The Beginning of the End for the Dollar?

Physician's Money Digest, November 2006, Volume 13, Issue 11

Oil has hit record highs thatcan slowly and quietlycripple our economy. Ahostile dictator is controllingour oil supply. Foreign leaders arenow warning us that they're going tostop purchasing dollars. We are indesperate need of more oil, yet wecan't find it. As oil supplies are tight,as war erupts in the Middle East, asgold rebounds and then swings wildly,and as our economy is in serious trouble,we must ask ourselves: Is this thebeginning of the end for the dollar?

Wall

Street Journal

Russian President Vladimir Putinblames America for the fall of the Sovietempire. Although it isn't new that othercountries blame America for their problems,other countries don't have thelargest natural gas reserve and aren't theworld's second largest producer of crudeoil like Russia is. According to the , Russia is now "using oilas a weapon to threaten its neighborsand global energy supplies."

Putin has already shut off severalcountries' gas supplies until they met hisdemands, showing no remorse over theloss of revenue. Russia supplies almost10 million barrels of oil to world marketseach day, about 12% of the world'stotal supply. If Russia restricted oilexports even by a small amount, itwould turn the supply/demand curveupside down, making prices skyrocket.It's troubling that our economic fate liesin the hands of someone who has thepower to make American oil and gasprices triple overnight, just because hehas a score to settle.

Complications Acquiring Oil

The current tight markets will notstabilize in the foreseeable future. Theequipment needed to find more oil isdisappearing. Due to two harsh hurricaneseasons and other economic factors,oil rigs in the Gulf of Mexico arefar fewer in number than several yearsago—shrinking from 148 rigs 5 yearsago to the 90 that remain today. Rigowners are now asking and gettingastronomical prices around the worldfor the use of their drilling equipment.Remarkably, gas giant BP is leasing adrilling ship in the Gulf of Mexico for$520,000 per day—the same shipleased 2 years ago was $184,500 perday. Based on these figures alone, oilprices should not drop significantly.

Although we are not running out ofoil yet, we are running out of cheap oil.This has the potential to cause a financialstorm unseen in this country sincethe Great Depression. The problem isthat as oil fields age, their pressure decreasesand it gets more expensive toextract the oil. The world has relied onlarge fields in Saudi Arabia and othercountries that were all found in the1960s or before. Those fields that wehave been relying on for 50 years arebecoming expensive to operate. The oilthey are finding is worth less than themoney they've spent to find it.

Dollar Losing Its Appeal

As for other foreign economic concerns,Yu Yongding, a member of TheMonetary Policy Committee of thePeople's Bank of China, has warned thatChina is going to diversify out of USdebt holdings and into gold. "We're stillfacing the possibility of a big devaluationof the US dollar, so the capital losseswill be huge?[which] will be a tremendoushit to the Chinese economy," Yu said. Everyone who owns dollarswants to sell them, but they can't sellthem all at once without collapsing themarket. Still the economic danger isclear; China, and other countries, will bediversifying away from US dollars.

The opportunities in this economicclimate are clear: oil and gold. Countriesmoving away from purchasing US debtwill look to bolster their reserves withgold, which should keep the preciousmetal's price climbing consistently higher.Oil prices will march in step, andthose companies who have provenreserves and can get oil and gasoline tothe market will profit mightily.

James DiGeorgia is editor and publisher ofthe Gold and Energy Advisor Newsletter(www.goldandenergyadvisor.com) and theauthor of the popular book, The New BullMarket in Gold and The Global War for Oil.