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The Golden Constant in the Oil Industry

On August 28, 1928 Achnacarry Castle , gave birth to The first " Oil Cartel"The "Seven Sisters" . Exxon,,Mobil,Gulf,Texaco,BP,Shell,Standard Oil of California

They laid down the foundation and the structure of the Oil industry.Decades of price war came to an end ,And they are now among the top 10 major companies in the world

The reason for starting the first issue of Our weekly Report "CRUDENOW" From here is because it is still relevant in today's Oil Price movements!!!

On that date the "Cartel" decided that all Crude, regardless of their types, and Source of production must have equal opportunity to compete in all markets.Read The draft,

This "equal opportunity " principle was achieved by taking the price of the crude in the gulf of "Mexico", plus the transportation cost from the this base to any final destination, even if the crude is produced from Iraqi oil fields destined to India. . This is called " base point pricing "

The crude price remained more and less constant around $2.1-$1.9 until 1972 ( or roughly ,4 gold shillings per barrel ) , and the dollar stayed officially at $35/ounce until 1972

In 1973 when USA abondanded the gold standard ;The gold broke free reaching above 1600 and the crude prices tracing the gold, reached also above $140 in 2008

see the the curve below .In spite of this drastic increases in the prices of both Gold and Oil , the Magic Figure of 2.3 gram per barrel ( 4 gold shilling per barrel ) stayed at the same level as it was 100 years ago.).

We apologies for going through these Lengthy materials, but is necessary in order to make important points

First we will explain why this constancy and then explain its usefulness . Now , it does not matter were you stand on the question of gold.

.. Whether you think that gold has become just another currency ,lost its glitters,and is traded like any commodity

or "gold is gold and the rest are credits " which is the opinion held by many including JB. Morgan

The fact remains that Gold was an acceptable "medium of exchange", and by time it became also a "store of value"..., the confusion sets in today when people find gold losing its function as a store of value, and now is as volatile as any other commodity or currency

This is gross miss understanding of the original function of gold , gold is still an acceptable medium of exchange and does need to have intrinsic value the old days Salt was used instead .

Gold is only a standard like (12 inches in a foot)to set the price of others


The inescapable conclusion is , "Oil Prices are still on the gold standard - -- this is clear from the following .....

When USA devalued the US dollar by 8.49 % in 1972 and subsequently left the gold standard in 1973 the seven sisters "invited" the 11 OPEC members to Geneva on 28 June 1973, to "ask " them !!!! "for adjustments to the posted price in the the light of the changes in the value of dollar visa vie other major 11 currencies

Here , when I joined the oil industry.Although I helped to design the Geneva Equation , but it was obvious to me " that what was changing was not the dollar but the price of gold ",and the Geneva formula " measures only the relative changes between currencies and not the purchasing power of a barrel" ;but who would listen to a junior economist...

So here comes the answer to our question of why the price of crude is constant in term of gold.

. The oil companies after a while discovered in practice that Geneva formula did not measure the purchasing power of a barrel therefore ,the bird-dog should be trained to sniff off the price of gold.

So the oil cartel until today carry out regularly the necessary general adjustments to the crude oil prices based on the price of gold (it is embedded in long term contracts, anyway) and it is no longer necessary to invite, OPEC , any more

The base price for WTI is 2.3 grams of gold.This is the unwriiten Law in the Oil Industry

However, still relative changes in currencies are also taken into account, remember these multi national companies , handle multi currencies in their down stream operations

Had the Geneva index existed today the crude would have been now only 2.9 dollar per barrel????? see the dollar DX from 1973

in 1973 the USA did not leave the gold standard as such the gold left the dollar and left the cage no.35. the economic scraficies required to keep the price at $35 for 70 years , was not possible

we are defacto on the gold standard, until we find an alternative,

Now an alternative is coming... Which is, whoop's "The Gold Standard " again , not to be caged but with adjustable collar and leash, to be taken for a walk daily at 10 am, and 3pm london time for a fix (The Gold price is fixed Daily ) The republican party is already supporting the issue.

The unstable dollar is turning the USA economy into "casino economy" , and the dollar vs the gold and other currencies is becoming a"gamble" and a lottery

The Wheel (Oil Gauge) above shows the crude oil price in gram of gold, today it is in the upper region and outside the 3 standard deviations(red)... Which means ,that soon we will achieve equilibrium either through the crude pricefalling from today's $105 to (1252 *2.3/31.1)=$93.6 per barrels or the gold rising to (103*2.3/32.1=$1392 per ounce roughly or both moving to meet to reach equilibrium.

Equilibrium is an evasive point, but the tendency is for the base point price of crude oil to sniff out the price of gold. The crude price always hovers around 2.3 grams of gold no matter what.( as for differential ? Please Wait,it is coming) next issue of crudenow deals with the usefulness of this constant ratio in the oil industry

Sep 26,2013 Jabbar Aljaf(click to see profile)