With crude oil prices bouncing above $80 per barrel once again, even OPEC leaders are saying this price is too high given the fragile state of the global economy.
The slumping US dollar is the primary reason.
The demand for gasoline in the United States is flat compared with last year. Yet, gas prices hit a new high for the year last week; the national average price for a gallon on Wednesday was around $2.68. That is 22.3 cents more expensive than last month, according to AAA, Wright Express and Oil Price Information Service.
Even the demand for jet fuel is down.
Since crude is bought and sold in dollars, those holding holding euros or another strong currency can get more crude for less.
Simply put, the price of oil is climbing as the dollar is falling. In fact, oil seems to be tracking the run up in gold prices.
"Oil is following the lead of gold as a hard asset," said Ellis Eckland, an independent analyst. Commodities are "alternative forms of currencies, especially gold," he said.
Inflation fears stoked by the massive liquidity pumped into the financial sector by central banks recently have pushed investors toward commodities to protect the value of their assets.
As a result, the dollar is under assault.
Last month, the British paper, The Independent, reported the following:
"Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar."
The story's author, Robert Fisk, called this "the most profound financial change in recent Middle East history."
What this would mean, in essence, is that oil will no longer be priced in dollars. The unique status has been an extraordinary advantage to the US, and that advantage now seems poised to disappear.
Is it any wonder? Oil exporting nations are being negatively affected by the dollar's decline.
The plan may help to explain the sudden rise in gold prices. Chinese banking sources told The Independent that the transitional currency in the move away from dollars may well be gold.
The so-called BRIC nations (Brazil, Russia, India and China) have publicly voiced a particular interest in collaborating in non-dollar oil payments.
The dollar's position as the dominant global reserve currency has given the US extraordinary control of international finance and trade. The BRIC countries, in particular, don't like this sort of hegemony. And now they are apparently moving to end it.
The current deadline for the currency transition is 2018.
With the US importing two-thirds of the oil it uses (14 million of the 21 million barrels used daily), and China importing 60 percent to support its rapidly expanding economy, there is growing competition for this finite commodity.
Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East.
"Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."
Against that backdrop, China's recent oil negotiations have been particularly interesting.
The US has fought two wars with Iraq, and is still engaged there, largely over oil.
Nobel economist Joseph Stiglitz estimates that the total cost of the current engagement will amount to $3 trillion, a staggering sum. The war has already exceeded the cost of the Vietnam conflict.
There has always been the belief that the US would at least secure long term oil contracts with the new Iraqi government, and establish stable supplies of oil for decades to come.
When the war started nearly seven years ago, experts said it would virtually pay for itself through increased Iraqi oil exports. That has not turned out to be the case. In fact, China is benefitting from America's loss in blood and treasure.
On Tuesday, Iraq signed a deal with British energy giant BP and China's CNPC to almost triple oil production at a giant southern oilfield.
"The two companies will invest 50 billion dollars in the project," Iraqi Oil Minister Hussein al-Shahristani told reporters.
The 20-year contract is expected to boost production at the Rumaila field from the current one million barrels per day to around 2.8 million bpd within its first six years, the minister said.
The costs of war have impacted the US economy and compounded the size of our continually growing national debt.
And now the dollar is tumbling as the price of oil rises in accordance.
Call it unintended consequences.
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