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Confluence of Events put Pressure on Energy Prices and the U.S. Dollar

Posted by Steve Markowitz on March 14, 2011

Enduringsense.com is temporarily modifying its format while the editor recuperates from rib injuries.  Snippets of stories from various news sources will be included with a bit less commentary than usual due to typing challenges.  In addition, guests’ postings may be included.

The two articles are from disconnected parts of the world with both having implications on oil prices and the U.S. dollar’s value.

The first article was just reported by the Wall Street Journal involves yet another explosion at one of Japan’s nuclear plants damaged by the earthquake and Tsunami.  This tragedy continues to grow.  It will impact energy prices long into the future as the world becomes even more wary of the safety of nuclear power generation.  Given tight supplies, oil prices will likely rise in the coming months.

In addition, Japan has historically been a large purchaser of U.S. Treasury Bonds.  The huge cost of reconstruction for Japan will likely force it to stop buying U.S. Treasuries and to even sell dollars so it has funds for the reconstruction.  This will put pressure on the value of the U.S. dollar as demand for it drops.  In order to attract Treasury buyers, interest paid on them will have to rise causing many interest rates in the U.S. to increase.

In another article, startfor.com has reports that Saudi Arabian troops have entered Bahrain to help its Sunni government put down the protest by mainly its Shiite population.  This intervention is the result of the Saudi government attempting to stop Shiite Iran, its long-term enemy, from becoming more influential in the region.  In addition, the Saudi government fears similar protest from its own population.

It remains to be seen if the Saudi efforts are successful in putting down protest in Bahrain or if leads to even more problems from its own population.  In either case, the Saudis will likely need more funds to spread amongst its potentially restive population, leaving less for U.S. Treasury purchases.  In addition, this ongoing turmoil in the Middle East can only push oil prices higher.

Unforeseen events of huge magnitudes have occurred throughout history and the world always finds a way to work through them.  That said the world has placed itself in a more precarious economic position at this time because of the huge build up of sovereign debt.  Many countries have already spent their reserves and reached their credit limits. That leaves little wiggle room for these evolving tragedies that continue to unfold.



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