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What’s Really Driving Obama’s Sudden Interest in Oil

By Keith Fitz-Gerald, Chief Investment Strategist, Money Morning                                                      April 2, 2010

U.S. President Barack Obama generated a lot of hubbub with his decision to open up parts of the Atlantic Ocean and Gulf of Mexico to oil drilling.

We’ve all heard the criticisms that some of the geological surveys are as much as 30 years old, and the arguments that the ecological impact of drilling off the U.S. East Coast isn’t worth the accessible oil, which some critics estimate could play out in as little as six months at current demand levels.

But even after more than a day of debate over the motivations for – and possible results from – President Obama’s apparent energy policy about-face, one thing is very clear: This announcement has nothing to do with oil.

It’s all about the U.S. dollar. 

The Greenback Blues

As we’ve been explaining for several years now, there’s a global struggle under way to undermine the U.S. dollar as the world’s reserve currency. Because most oil is priced in U.S. dollars, the United States bears no exchange-rate risk when it comes to the country meeting its energy needs. However, thanks to the weak-dollar policy of the U.S. Federal Reserve, oil has become a proxy for stored value – which means that anybody who wants to hedge against the greenback’s eventual decline and the $14 trillion in debt we’ve amassed must own the currency.

That’s why, as we suggested at the very onset of the global financial crisis, that countries such as China, Russia, Venezuela and a long list of others have scoured the globe to lock up supplies since this mess first unfolded.

So it only makes sense that Washington would seek ways to boost its own oil holdings. Unfortunately, with all these other global players already having made their moves, the Inside-the-Beltway gang is more than a day late and a dollar short when it comes to staking claims around the world. Not only that, but – with U.S. debt climbing – we can’t exactly walk in and strike favorable deals with a world that thinks our currency is a liability at this point.

A Lesson From History

If we look at how the world has changed since the U.S. drilling moratorium was put into effect in the first place decades ago, one thing becomes clear: The drilling ban has become too expensive to keep in place for much longer.

And it’s not just because of oil prices, which are destined to rise – by substantial amounts – over time. It also has to do with the opportunity cost of not opening the fields. In fact, everyday we don’t open them up increases the risk of a protracted U.S. decline – much like the one that England experienced during the 1900s.

At the end of World War I, England was the most powerful nation on earth, boasting both a solid economy and a healthy currency. Money flowed freely and the pound sterling was the world’s chief reserve currency.

By 1939, however, that had all changed. England had spent itself into oblivion and the pound sterling was being abandoned en masse by the international banking community – not to mention by the Crown‘s own subjects. To prevent a complete breakdown in global markets, the government made it an act of treason to use anything but the pound sterling to settle debts, while simultaneously implementing strict exchange-rate controls designed to prevent an all-out currency collapse.

By the start of the 1970s, Britain was all but bankrupt and unable to sell long-term government bonds, which may be a harbinger of things to come for this country, given our current trajectory.

So what saved Great Britain from oblivion? Many historians attribute this rebirth to the leadership of the dynamic Margaret Thatcher, and the proliferation of “Thatcherism.” But the truth is that the catalyst for the United Kingdom’s turnabout was the North Sea oil fields, which began pumping in earnest in the latter part of the 1970s – producing a trade surplus that helped engender new support for the pound in international markets.

As global-investing icon Jim Rogers observed when I interviewed him in August 2008: “Even if Mother Teresa had come in [as prime minister] in ’79, or Joseph Stalin, or whomever – … you know, Jimmy Carter, George Bush, whomever – it still would’ve been great. You give me the largest oil field in the world and I’ll show you a good time, too. That’s what happened.”

I hope you’re beginning to see a common thread, here.

I’m not projecting the U.S. economy to undergo a decades-long decline like the one that Britain experienced – though it is entirely possible. What I am saying is that the cracking open of huge-and-captive oil reserves may be a means of preventing such a scenario – or at least slowing it down.

The bottom line, then, is that President Obama’s apparently sudden policy reversal has nothing to do with energy security, or even environmental concerns, but is instead an attempt to offset the massive increase in U.S. debt with the only lubricant on the planet capable of offsetting the inflationary friction that the Team Bernanke Fed is creating – oil.

We’ve been saying for some time that oil prices are destined to head higher. This is just additional proof. Buy it while you can.

Link to this story here: http://moneymorning.com/2010/04/02/obama-offshore-drilling/