising itself. Perhaps that’s because America’s shale-oil and shale-gas boom has made it a lot less dependent on being politically and militarily engaged in the Middle East. As the ‘peace dividend’ was to the early 1990s, the ‘shale dividend’ is to today.

On the oil and energy issue, the US has overtaken Saudi Arabia as the world’s largest daily oil producer at around 11 million barrels per day. The same hydraulic fracturing and horizontal drilling technology that led the US to become the world’s largest natural gas producer in 2010 has put it on top in oil all up. The International Energy Agency reckons the United States is now the world’s largest producer of oil and natural gas liquids.

Saudi Arabia still has (or claims to have) the highest-quality, easiest to produce reserves of crude oil. How long will America’s ascendancy last? Shale oil is capital intensive. It only makes sense when oil prices are high. And how long will the wells remain productive? There are lots of questions. But for now, lots of oil is flowing in places like North Dakota and Texas.

This will be more relevant when I discuss America later this week in our ‘rim of fire’ tour of Asia-Pacific. But I bring it up to point out that Australia’s energy liabilities are entirely self-inflicted. There are a handful of companies drilling and exploring in the Cooper Basin in South Australia and Queensland that could lead Australia’s very own energy boom. I’ve recommended several of them to readers of my newsletter.

The only reason Australia is increasingly dependent on refined fuels imported from the north is that it chooses to be. This choice is based on short-sighted and naïve public policy driven by people who don’t realise how dangerous the world is about to get. If energy security was a bigger part of national security strategy, vanishing refinery capacity would not be part of the three lethal weaknesses I’ve mentioned in my recent report.


Dan Denning
for Markets and Money

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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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