It Was Always About Oil: The Iran extra.

Why are Bush and the neocons continuing to beat war drums on Iran? Simple. The strength of the US dollar and the trading of US dollars for oil. Libby at Newshoggers reacted with some understandable shock and asks:

I used to hear a lot of speculation that the real reason we invaded Iraq was because Saddam was proposing the same sort of scheme. Could this be why the administration continues to overstate the threat of Iran?

What scheme, you ask? Well, Iran has just announced that they will not take US dollars for crude oil.

Major crude producer Iran has completely stopped carrying out its oil transactions in dollars, Oil Minister Gholam Hossein Nozari said on Saturday, labelling the greenback an "unreliable" currency.

"At the moment, selling oil in dollars has been completely halted, in line with the policy of selling crude in non-dollar currencies," Nozari was quoted as saying by the ISNA news agency.

"The dollar is an unreliable currency, considering its devaluation and the oil exporters' losses," he added.

The world's fourth largest oil exporter, Iran has massively reduced its dependence on the dollar over the past year in the face of US pressures on its financial system and the fall in the dollar.

So let's go back a little ways and look at what happened in Iraq. I posted this in January.

In October, 2000 Saddam took the radical decision to move the currency of petroleum sales under the Oil-For-Food program from US dollars to Euros. He went even further by having the UN Oil-For-Food reserve fund converted to Euros. 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 currency conversion advantage recognized by Iraq was not lost on OPEC. Nor was it lost on the Bush administration. If OPEC started to move, however slowly, to Euros the US dollar would lose its supremacy in the world and the US economy would suffer. Imported goods, relatively cheap as long as the US dollar remained the dominant oil-trading currency, would shoot up in price. Britain shared in the concern. The UK trades oil for US dollars and one of the two major international oil exchanges is based in London, England. The slowness of Britain in converting to Euros as a national currency leaves them holding US dollar reserves. As a net importer of oil this works for them on the world market – unless major suppliers convert to Euros. Iraq, however, had tipped over the can and Saddam’s decision to convert from petro-dollars to petro-euros, even if it was purely emotional, had two major effects: it caused a strengthening of the Euro against the US dollar, impacting the US economy and, it put him and Iraq in a somewhat better light with the Europeans whose multi-national currency he was now using. The fact that a dollar to euro conversion had already taken place in Iraq gave the US and the UK nightmares.

It was after that happened, and Saddam had converted Iraq's oil trading currency, that the Bush administration started to rumble on about Iraq being militarily dangerous.

Far from being a scheme Saddam proposed, he actually took it one further and made the conversion complete by booking Iraq's oil revenues in Euros instead of US dollars.

We are all very well aware that before the al Qaeda attack on the US and before Afghanistan had ever made any significant appearance on the Bush administration radar, Bush and the neocons were formulating plans to remove Saddam from power.

Thus began the portrayal of Iraq as a military threat to the region and the world. The truth is, Iraq was militarily neutered and represented no threat at all. The intelligence used to support the neocon assertion to the contrary was, as we now know, cherry-picked, twisted and manufactured.

What Iraq represented was an economic threat. Not that Saddam's minimal oil production was having any serious effect on overall global supply, but that his conversion to Euros was providing an example for other OPEC producers. If others followed his path, the effect on the US dollar would be crippling.

The US relies on crude oil being traded in US dollars. It's a part of their economy. As a nation with a huge balance of trade deficit the only way the dollar retains any strength is if other countries hold US currency reserves. By making the US dollar the booked crude oil trading currency, the dollar retains strength. The consumer economy of the United States continues to hum along nicely because the US dollar, the strength of which requires other countries to demand them for payment and then use them to purchase other commodities, is the dominant global currency based solely on its demand outside the United States. Without that global demand the strength of the US dollar would plummet to a level which reflects US industrial output and its enormous debt.

Iran is now making the same moves Saddam made. This time however, Iran is not an insignificant player. At over 1.5 gigabarrels of production per year, Iran's conversion of currency is already having an effect on the US dollar. With the world's second largest known reserve of conventionally extracted crude oil (Canada has the second largest reserve if non-conventional extraction is the measure) Iran has an impact on both the global supply and the US dollar.

Despite the fact that the US prohibits the import of Iranian crude oil into the States, the US continued to reap the reward of a strong dollar as long as all other importers were required to book and pay for Iranian crude oil in US funds.

There is another similarity with Iraq that is causing the Bush administration to continue suggesting that Iran needs to be bombed/invaded/regime-changed.

Iraq had severe limitations imposed on it after the 1991 Gulf War. Since that time, Iraq has never reached its potential in oil production. European oil companies had started to make inroads in Saddam's Iraq in terms of rebuilding oil production infrastructure. Once sanctions had been eased on Iraq, (and they eventually would have been), it would leave European oil companies with exclusive access to the world's third largest conventional crude supply in a country that traded, not in US dollars, but in Euros. The next logical step would be the introduction of an oil exchange, without the US dollar as the trading currency.

Iran is in a similar situation. Its oil production infrastructure is in terrible condition. Since the fall of the Shah, Iran's oil output has fallen sharply and never recovered. To rebuild its oil infrastructure it would be a sure bet that Iran would turn to almost any country other than the United States. Iran has been working feverishly to set up an oil bourse which trades in a currency other than the US dollar.

With already declaring that the US dollar is no longer an acceptable exchange for Iranian crude oil, Iran is starting to look very much like Iraq did in 2000/2001.

A Bush administration target.