Thread: Iran's oil gambit - and potential affront to the US

And here's energybulletins take on the matter. Interesting to see such a cynical view of recent events

Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse
by William Clark

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“This notion that the United States is getting ready to attack Iran is simply ridiculous...Having said that, all options are on the table.”
– President George W. Bush, February 2005


Contemporary warfare has traditionally involved underlying conflicts regarding economics and resources. Today these intertwined conflicts also involve international currencies, and thus increased complexity. Current geopolitical tensions between the United States and Iran extend beyond the publicly stated concerns regarding Iran’s nuclear intentions, and likely include a proposed Iranian “petroeuro” system for oil trade.

Similar to the Iraq war, military operations against Iran relate to the macroeconomics of ‘petrodollar recycling’ and the unpublicized but real challenge to U.S. dollar supremacy from the euro as an alternative oil transaction currency.

It is now obvious the invasion of Iraq had less to do with any threat from Saddam’s long-gone WMD program and certainly less to do to do with fighting International terrorism than it has to do with gaining strategic control over Iraq’s hydrocarbon reserves and in doing so maintain the U.S. dollar as the monopoly currency for the critical international oil market. Throughout 2004 information provided by former administration insiders revealed the Bush/Cheney administration entered into office with the intention of toppling Saddam Hussein.[1][2]

Candidly stated, ‘Operation Iraqi Freedom’ was a war designed to install a pro-U.S. government in Iraq, establish multiple U.S military bases before the onset of global Peak Oil, and to reconvert Iraq back to petrodollars while hoping to thwart further OPEC momentum towards the euro as an alternative oil transaction currency (i.e. “petroeuro”).[3] However, subsequent geopolitical events have exposed neoconservative strategy as fundamentally flawed, with Iran moving towards a petroeuro system for international oil trades, while Russia evaluates this option with the European Union.

In 2003 the global community witnessed a combination of petrodollar warfare and oil depletion warfare. The majority of the world’s governments – especially the E.U., Russia and China – were not amused – and neither are the U.S. soldiers who are currently stationed inside a hostile Iraq. In 2002 I wrote an award-winning online essay that asserted Saddam Hussein sealed his fate when he announced in September 2000 that Iraq was no longer going to accept dollars for oil being sold under the UN’s Oil-for-Food program, and decided to switch to the euro as Iraq’s oil export currency.[4]

Indeed, my original pre-war hypothesis was validated in a Financial Times article dated June 5, 2003, which confirmed Iraqi oil sales returning to the international markets were once again denominated in U.S. dollars – not euros.

The tender, for which bids are due by June 10, switches the transaction back to dollars -- the international currency of oil sales - despite the greenback's recent fall in value. Saddam Hussein in 2000 insisted Iraq's oil be sold for euros, a political move, but one that improved Iraq's recent earnings thanks to the rise in the value of the euro against the dollar [5]


The Bush administration implemented this currency transition despite the adverse impact on profits from Iraqi’s export oil sales.[6] (In mid-2003 the euro was valued approx. 13% higher than the dollar, and thus significantly impacted the ability of future oil proceeds to rebuild Iraq’s infrastructure). Not surprisingly, this detail has never been mentioned in the five U.S. major media conglomerates who control 90% of information flow in the U.S., but confirmation of this vital fact provides insight into one of the crucial – yet overlooked – rationales for 2003 the Iraq war.

Concerning Iran, recent articles have revealed active Pentagon planning for operations against its suspected nuclear facilities. While the publicly stated reasons for any such overt action will be premised as a consequence of Iran's nuclear ambitions, there are again unspoken macroeconomic drivers underlying the second stage of petrodollar warfare – Iran's upcoming oil bourse. (The word bourse refers to a stock exchange for securities trading, and is derived from the French stock exchange in Paris, the Federation Internationale des Bourses de Valeurs.)

In essence, Iran is about to commit a far greater “offense” than Saddam Hussein's conversion to the euro for Iraq’s oil exports in the fall of 2000. Beginning in March 2006, the Tehran government has plans to begin competing with New York's NYMEX and London's IPE with respect to international oil trades – using a euro-based international oil-trading mechanism.[7]

The proposed Iranian oil bourse signifies that without some sort of US intervention, the euro is going to establish a firm foothold in the international oil trade. Given U.S. debt levels and the stated neoconservative project of U.S. global domination, Tehran’s objective constitutes an obvious encroachment on dollar supremacy in the crucial international oil market.

From the autumn of 2004 through August 2005, numerous leaks by concerned Pentagon employees have revealed that the neoconservatives in Washington are quietly – but actively – planning for a possible attack against Iran. In September 2004 Newsweek reported:

Deep in the Pentagon, admirals and generals are updating plans for possible U.S. military action in Syria and Iran. The Defense Department unit responsible for military planning for the two troublesome countries is “busier than ever,” an administration official says. Some Bush advisers characterize the work as merely an effort to revise routine plans the Pentagon maintains for all contingencies in light of the Iraq war. More skittish bureaucrats say the updates are accompanied by a revived campaign by administration conservatives and neocons for more hard-line U.S. policies toward the countries…’

…administration hawks are pinning their hopes on regime change in Tehran – by covert means, preferably, but by force of arms if necessary. Papers on the idea have circulated inside the administration, mostly labeled "draft" or "working draft" to evade congressional subpoena powers and the Freedom of Information Act. Informed sources say the memos echo the administration's abortive Iraq strategy: oust the existing regime, swiftly install a pro-U.S. government in its place (extracting the new regime's promise to renounce any nuclear ambitions) and get out. This daredevil scheme horrifies U.S. military leaders, and there's no evidence that it has won any backers at the cabinet level.[8]


Indeed, there are good reasons for U.S. military commanders to be ‘horrified’ at the prospects of attacking Iran. In the December 2004 issue of the Atlantic Monthly, James Fallows reported that numerous high-level war-gaming sessions had recently been completed by Sam Gardiner, a retired Air Force colonel who has run war games at the National War College for the past two decades.[9] Col. Gardiner summarized the outcome of these war games with this statement, “After all this effort, I am left with two simple sentences for policymakers: You have no military solution for the issues of Iran. And you have to make diplomacy work.” Despite Col. Gardiner’s warnings, yet another story appeared in early 2005 that reiterated this administration’s intentions towards Iran. Investigative reporter Seymour Hersh’s article in The New Yorker included interviews with various high-level U.S. intelligence sources. Hersh wrote:


In my interviews [with former high-level intelligence officials], I was repeatedly told that the next strategic target was Iran. Everyone is saying, ‘You can’t be serious about targeting Iran. Look at Iraq,’ the former [CIA] intelligence official told me. But the [Bush administration officials] say, ‘We’ve got some lessons learned – not militarily, but how we did it politically. We’re not going to rely on agency pissants.’ No loose ends, and that’s why the C.I.A. is out of there.[10]


The most recent, and by far the most troubling, was an article in The American Conservative by intelligence analyst Philip Giraldi. His article, “In Case of Emergency, Nuke Iran,” suggested the resurrection of active U.S. military planning against Iran – but with the shocking disclosure that in the event of another 9/11-type terrorist attack on U.S. soil, Vice President Dick Cheney’s office wants the Pentagon to be prepared to launch a potential tactical nuclear attack on Iran – even if the Iranian government was not involved with any such terrorist attack against the U.S.:


The Pentagon, acting under instructions from Vice President Dick Cheney's office, has tasked the United States Strategic Command (STRATCOM) with drawing up a contingency plan to be employed in response to another 9/11-type terrorist attack on the United States. The plan includes a large-scale air assault on Iran employing both conventional and tactical nuclear weapons. Within Iran there are more than 450 major strategic targets, including numerous suspected nuclear-weapons-program development sites. Many of the targets are hardened or are deep underground and could not be taken out by conventional weapons, hence the nuclear option. As in the case of Iraq, the response is not conditional on Iran actually being involved in the act of terrorism directed against the United States. Several senior Air Force officers involved in the planning are reportedly appalled at the implications of what they are doing – that Iran is being set up for an unprovoked nuclear attack – but no one is prepared to damage his career by posing any objections.[11]


Why would the Vice President instruct the U.S. military to prepare plans for what could likely be an unprovoked nuclear attack against Iran? Setting aside the grave moral implications for a moment, it is remarkable to note that during the same week this “nuke Iran” article appeared, the Washington Post reported that the most recent National Intelligence Estimate (NIE) of Iran’s nuclear program revealed that, “Iran is about a decade away from manufacturing the key ingredient for a nuclear weapon, roughly doubling the previous estimate of five years.”[12]

This article carefully noted this assessment was a “consensus among U.S. intelligence agencies, [and in] contrast with forceful public statements by the White House.” The question remains, Why would the Vice President advocate a possible tactical nuclear attack against Iran in the event of another major terrorist attack against the U.S. – even if Tehran was innocent of involvement?

Perhaps one of the answers relates to the same obfuscated reasons why the U.S. launched an unprovoked invasion to topple the Iraq government – macroeconomics and the desperate desire to maintain U.S. economic supremacy. In essence, petrodollar hegemoy is eroding, which will ultimately force the U.S. to significantly change its current tax, debt, trade, and energy policies, all of which are severely unbalanced. World oil production is reportedly “flat out,” and yet the neoconservatives are apparently willing to undertake huge strategic and tactical risks in the Persian Gulf. Why? Quite simply – their stated goal is U.S. global domination – at any cost.

To date, one of the more difficult technical obstacles concerning a euro-based oil transaction trading system is the lack of a euro-denominated oil pricing standard, or oil ‘marker’ as it is referred to in the industry. The three current oil markers are U.S. dollar denominated, which include the West Texas Intermediate crude (WTI), Norway Brent crude, and the UAE Dubai crude. However, since the summer of 2003 Iran has required payments in the euro currency for its European and Asian/ACU exports – although the oil pricing of these trades was still denominated in the dollar.[13]

Therefore a potentially significant news story was reported in June 2004 announcing Iran’s intentions to create of an Iranian oil bourse. This announcement portended competition would arise between the Iranian oil bourse and London’s International Petroleum Exchange (IPE), as well as the New York Mercantile Exchange (NYMEX). [Both the IPE and NYMEX are owned by a U.S. consortium, and operated by an Atlanta-based corporation, IntercontinentalExchange, Inc.]

The macroeconomic implications of a successful Iranian bourse are noteworthy. Considering that in mid-2003 Iran switched its oil payments from E.U. and ACU customers to the euro, and thus it is logical to assume the proposed Iranian bourse will usher in a fourth crude oil marker – denominated in the euro currency. This event would remove the main technical obstacle for a broad-based petroeuro system for international oil trades. From a purely economic and monetary perspective, a petroeuro system is a logical development given that the European Union imports more oil from OPEC producers than does the U.S., and the E.U. accounted for 45% of exports sold to the Middle East. (Following the May 2004 enlargement, this percentage likely increased).

Despite the complete absence of coverage from the five U.S. corporate media conglomerates, these foreign news stories suggest one of the Federal Reserve’s nightmares may begin to unfold in the spring of 2006, when it appears that international buyers will have a choice of buying a barrel of oil for $60 dollars on the NYMEX and IPE - or purchase a barrel of oil for €45 - €50 euros via the Iranian Bourse. This assumes the euro maintains its current 20-25% appreciated value relative to the dollar – and assumes that some sort of US "intervention" is not launched against Iran.

The upcoming bourse will introduce petrodollar versus petroeuro currency hedging, and fundamentally new dynamics to the biggest market in the world - global oil and gas trades. In essence, the U.S. will no longer be able to effortlessly expand its debt-financing via issuance of U.S. Treasury bills, and the dollar’s international demand/liquidity value will fall.

It is unclear at the time of writing if this project will be successful, or could it prompt overt or covert U.S. interventions – thereby signaling the second phase of petrodollar warfare in the Middle East. Regardless of the potential U.S. response to an Iranian petroeuro system, the emergence of an oil exchange market in the Middle East is not entirely surprising given the domestic peaking and decline of oil exports in the U.S. and U.K, in comparison to the remaining oil reserves in Iran, Iraq and Saudi Arabia.

What we are witnessing is a battle for oil currency supremacy. If Iran’s oil bourse becomes a successful alternative for international oil trades, it would challenge the hegemony currently enjoyed by the financial centers in both London (IPE) and New York (NYMEX), a factor not overlooked in the following (UK) Guardian article:


Iran is to launch an oil trading market for Middle East and Opec producers that could threaten the supremacy of London's International Petroleum Exchange.

…Some industry experts have warned the Iranians and other OPEC producers that western exchanges are controlled by big financial and oil corporations, which have a vested interest in market volatility.

The IPE, bought in 2001 by a consortium that includes BP, Goldman Sachs and Morgan Stanley, was unwilling to discuss the Iranian move yesterday. “We would not have any comment to make on it at this stage,” said an IPE spokeswoman. [14]


During an important speech in April 2002, Mr. Javad Yarjani, an OPEC executive, described three pivotal events that would facilitate an OPEC transition to euros.[15] He stated this would be based on (1) if and when Norway's Brent crude is re-dominated in euros, (2) if and when the U.K. adopts the euro, and (3) whether or not the euro gains parity valuation relative to the dollar, and the EU’s proposed expansion plans were successful.

Notably, both of the later two criteria have transpired: the euro’s valuation has been above the dollar since late 2002, and the euro-based E.U. enlarged in May 2004 from 12 to 22 countries. Despite recent “no” votes by French and Dutch voters regarding a common E.U. Constitution, from a macroeconomic perspective, these domestic disagreements do no reduce the euro currency’s trajectory in the global financial markets – and from Russia and OPEC’s perspective – do not adversely impact momentum towards a petroeuro. In the meantime, the U.K. remains uncomfortably juxtaposed between the financial interests of the U.S. banking nexus (New York/Washington) and the E.U. financial centers (Paris/Frankfurt).

The most recent news reports indicate the oil bourse will start trading on March 20, 2006, coinciding with the Iranian New Year.[16] The implementation of the proposed Iranian oil Bourse – if successful in utilizing the euro as its oil transaction currency standard – essentially negates the previous two criteria as described by Mr. Yarjani regarding the solidification of a petroeuro system for international oil trades. It should also be noted that throughout 2003-2004 both Russia and China significantly increased their central bank holdings of the euro, which appears to be a coordinated move to facilitate the anticipated ascendance of the euro as a second World Reserve Currency. [17] [18]

China’s announcement in July 2005 that it was re-valuing the yuan/RNB was not nearly as important as its decision to divorce itself from a U.S. dollar peg by moving towards a “basket of currencies” – likely to include the yen, euro, and dollar.[19] Additionally, the Chinese re-valuation immediately lowered their monthly imported “oil bill” by 2%, given that oil trades are still priced in dollars, but it is unclear how much longer this monopoly arrangement will last.

Furthermore, the geopolitical stakes for the Bush administration were raised dramatically on October 28, 2004, when Iran and China signed a huge oil and gas trade agreement (valued between $70 - $100 billion dollars.) [20] It should also be noted that China currently receives 13% of its oil imports from Iran. In the aftermath of the Iraq invasion, the U.S.-administered Coalition Provisional Authority (CPA) nullified previous oil lease contracts from 1997-2002 that France, Russia, China and other nations had established under the Saddam regime. The nullification of these contracts worth a reported $1.1 trillion created political tensions between the U.S and the European Union, Russia and China.

The Chinese government may fear the same fate awaits their oil investments in Iran if the U.S. were able to attack and topple the Tehran government. Despite U.S. desires to enforce petrodollar hegemony, the geopolitical risks of an attack on Iran’s nuclear facilities would surely create a serious crisis between Washington and Beijing.

It is increasingly clear that a confrontation and possible war with Iran may transpire during the second Bush term. Clearly, there are numerous tactical risks regarding neoconservative strategy towards Iran. First, unlike Iraq, Iran has a robust military capability. Secondly, a repeat of any “Shock and Awe” tactics is not advisable given that Iran has installed sophisticated anti-ship missiles on the Island of Abu Musa, and therefore controls the critical Strait of Hormuz – where all of the Persian Gulf bound oil tankers must pass.[21]

The immediate question for Americans? Will the neoconservatives attempt to intervene covertly and/or overtly in Iran during 2005 or 2006 in a desperate effort to prevent the initiation of euro-denominated international crude oil sales? Commentators in India are quite correct in their assessment that a U.S. intervention in Iran is likely to prove disastrous for the United States, making matters much worse regarding international terrorism, not to the mention potential effects on the U.S. economy.


…If it [U.S.] intervenes again, it is absolutely certain it will not be able to improve the situation…There is a better way, as the constructive engagement of Libya’s Colonel Muammar Gaddafi has shown...Iran is obviously a more complex case than Libya, because power resides in the clergy, and Iran has not been entirely transparent about its nuclear programme, but the sensible way is to take it gently, and nudge it to moderation. Regime change will only worsen global Islamist terror, and in any case, Saudi Arabia is a fitter case for democratic intervention, if at all.[22]


A successful Iranian bourse will solidify the petroeuro as an alternative oil transaction currency, and thereby end the petrodollar's hegemonic status as the monopoly oil currency. Therefore, a graduated approach is needed to avoid precipitous U.S. economic dislocations. Multilateral compromise with the EU and OPEC regarding oil currency is certainly preferable to an ‘Operation Iranian Freedom,’ or perhaps another CIA-backed coup such as operation "Ajax” from 1953. Despite the impressive power of the U.S. military, and the ability of our intelligence agencies to facilitate ‘interventions,’ it would be perilous and possibly ruinous for the U.S. to intervene in Iran given the dire situation in Iraq. The Monterey Institute of International Studies warned of the possible consequences of a preemptive attack on Iran’s nuclear facilities:


An attack on Iranian nuclear facilities…could have various adverse effects on U.S. interests in the Middle East and the world. Most important, in the absence of evidence of an Iranian illegal nuclear program, an attack on Iran’s nuclear facilities by the U.S. or Israel would be likely to strengthen Iran's international stature and reduce the threat of international sanctions against Iran.[23]


Synopsis:
It is not yet clear if a U.S. military expedition will occur in a desperate attempt to maintain petrodollar supremacy. Regardless of the recent National Intelligence Estimate that down-graded Iran’s potential nuclear weapons program, it appears increasingly likely the Bush administration may use the specter of nuclear weapon proliferation as a pretext for an intervention, similar to the fears invoked in the previous WMD campaign regarding Iraq.

If recent stories are correct regarding Cheney’s plan to possibly use another 9/11 terrorist attack as the pretext or casus belli for a U.S. aerial attack against Iran, this would confirm the Bush administration is prepared to undertake a desperate military strategy to thwart Iran’s nuclear ambitions, while simultaneously attempting to prevent the Iranian oil Bourse from initiating a euro-based system for oil trades.

However, as members of the U.N. Security Council; China, Russia and E.U. nations such as France and Germany would likely veto any U.S.-sponsored U.N. Security Resolution calling the use of force without solid proof of Iranian culpability regarding a terrorist attack in the U.S. A unilateral military strike on Iran would isolate the U.S. government in the eyes of the world community, and it is conceivable that such an overt action could provoke other industrialized nations to strategically abandon the dollar en masse.

Indeed, such an event would create pressure for OPEC and Russia to move towards a monopoly petroeuro system in an effort to cripple the U.S. dollar and thwart the U.S. global military presence. I refer to this in my book as the “rogue nation hypothesis.” (A similar tactic was used by the U.S. to end the 1956 Suez crisis.)

While central bankers throughout the world community would be extremely reluctant to ‘dump the dollar,’ the reasons for any such drastic reaction are likely straightforward from their government’s perspective – the global community is dependent on the oil and gas energy supplies found in the Persian Gulf.

Hence, industrialized nations would likely move in tandem on the currency exchange markets in an effort to thwart the neoconservatives from pursuing their desperate strategy of dominating the world’s largest hydrocarbon energy supply. Any such efforts that resulted in a dollar currency crisis would be undertaken – not to cripple the U.S. dollar and economy as punishment towards the American people per se – but rather to thwart further unilateral warfare and its potentially destructive effects on the critical oil production and shipping infrastructure in the Persian Gulf.

Barring a U.S. attack, it appears imminent that Iran’s euro-denominated oil bourse will open in March 2006. Logically, the most appropriate U.S. strategy is compromise with the E.U. and OPEC towards a dual-currency system for international oil trades.



Of all the enemies to public liberty war is, perhaps, the most to be dreaded because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes...known instruments for bringing the many under the domination of the few…No nation could preserve its freedom in the midst of continual warfare.
– James Madison, Political Observations, 1795


***
Footnotes:
[1] Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O’ Neill, Simon & Schuster publishers (2004)
[2] Richard A. Clarke, Against All Enemies: Inside America’s War on Terror, Free Press (2004)
[3] William Clark, “Revisited - The Real Reasons for the Upcoming War with Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth,” January 2003 (updated January 2004)
www.ratical.org/ratville/CAH/RRiraqWar.html

[4] Peter Philips, Censored 2004, The Top 25 Censored News Stories, Seven Stories Press, (2003) General website for Project Censored: www.projectcensored.org/
Story #19: U.S. Dollar vs. the Euro: Another Reason for the Invasion of Iraq
http://www.projectcensored.org/publi...s/2004/19.html

[5] Carol Hoyos and Kevin Morrison, "Iraq returns to the international oil market," Financial Times, June 5, 2003
[6] Faisal Islam, “Iraq nets handsome profit by dumping dollar for euro,” [UK] Guardian, February 16, 2003
observer.guardian.co.uk/iraq/story/0,12239,896344,00.html
[7] “Oil bourse closer to reality,” IranMania.com, December 28, 2004. Also see: “Iran oil bourse wins authorization,” Tehran Times, July 26, 2005

[8] “War-Gaming the Mullahs: The U.S. weighs the price of a pre-emptive strike,” Newsweek, September 27 issue, 2004. Online: www.msnbc.msn.com/id/6039135/site/newsweek/

[9] James Fallows, “Will Iran be Next?,” Atlantic Monthly, December 2004, pgs. 97 – 110

[10] Seymour Hersh, “The Coming Wars,” The New Yorker, January 24th – 31st issue, 2005, pgs. 40-47
Posted online January 17, 2005. Online: www.newyorker.com/fact/content/?050124fa_fact

[11] Philip Giraldi, “In Case of Emergency, Nuke Iran,” American Conservative, August 1, 2005

[12] Dafina Linzer, “Iran Is Judged 10 Years From Nuclear Bomb U.S. Intelligence Review Contrasts With Administration Statements,” Washington Post, August 2, 2005; Page A01

[13] C. Shivkumar, “Iran offers oil to Asian union on easier terms,” The Hindu Business Line (June 16, 2003). http://www.thehindubusinessline.com/...1702380500.htm

[14] Terry Macalister, “Iran takes on west's control of oil trading,” The [UK] Guardian, June 16, 2004
http://www.guardian.co.uk/business/s...239644,00.html

[15] “The Choice of Currency for the Denomination of the Oil Bill," Speech given by Javad Yarjani, Head of OPEC's Petroleum Market Analysis Dept, on The International Role of the Euro (Invited by the Spanish Minister of Economic Affairs during Spain's Presidency of the EU) (April 14, 2002, Oviedo, Spain)
http://www.opec.org/NewsInfo/Speeche...SpainApr14.htm

[16] “Iran's oil bourse expects to start by early 2006,” Reuters, October 5, 2004 www.iranoilgas.com

[17] “Russia shifts to euro as foreign currency reserves soar,” AFP, June 9, 2003
www.cdi.org/russia/johnson/7214-3.cfm

[18] “China to diversify foreign exchange reserves,” China Business Weekly, May 8, 2004
http://www.chinadaily.com.cn/english...ent_328744.htm

[19] Richard S. Appel, “The Repercussions from the Yuan’s Revaluation,” kitco.com, July 27, 2005
www.kitco.com/ind/appel/jul272005.html

[20] “China, Iran sign biggest oil & gas deal,” China Daily, October 31, 2004. Online: http://www.chinadaily.com.cn/english...ent_387140.htm

[21] Analysis of Abu Musa Island, www.globalsecurity.org
http://www.globalsecurity.org/wmd/wo...n/abu-musa.htm

[22] “Terror & regime change: Any US invasion of Iran will have terrible consequences,” News Insight: Public Affairs Magazine, June 11, 2004 http://www.indiareacts.com/archivede...=908&ctg=World

[23] Sammy Salama and Karen Ruster, “A Preemptive Attack on Iran's Nuclear Facilities: Possible Consequences,” Monterry Institute of International Studies, August 12, 2004 (updated September 9, 2004) cns.miis.edu/pubs/week/040812.htm

From here

Petrodollar or Petroeuro? A new source of global conflict
Cóilín Nunan

The current political and economic rift between the US and the European Union has been called a clash of civilizations. Its major cause is a struggle over the gains to be had from producing the world's leading currency

No observer of the lead-up to the war in Iraq and its aftermath could have failed to notice that the level of cooperation between Europe and America was extremely low. France and Germany were very strong opponents of the US/UK invasion and even after the war was declared over, disagreements persisted over the lifting of sanctions and how Iraq should be run. So was this just a one-off tiff or was it a symptom of deeper flaws in the relationship? I believe that the war on Iraq illustrated for the first time that continental Europe, led by France and Germany, no longer wishes to follow the Americans politically, although what has been termed a 'clash of civilisations'1 is probably better viewed as a 'clash of economies'.

While disagreements over the US trade barriers on steel imports or the European restrictions on imports of American genetically modified crops have attracted widespread comment, the most intense economic rivalry of all has received far less media attention than it perhaps should: this is the rivalry between the dollar and the euro for the position of world reserve currency, a privileged status that has been held by the dollar ever since the Bretton Woods agreement nearly 60 years ago.

At present, approximately two thirds of world trade is conducted in dollars and two thirds of central banks' currency reserves are held in the American currency which remains the sole currency used by international institutions such as the IMF. This confers on the US a major economic advantage: the ability to run a trade deficit year after year. It can do this because foreign countries need dollars to repay their debts to the IMF, to conduct international trade and to build up their currency reserves. The US provides the world with these dollars by buying goods and services produced by foreign countries, but since it does not have a corresponding need for foreign currency, it sells far fewer goods and services in return, i.e. the US always spends more than it earns, whereas the rest of the world always earns more than it spends. This US trade deficit has now reached extraordinary levels, with the US importing 50% more goods and services than it exports. So long as the dollar remains the dominant international currency the US can continue consuming more than it produces and, for example, build up its military strength while simultaneously affording tax cuts.

Getting a share of this economic free lunch has been one of the motivations, and perhaps the main motivation, behind setting up the euro2 . Were the euro to become a reserve currency equal to, or perhaps even instead of, the dollar, countries would reduce their dollar holdings while building up their euro savings. Another way of putting this would be to say that Eurozone countries would be able to reduce their subsidy to American consumption and would find that other countries were now subsidising Eurozone consumption instead.

A move away from the dollar towards the euro could, on the other hand, have a disastrous effect on the US economy as the US would no longer be able to spend beyond its means. Worse still, the US would have to become a net currency importer as foreigners would probably seek to spend back in the US a large proportion of the estimated three trillion dollars which they currently own. In other words, the US would have to run a trade surplus, providing the rest of the world with more goods and services than it was receiving in return. A rapid and wholesale move to the euro might even lead to a dollar crash as everyone sought to get rid of some, or all, of their dollars at the same time. But that is an outcome that no-one, not even France or Germany, is seeking because of the huge effect it would have on the world economy. Europe would much prefer to see a gradual move to a euro-dollar world, or even a euro-dominated one.

A move away from the dollar towards the euro could have a disastrous effect on the US economy
It turns out that there is a small group of countries which is playing the arbiter in this global contest. These are the world's oil exporters, in particular OPEC and Russia. Ever since the days when the US dominated world oil production, sales of oil and natural gas on international markets have been exclusively denominated in dollars. This was partly a natural state of affairs since, up until the early 1950s, the US accounted for half or more of the world's annual oil production. The tendency to price in dollars was additionally reinforced by the Bretton Woods agreement which established the IMF and World Bank and adopted the dollar as the currency for international loans.

The vast majority of the world's countries are oil importers and, since oil is such a crucial commodity, the need to pay for it in dollars encourages these countries keep the majority of their foreign currency reserves in dollars not only to be able to buy oil directly but also to protect the value of their own currencies from falling against the dollar. Because a sudden devaluation of a country's currency against the dollar would lead to a jump in oil prices and a possible economic crisis, every country's central bank needs dollar reserves so as to be able to buy its own currency on the foreign exchange markets when its value needs to be supported.

The fact that oil sales and loans from the IMF are dollar-denominated also encourages poorer countries to denominate their exports in dollars as this minimises the risk of losses through any fluctuations in the value of the dollar. The knock-on effect of this is that, since many of these exports are essential raw materials which richer countries need to import, their denomination in dollars reinforces the need for rich countries to keep their own currency reserves in dollars.

While the denomination of oil sales is not a subject which is frequently discussed in the media, its importance is certainly well understood by governments. For example, when in 1971 President Nixon took the US off the gold standard, OPEC did consider moving away from dollar oil pricing, as dollars no longer had the guaranteed value they once did. The US response was to do various secret deals with Saudi Arabia in the 1970s to ensure that the world's most important oil exporter stuck with the dollar3 . What the Saudis did, OPEC followed. More recently, in June 2003, the Prime Minister of Malaysia publicly encouraged his country's oil and gas exporters to move from the dollar to the euro. The European and American reactions were polar opposites: the EU's Energy Commissioner, Loyola de Palacio, welcomed the suggestion, saying that 'in the future the euro is [going to be] taking a place in the international markets in general as the money of exchange' and that this was 'a matter of realism'4 . Her counterpart in the US, the director of the Energy Information Administration, Guy Caruso, said that he couldn't see 'any particular merit' in the move and that over the long run 'the dollar's always won out'5 . Either way, Malaysia is only a relatively minor oil exporter, so what it does can only have a very limited effect. A switch by a major oil exporter would be of far greater significance.

The first country to actually make the switch was a very important oil exporter indeed: Iraq, in November 20006 ,7 . Before the war in Iraq began, some observers, myself included, argued that this might well be a major reason for the US desire to invade and the strong Franco-German opposition to the invasion8 ,9 . Corroborating evidence included the apparent influence which loyalty (or lack thereof) to the dollar seemed to have on the US attitude towards other OPEC members. Iran had been talking of selling its own oil for euros6 ,10 and was subsequently included in George Bush's 'axis of evil'. Venezuela, another important oil exporter, had started bartering some of its oil, thus avoiding the use of the dollar, and was encouraging OPEC to do likewise11 - and the US was widely suspected in having played a part in the attempted coup against the Venezuelan president, Hugo Chavez.

Semi-official confirmation that petro-currency rivalry was at the heart of the split between France and Germany, on the one hand, and the US, on the other, was provided by Howard Fineman, the chief political correspondent for Newsweek, in an article he wrote in April 2003, in the aftermath of the war. The Europeans and Americans were then arguing over whether the UN's oil-for-food programme in Iraq should remain in place or not. Using the term 'clash of civilisations' to describe the divide which was developing, Fineman explained that the disagreement had little to do with the French calls for the search for weapons of mass destruction to resume and for sanctions to remain in place until the search was complete. Instead, Fineman said, it was mainly about the dollar vs the euro. Citing White House officials and a presidential aide, he explained that the dispute between the two continents was really about 'who gets to sell - and buy - Iraqi oil, and what form of currency will be used to denominate the value of the sales. That decision, in turn, will help decide who controls Iraq, which, in turn, will represent yet another skirmish in a growing global economic conflict. We want a secular, American-influenced pan-ethnic entity of some kind to control the massive oil fields (Iraq's vast but only real source of wealth). We want that entity to be permitted to sell the oil to whomever it wants, denominated in dollars.' Fineman concluded his article by confidently predicting that future Iraqi oil sales would be switched back to dollars1 .

Fineman's White House sources would appear to have been reliable as that is precisely what has happened: when Iraqi oil exports resumed in June of last year, it was announced that payment would be in dollars only12 13 . It was also decided that the billions of Iraqi euros which were being held in a euro account, controlled by the UN under the oil-for-food programme, were to be transferred into the Development Fund for Iraq, a dollar account controlled by the US13 14 15 .

Furthermore, Youssef Ibrahim, a former senior Middle East correspondent for the New York Times and energy editor on the Wall Street Journal, who is a member of the influential Council on Foreign Relations, has called Iraq's switch to the euro 'another reason' for the war, saying that a general move by oil producers to the euro would be a 'catastrophe' for the US16 .

America's willingness to use violence to defend its economic interests does not seem to have reduced the number of oil exporters considering switching to the euro as they recognise that their use of the dollar enables the US to build up its military strength. In addition to Malaysia, Indonesia has the switch under consideration17 while Iran has been shifting its currency reserves into euros. Moreover, according to the Vice-President of the Iranian central bank, it has actually sold some of its oil to Europe for euros and is encouraging members of an Asian trade organisation, the Asian Clearing Union, to pay for Iranian oil in the European currency18 . Along with Malaysia, it is also at the forefront of efforts to establish a new gold-backed currency, the Islamic Gold Dinar, to be used in international trade amongst Muslim countries instead of both the dollar and the euro19 . In a further development, in June 2004, Iran announced that it had plans to establish an oil-trading market for Middle Eastern and OPEC producers which could threaten the dominance of London's International Petroleum Exchange and New York's Nymex20 . Such a move could help remove some of the technical difficulties that exist with a switch away from dollar-denomination of oil sales.

the US has refused to get involved in direct talks with the Iranian government which it views as 'evil'.
It is therefore not surprising to find that, just as with Iraq, the European Union and the US are dealing with Iran in very different ways. While the EU has been holding trade negotiations with Iran21 and involved in dialogue about its nuclear programme, the US has refused to get involved in direct talks with the Iranian government which it views as 'evil'. The American Enterprise Institute, a highly influential American 'think tank', has in fact been actively calling for 'regime change'22 and, although this policy has yet to be officially endorsed by the Bush administration, in July 2004 it was claimed in the British press that a senior official of the Bush administration had indicated that, if re-elected, Bush would intervene in the internal affairs of Iran in an attempt to overturn the Iranian government23 24 .

European enthusiasm for the 'petroeuro' also appears undampened by the US takeover of Iraq. Since the war, the European Union has been actively encouraging Russia, another opponent of the US invasion, to move to euro oil and gas sales. In October 2003, during a joint press conference with Germany's Prime Minister Gerhard Schroeder, the Russian President Vladimir Putin declared that Russia was thinking about selling its oil for euros. A few days later, the European Commission President, Romano Prodi, said, after a summit between Russia and the European Union, that Russia was now drawn to having its imports and exports denominated in euros25 26 .

In December 2003, speculation about the future roles of the dollar and the euro increased when OPEC Secretary General Alvaro Silva, a former Venezuelan oil minister, said that the organisation was now considering trading in euros or in a basket of currencies other than the dollar, as the US currency was declining in value27 . Although a few days later the Saudi oil minister Ali al-Naimi said that OPEC would not be discussing a switch to the euro at its next meeting (comments reinforced by the Qatari President of OPEC and the Algerian oil minister28 ), articles discussing a possible move continued to appear in the media29 30 and the euro's value against the dollar soared. Despite the speculation, no decision to move to the euro was taken at OPEC's meeting in early February 2004 and thereafter the euro's value fell back again.

In fact, close inspection of the dollar-euro exchange rate shows that since the euro's introduction in January 1999, petro-currency rivalry appears to have played an important part in swinging the rate one way or the other (see Graph). The markets, it seems, have noticed the importance of what is happening. On the other hand, the lack of an open discussion of the issues suggests that politicians and bankers are keen to move ahead with their plans with little or no explanation to the general public.

1) January 1999: launch of the euro.

2) January 1999 * Oct 2000: euro in "bear market² versus the dollar.

3) November 2000: Iraq switches oil sales to euro. Euro's fall versus the dollar is halted.

4) April 2002: senior OPEC representative gives speech in which he states that OPEC would consider possibility of selling oil in euros.

5) April 2002 to May 2003: euro in "bull market" versus the dollar.

6) June 2003: US switches Iraqi oil sales back to dollar.

7) June 2003 to September 2003: euro falls versus dollar.
8) October 2003 to early February 2004: statements by Russian and OPEC politicians/officials that switch to euro for oil sales is being considered. Euro's value versus the dollar increases.

9) 10 February 2004: OPEC meets and no decision to switch to euro is taken.

10) February 2004 to May 2004: euro falls versus the dollar.

11) June 2004: Iran announces intention to establish oil-trading market to rival those of London and New York.

12) June 2004: euro's value versus the dollar begins to increase again.





Should we not, however, be debating more openly what kind (or kinds) of international financial structure(s) we want to adopt, since the question has potentially huge implications for the stability of the world economy and for peace and stability in oil-exporting countries? A good starting point for such a debate would be the recognition that no country or countries should be allowed to dominate the system by controlling the issuance of the currency or currencies used. Similarly fundamental would be to prevent any country from running a persistent trade surplus or deficit so as to avoid the build up of unjust subsidies, unpayable debts and economic instability. At Bretton Woods, John Maynard Keynes, who understood how important these two conditions were, proposed a system which would have met them, but his proposal was rejected in favour of the dollar31 .

The dollar, though, is no longer a stable, reliable currency: the IMF has warned that the US trade deficit is so bad that its currency could collapse at any time32 . Will we really have to wait for a full-blown dollar crisis before a public debate about creating a just and sustainable trading system can begin?

References
1. Howard Fineman, 'In Round 2, it's the dollar vs. euro', April 23 2003, Newsweek, http://www.msnbc.com/news/904353.asp...FD3221F4&cp1=1

2. Anon., 'Will the euro rule the roost?', January 1 1999, BBC News, http://news.bbc.co.uk/1/hi/events/th..._emu/inside_em u/225434.stm
3. David E. Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets, Cornell University Press, 1999

4. Anon., 'EU says oil could one day be priced in euros', 16 June 2003, Reuters

5. Irene Kwek, 'EIA Says Oil Price Switch To Euro From Dollar Unlikely', 16 June 2003, Dow Jones Newswires

6. Recknagel, Charles, 'Iraq: Baghdad Moves to Euro', November 1 2000,Radio Free Europe, http://www.rferl.org/nca/features/20...2000160846.asp

7. Faisal Islam, 'When will we buy oil in euros?', February 23 2003, The Observer, http://www.observer.co.uk/business/s...900867,00.html

8. William Clark, 'The Real Reasons for the Upcoming War With Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth', January 2003, http://www.ratical.org/ratville/CAH/RRiraqWar.html

9. Cóilín Nunan, 'Oil, currency and the war on Iraq', January 2003, http://www.feasta.org/documents/papers/oil1.htm

10. Anon., 'Iran may switch to euro for crude sale payments', Alexander Oil and Gas, September 5 2002, http://www.gasandoil.com/goc/news/ntm23638.htm

11. Hazel Henderson, 'Globocop v. Venezuela's Chavez: Oil, Globalization and Competing Visions of Development', April 2002, InterPress Service, http://www.hazelhenderson.com/Globoc....%20Chavez.htm

12. Carola Hoyos and Kevin Morrison, 'Iraq returns to international oil market', June 5 2003, Financial Times

13. Coalition Provisional Authority Regulation Number 2, http://www.cpa-iraq.org/regulations/...ml#Regulations

14. UN Security Council Resolution 1483, http://www.un.org/Docs/sc/unsc_resolutions03.html

15. Judy Aita, 'U.N. Transfers Oil-for-Food Program to CPA, Iraqi Officials Nov 22', November 2003, Washington File, http://www.cpa-iraq.org/audio/200311...ogram-post.htm

16. Catherine Belton, 'Why not price oil in euros?', October 10 2003, Moscow Times

17. Kazi Mahmood, 'Economic Shift Could Hurt U.S.-British Interests In Asia', March 30 2003, IslamOnline.net

18. C. Shivkumar, 'Iran offers oil to Asian union on easier terms', June 16 2003, http://www.blonnet.com/2003/06/17/st...1702380500.htm

19. Anon, 'Malaysia, Iran discuss the use of gold dinar', July 3 2003, Asia Times, http://www.atimes.com/atimes/Southea.../EG03Ae01.html

20. Terry Macalister, 'Iran takes on west's control of oil trading', June 16 2004, The Guardian, http://www.guardian.co.uk/business/s...239644,00.html

21. Hooman Peimani, 'EU and Iran talk trade, not war', June 7 2003, Asia Times, www.atimes.com/atimes/Middle_East/EF07AK02.html

22. Guy Dinmore, 'US lobbyists tune in for regime change in Iran', December 5 2003, Financial Times

23. Michael Binyon and Bronwen Maddox, 'US sets sights on toppling Iran regime', July 17 2004, The Times

24. Jennifer Johnston, 'Regime change in Iran now in Bush's sights', July 18 2004, The Sunday Herald, www.sundayherald.com/43461

25. Lisa Jucca and Melissa Akin, 'Europe Presses Russia on Euro', October 20 2003, Moscow Times

26. Simon Nixon, 'What's that in euros?', October 18 2003, The Spectator, http://www.spectator.co.uk/article.p...-10-18&id=3619

27. Anon., 'OPEC may trade oil in euros to compensate for dollar decline', December 9 2003, Associated Press, http://www.hindustantimes.com/news/1...4,00020008.htm

28. Anon., 'Saudi Arabia: Dollars only please', December 13 2003, Reuters, http://money.cnn.com/2003/12/13/news...onal/bc.energy .saudi.reut/

29. Patrick Brethour, 'OPEC mulls move to euro for pricing crude oil', January 12 2004, Globe and Mail, http://www.globeandmail.com/servlet/...tory/Business/

30. Anon., 'To euro or not: should oil pricing ditch the dollar?', February 9 2004, AFP

31. Michael Rowbottom, Goodbye America! Globalisation, Debt and the Dollar Empire, Jon Carpenter Publishing, 2000

32. Charlotte Denny and Larry Elliott, 'IMF warns trade gap could bring down dollar', September 19 2003, The Guardian, http://www.guardian.co.uk/business/s...045193,00.html

Quite why the Dollar has been able to maintain it's value has perplexed me for some time, especially with the trade imbalance the way it is. The 'free goods' scenario goes a long way to explaining this for me.