Oil bourses and petrodollars
March 26th, 2006
I’ve read some interesting and scary things about Iraq and the Middle East recently, which have made the political situation over there a little more clear. First, just in case you’re not convinced that WMD’s were cooked-up to justifiy the war in Iraq, an article in Harper’s Magazine makes it painfully clear:
Before reading the report, I wouldn’t have expected to find myself thinking that [impeachment] was either likely or possible; after reading the report, I don’t know why we would run the risk of not impeaching the man. We have before us in the White House a thief who steals the country’s good name and reputation for his private interest and personal use; a liar who seeks to instill in the American people a state of fear; a televangelist who engages the United States in a never-ending crusade against all the world’s evil, a wastrel who squanders a vast sum of the nation’s wealth on what turns out to be a recruiting drive certain to multiply the host of our enemies.
So what was the actual agenda? It turns out to be about oil, but not in the simplistic way that I’d thought. In order to understand the reason fully it’s necessary to know more about the US dollar, and why the dollar is the World’s default reserve currency. Energy bulletin describes this in considerable detail, but the short version is this: Because oil is only traded in dollars, it’s necessary for oil importers (i.e. effectively everyone) to maintian a large dollar reserve. Demand is therefore high for the dollar because everyone needs oil, and because the dollar is not linked to gold (i.e. America does not commit to giving you some actual yellow metal if you walk up to the fed with a wheelbarrow of cash), America can just keep on printing notes at zero cost, and importing goods with the cash. But if the dollar isn’t linked to gold, what backs the currency? In reality it’s the fact that you can always get oil for your bucks that gives the dollar it’s value.
But what if the oil producers were to start accepting currencies other than the $US for oil? The need to maintain dollar reserves would lessen, demand for the dollar would drop like a stone, oil consumers would dump their dollar reserves, and the dollar would weaken catastrophically. This is against the existing background of an apallingly large US budget deficit, and bubbles in the US property and stock markets. It would all come crashing down if the euro became established as a currency for trading oil. The hegemony of the dollar would be over, and with it, America’s time as the most powerful nation on the planet. It starts to become clear why America would go to extreme lengths to protect this position.
But could it ever happen? It already has: as Indymedia Ireland reports:
In November of 2000 another country did in fact stop accepting dollars in payment for its oil and switched the currency required to purchase its oil to the euro. By 2001 that country had converted $10 billion in reserves to euro, essentially abandoning the dollar. That country was Iraq and that country was subsequently invaded by the US and its allies.
Within two months of the invasion, Iraq’s reserves were converted back to dollars and Iraqi oil became tradable using dollars once again. Coincidentally (or maybe not), the United States’ latest period of recession started and finished within this two-and-a-half year timeframe.
Can this really be true? It certainly makes a lot more sense to me than the stated reasons. More here (long).
All the sabre-rattling about the nuclear ambitions of Iran takes on a new significance when you read that on March 20th Iran opened its own oil bourse priced in euros.
There’s one other interesting occurence according to this alarm put out by Europe2020 / LEAP (some sort of think-tank, as far as I can make out): On March 26th the US Federal reserve bank discontinues publication of it’s M3 indicator, the most reliable measure of the amount of dollars currently in circulation [definition - scroll down]. This can only be, the article explains, to hide the ‘monetarisation’ of the US debt, i.e. undertaking to not pay it back. The alarm makes fascinating and frightening reading. If you can’t be bothered reading anything else I’ve linked to here, read this. Excerpt:
(LEAP/E2020) now estimates to over 80% the probability that the week of March 20-26, 2006 will be the beginning of the most significant political crisis the world has known since the Fall of the Iron Curtain in 1989, together with an economic and financial crisis of a scope comparable with that of 1929.
Scary stuff, but if you’re reading this before bedtime, here’s a counter opinion at Asia Times to help stave off the nightmares. In the mean time, I’m keeping my eyes open.