It Was Always About The Oil: Follow the bouncing money (Part 3)

This is Part 3 of a multi-part post. Part 1 and Part 2 are here. Part 4 will be posted in two weeks.

In part 2 the effect of Iraq’s decision to convert the currency of oil sales from US dollars to Euros was mentioned. In doing so, Saddam’s Iraq generated a windfall as the Euro gained strength against the US dollar.

While many analysts suggested this would cost Iraq hundreds of millions of dollars in lost revenue most did not forecast the steady gain of the Euro against the US dollar. By January, 2003, Iraq’s original UN reserve fund of 10 billion dollars US had expanded to 26 billion Euros (24.8 billion US dollars).

The effect of this move by Iraq, which had been relegated to limited oil production by UN sanctions, sent shockwaves through the economies of both the United States and Britain. What was clearly apparent was that if the world oil market started to shift to Euros to purchase oil, the US economy could collapse.

That may sound a little rash, however it must be understood that the US dollar, which has supremacy as the world’s reserve currency, is now facing stiff competition from the Euro. And, until Saddam flipped Iraq’s oil sales and Iraq’s UN reserve fund into Euros, the US dollar was the only currency with which oil was purchased and sold.

To understand how this affects the US economy it must first be understood that the US has a massive trade deficit. The US imports 66 percent more than it exports, a figure which has been rapidly accelerating since the ascendancy of the Bush administration. As a share of the US Gross Domestic Product, the US trade imbalance constitutes 6.8 percent. Most countries would collapse under the economic pressure of half those figures.

However, as Coilin Nunan wrote in 2004, as long as most of the world’s trade flows through the US dollar, the US enjoys a position of economic strength, even if it doesn’t produce goods for export.

US currency accounts for approximately two thirds of all official exchange reserves. More than four-fifths of all foreign exchange transactions and half of all world exports are denominated in dollars. In addition, all IMF loans are denominated in dollars.

But the more dollars there are circulating outside the US, or invested by foreign owners in American assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. The dollars cost the US next to nothing to produce, so the fact that the world uses the currency in this way means that the US is importing vast quantities of goods and services virtually for free.

Since so many foreign-owned dollars are not spent on American goods and services, the US is able to run a huge trade deficit year after year without apparently any major economic consequences.

Nunan’s figures are now out of date since, in fact, the US dollar is no longer the solitary global reserve currency. The Euro has grown in popularity and the central banks of many countries hold reserves of both US dollars and Euros.

The one commodity exchange that assured a dominant US dollar was oil. Both the New York Mercantile Exchange and the International Petroleum Exchange in London trade oil exclusively in US dollars. Since oil is the primary commodity of any industrialized country, continued oil trading using the US dollar as currency guaranteed US economic strength.

In 1975, after Nixon had taken the US dollar off the gold-standard, Henry Kissinger established the US-Saudi Arabia Joint Commission on Economic Cooperation. While, on the surface this looked like a diplomatic effort to soften the hard feelings of an OPEC instituted 400 percent increase in the price of crude oil, there was a lot more to it. The Saudis agreed to buy US Treasury bonds with their petro-dollars, thus flooding world reserves with US currency, and forced OPEC to agree to sell oil in no other currency but US dollars. In return, the US secretly armed Saudi Arabia.

The United States, even though it is the world’s largest oil importer, had economic control over world oil trading. Industrialized countries needed oil. In most countries, that meant buying it. The only way to buy oil was with US dollars. Until Iraq broke the OPEC agreement in November, 2000 and shifted oil sales to Euros.

One of the reasons the European Community created the Euro was to develop a second global reserve currency. Since its inception there have been moves to lodge it in the central banks of industrialized countries. However, it was over-valued in its early days and with corrections it fell against the US dollar. Once the economies of Europe had settled in to the new currency it started to slowly rise. Europe maintained higher interest rates than the US and steady growth started to make the Euro attractive. When Iraq denominated oil sales in Euros all of OPEC, particularly Iran, noticed.

When the Bush administration invaded and occupied Iraq one of the first pieces of business was to convert Iraq’s oil sales back to US dollars. The move, while ravaging Iraq’s reserve funds, improved the standing of the US dollar. It also put one of the world’s largest known petroleum reserves back on a US dollar standard.

Iran announced in March, 2005, that it would open its own commodity exchange and trade oil in a variety of currencies, primarily the Euro. Since 2003 Iran has been requiring payments for oil exported to European and Asian consignees in Euros. Combined with the fact that the Russians have started trading oil in Euros, it has given the willies to the economists in the US government and across the US industrial complex. Since the oil price on the two major exchanges is still denominated in US dollars whatever cash and carry currency is used is almost irrelevant since conversion is necessary. But, if Iran creates a new oil bourse of its own it could set a new price marker and it would most certainly be Euros. The US dollar would sink badly.

OPEC, instead of having to utilize the NYMX or IPE to sell their petroleum would have another alternative – Iran. That means they could mix the currency they demand and there is every reason to believe they would trade with Europe in Euros only.

Philip Giraldi, a former CIA counter-terrorism analyst wrote this in August 2005, in American Conservative:

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.

The question as to why Cheney would want to take out Iran, even if they are not involved in any terrorist event, is answered by William Clark.

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.

The shifting of Iraq back to US dollars is only one part of the issue. Saudi Arabia, as was mentioned in part 2, has a large part to play in the US involvement in Iraq. In demanding the US provide protection against invasion and maintain readily available forces able to secure the giant Saudi Ghawar oil fields against both external and internal threats, the Saudis are able to hold out a unique threat out to the Bush administration: Without threatening to cut off oil supplies or even reduce production the House of Saud has simply to sell oil for Euros or convert their US held assets to Euros and the US economy will immediately begin to suffer.

China has been reducing its US dollar reserves in the last year. Part of this would be a hedge against the possible fall of the US dollar and part of it would be to possess the currency reserve necessary to purchase OPEC oil should Euros become the dominant petro-currency. That has the effect of panicking US economists. More nerves start to shatter when, at the beginning of the 2007, financial papers reported that the Euro had outpaced the US dollar as the most widely used cash for international transactions. The US dollar still sits at about 65% held in foreign central bank reserves, but that is a drop from the past and the Euro now holds 25% of that statistic.

The consumptive US economy has transformed itself into something non-productive. China is the shop floor of a good deal of US manufacturing interests. What makes that possible is the fact that China has held US dollars in its reserves. If it significantly reduces its US dollar reserves in favour of Euros, all those cheap “Made in China” goods will suddenly become very expensive. The US standard of living will crash.

China has another problem. The Yuan is appreciating against the US dollar, despite being pegged. With US dollar reserves in excess of $1 trillion, the sinking dollar is causing the actual value of reserves to shrink. There have been moves to create a third global reserve currency known as the Asian Currency Unit. Iran has already indicated that it will trade in ACUs once the currency system is established. That would further serve to shatter the US dollar and the US economy.

The confluence of “Big Oil” demanding that they be allowed to extract Iraqi oil reserves with as much freedom as possible and the threat against US economic supremacy has caused the short-sighted neo-con establishment to resort to what they view as the easiest solution to their immediate problem: military force.

The US, in an attempt to break the back of OPEC and maintain global economic supremacy has only one short-term option – be in direct control of as much Middle East oil as possible. Controlling Iraq’s oil and manipulating the currency denomination of oil sales however, won’t be enough. There’s more.

The US is now meddling with the economies of the friendly Gulf states. In consonance with other Bush endeavours, it has a familiar ring to it: Operation Enduring Free Trade.

To be continued... (Watch for Part 4 in the weeks ahead)

While this post is filed under Dave's name, Cheryl shares an equal credit in its production as a series having contributed an enormous amount of research.