The Story of Uncle Sam and the Crude oil prices

Friday, August 7, 2015 Politics

The great Uncle Sam and the crude oil prices

Today, a kid asked me who he should thank for the crude oil prices that had been escalating for the past couple of months. I replied, “Uncle Sam”. But I also told him that I was certain Uncle Sam would not be celebrating with him on this. That perked his curiosity. So taking an old book, I sat down on an ancient chair and looking into the horizon started talking about the great Uncle Sam....

Uncle Sam was a young chap during the First World War. He had a decent economy that grew steadily without any threat whatsoever until 1929 (the great depression). The meltdown was so severe that it caused his economy to crumble and sent thousands out of their jobs. Suddenly Uncle Sam found himself panicking. He did not know what to do; his friends abroad were floating their economy, turning away from gold based currencies thus making it easier for them to simply print more money to help pay off their debts. Strangely enough, Uncle Sam found the answer to his problems when Hitler came into the picture. All of a sudden there was a war like situation in the European subcontinent and all his friends were in need of weapons. Uncle Sam realized that he could be their provider and discovered that a European war would actually be conducive to his economy and that he wouldn’t have to resort to any drastic measures that might make his people hate him. So Uncle Sam waited and watched how the scenario played out in the European Continent. Let's say Uncle Sam was fortunate or unfortunate that Pearl Harbor happened and before he could blink he was in the war. For the war, Uncle Sam had taken hefty loans to support the massive demand for weapons but because the demand was so high he could easily pay off the debt. However, once the war ended, there was a sudden dip in weapons demand which Uncle Sam knew would cause problems in his economy.Therefore he came up with the Marshall plan which would enable him to provide complete assistance for European recovery. Furthermore he also formulated the global trading rules which meant that all global trading would be done with the dollar which was minted at $35/ounce of gold. He also promised other countries that he wouldn’t print money other than on these criteria. This kept Uncle Sam's economy running; however now Uncle Sam had a new competitor, the Soviet Union who whose Communist principles were completely against Uncle Sam's family ideals of Capitalism. Therefore Uncle Sam decided that where ever Soviet Union found a friend he would make that friend's enemy his friend and in this manner he found Israel, Saudi Arabia, half of Europe (NATO), South Vietnam etc in his friend’s circle. So everything was going good until because of the war expenditure in Vietnam, Uncle Sam was put in a tight spot where everyone who had given him loans in the name of gold was asking for it back as they did not believe in a war economy. This caused Uncle Sam's economy to become fragile and it had to come up with an executive order famously known as Nixon shock which meant that the dollar would be a free floating currency and would have no dependence on gold.


However this simply served to exacerbate the market problems. Around this time, there was a clash between Israel and its neighbors comprising of Egypt, Jordan, Syria, Iraq and Palestine. As sworn allies Uncle Sam rushed to Israel’s aid with weapons whereas the rest of the countries weere supported by the Soviet Union. It should be mentioned here that at this juncture Uncle Sam did not bring Saudi Arabia into the picture which consequently escalated problems during the Yom kippur war (1973). Saudi Arabia who was then the biggest producer of oil along with OPEC under the leadership of king Faisal, embargoed oil supply against Uncle Sam and his allies. This was a severe blow against Uncle Sam whose oil produce was declining then and who was heavily dependent on OPEC for his energy needs .Therefore Uncle Sam brought a peace deal between Israel and the Arab nations in 1974 and also came up with an agreement with Saudi Arabia and other OPEC nations that Uncle Sam would provide protection and security for them on the condition that they sell their crude oil on the basis of the dollar which automatically merged them both and created the petrodollar .


This made it possible for Uncle Sam to spend more on military expenditure on the offset of oil. It was this arms race which ultimately brought the Soviet Union to its knees. So Uncle Sam now had the OPEC nations with him which was another diplomatic joker card in case a problem arose but then Libya under Gaddafi said it wanted to trade its crude oil in a new currency called gold dinar and Syria, Iraq, Iran and other nations soon followed this later on. All these developments made Uncle Sam very uncomfortable and it resulted in the destabilization and overthrow of these nation’s main leaders. But Uncle Sam had to be sure that a 1973 like situation would never occur again, so he threw billions into the fracking industry to establish energy security.


But when Russia annexed Crimea, Uncle Sam had to come up with a way to bring the Russian government onto the negotiating table. He had tried sanctions but all it did was promote nationalism in Russia. So the only other trick up Uncle Sam's sleeve was in reducing oil prices. As Russia's main export and income was oil, this had the devastating effect of crippling its economy .This meant that Saudi Arabia and other OPEC nations could increase its oil productions more than the demand which in turn would reduce the price of crude oil. However a new problem arose when Uncle Sam started the fracking process. Fracking was an expensive way to obtain gas and eventually it had become unfeasible and was causing Uncle Sam problems in his economy. Moreover, the Iran nuclear deal was done too, in order that Iran could start exporting its oil for the first time since sanctions were lifted. This was done to supply oil to a fuel hungry market in hopes that Russia would be hit due to the ever decreasing prices.


‘So you see kid, Uncle Sam is one person who you should thank for the oil prices in its present condition’.






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