Oil

  The rise of the petroeuro

  US sabre-rattling at Iran has less to do with global security and everything to do with keeping the US dollar the medium of exchange in oil markets

  By Dan Adleman

By now we’ve grown accustomed to hearing about the confluence of clandestine motives for America’s invasion and occupation of Iraq. Even many of the administration’s staunchest supporters openly acknowledge that Saddam was a dog without teeth and that this ongoing war has a lot more to do with controlling the flow of oil and capital in the Middle East (not to mention buffering Israel against Iran) than preventing a nuclear attack on America. There are many indications, however, that Hussein did indeed pose a very grave threat to the US—it just wasn’t a military one.

In November 2000, Hussein began demanding euros instead of American dollars (“the currency of the enemy state,” as Hussein called it) for Iraqi oil. Aside from a brief mention on CNN, the switch went almost entirely unnoticed by western media outlets. But the oil-producing nations of the world took notice. Shortly thereafter, Venezuela, Russia, and Iran all began to discuss shifting from the petrodollar to the petroeuro. According to Republican Congressman Ron Paul of Texas, this kind of shift could pose a fatal threat to the vitality of the American economy. But in order to understand this abstruse concept of petrodollar warfare, it’s important to go back and retrace the emergence of the American petrodollar as the world’s pre-eminent reserve currency.

The right place to begin the story is at the 1944 Bretton Woods Conference, which set the international gold standard whereby the American dollar was pegged to gold at $35 per ounce, launched the IMF and World Bank to oversee reconstruction and lend American dollars to nations in need, and established the greenback as the backbone of international exchange. This new mechanism was in everyone’s best interest as America’s supremely robust economy provided the stability that the rest of the world required to pick up steam and extricate itself from the morass of WWII. Most industrialized nations felt confident that as long as America had plenty of gold in its vaults, the global economic engine would keep chugging along at an admirable pace.  

And so it went—until Uncle Sam’s pathological escalation of the Vietnam War resulted in a skyrocketing deficit, and countries like Britain and France, worrying that the dollar would plummet as America printed more and more money to pay its exorbitant military bills, began to lose faith in the strength of the US currency. So they started exchanging their dollars back for gold, at $35 per ounce, and as the dollars cascaded back into the US, it wasn’t long before the strain on America’s gold supply reached crisis proportions. As a result, in order to avoid being forced to empty out Fort Knox, Nixon abandoned the gold standard altogether, leaving the dollar’s floating value to be determined by market forces. The result was disastrous. The dollar became volatile and inflation spiralled out of control as wartime debt continued to soar.

In 1974, Henry Kissinger, Nixon’s Secretary of State, stepped in and turned things around by establishing what he referred to as “petrodollar recycling.” First, the oil-producing nations would have to agree to price their oil exclusively in American dollars. Kissinger accomplished this goal through his intimate relationship with the Saudi royal family. The Saudis, OPEC’s top producer, and America, its top purchaser, unilaterally made the greenback the sole “petrodollar.” From that point onward, any nation that wanted to purchase oil had to do so in American dollars. Then, oil-producing nations, such as Saudi Arabia, bought US Treasury bonds and deposited their surplus American dollars in New York and London Banks, which, through the IMF (which is also greenback-denominated), lent these dollars out to needy countries, which in turn used a great deal of that money to buy oil. (And now, not only do they have to pay off their often usurious loans in dollars, but they’re also often compelled to open up their domestic economies to parasitic, predominantly American, corporate interests.)

The windfall for the American economy is astronomical since almost every country in the world needs to stockpile American currency for purchases of oil. In order to accomplish this, every nation but the US has to do whatever it can to sustain a large trade surplus. America, on the other hand, has the luxury of maintaining an enormous trade deficit because, in effect, the dollar is its greatest export. In a nutshell, the US produces dollars while the rest of the world produces things that dollars can buy. Moreover, the wealthy nations become eager to loan the US money through Treasury Bonds. This way, they can collect interest on their surplus American dollars while having a means to exercise leverage over the US by owning its debt.

As William Clark points out in Petrodollar Warfare, a book recommended to anyone who wants to grasp the issue better, America profits at every turn. While getting what can be interpreted as free oil (because America is the only nation with a licence to print the world’s petrocurrency, and it can print as much as it likes), and a constant influx of relatively easy-to-service loans, its dollars are constantly reinjected into the American economy through the New York and London banks.

At the end of the day, the dollar—as the international reserve currency—completely dominates the world economy, accounting for almost 70% of global transactions. And because the American dollar is the world’s economic lifeblood, the US can sustain enormous deficits while granting tax cuts to the rich and perpetrating an absurdly expensive war.

Of course, as was the case during the Vietnam era, there is a breaking point. Even America can’t sustain this kind of profligate spending indefinitely. As the US prints more and more money to service its needs, the dollar is rapidly losing value relative to the euro. And since EU countries now import more OPEC oil than the US does, the euro is becoming an increasingly attractive option for countries that want to turn a profit while hitting the US where it hurts. In fact, in a very short time, as a direct result of the euro’s consistent appreciation, Hussein’s Oil for Food reserve leaped from $10 billion to €26 billion. 

Fast-forward to the present. Now Iran is opening an oil bourse (a fancy word for “commodities exchange”) in which oil will be sold in euros rather than dollars. Venezuela’s Hugo Chavez has also committed to the petroeuro. Both of these countries have recently cemented tight relationships with China, the world’s number two oil importer. Of course, these gestures alone wouldn’t likely bring Uncle Sam to his knees. But they’re more than just a slap to the face and may be the beginning of a slippery slope that threatens to end the dollar’s hegemony over world trade.

Of course, this won’t happen overnight. After all, the world economy is engineered to receive most of its nourishment from the dollar. It’s as though we’re all passengers in the same monster SUV and the dollar is the gas that makes it go. It would be absurd to suggest that you could simply switch to some other fuel source overnight. The whole thing would crash. And we, the entire global community, would suffer the consequences. But Iran and Venezuela are doing some serious tinkering with the engine, and the Bush administration is doing everything it can to destabilize their efforts. 

So as the drumbeat for war escalates and America and its pitbulls continue to shake their fists at Iran for its ostensible nuclear ambitions, those of us who are a step removed from the FoxNews sabre-rattling rhetoric should do everything we can to prevent the American (and Canadian) public from being hoodwinked into another senseless war. By now it should be clear that, like Operation Iraqi Liberation, a war with Iran would have nothing to do with keeping the American public safe. If America attacks Iran, it will be, among other reasons, to preempt the emergence of a multipolar, more democratic, world economy.