Iranian Oil Exchange
                 …Declaration of War?

The petroeuro threat
By Joel Bainerman

This article originally appeared in Haaretz and is reprinted with the author's permission.

Most Israelis believe that nuclear ambitions are the reason the U.S. is so annoyed with Iran. But there could be another reason entirely for war-drums in Washington: an existential threat in the form of the IOB.

On March 20th, 2006, Iran is planning to open an International Oil Bourse (IOB) that would trade oil -- priced in euros.

The world currently conducts all oil trades in U.S. dollars. In fact the term petro-dollar was coined in 1973, to mean a dollar that a country earns through selling oil.

The Iranians have developed a petroeuro system for oil trade which, when enacted, could threaten U.S. dollar supremacy. If the IOB only accepts the euro for oil, any country could buy oil from any oil-producing nation using euros instead of dollars. The Iranian plan is not limited to purchasing one oil-producing country's oil with euros.

The petroeuro would create a global alternative to the U.S. dollar and further momentum at OPEC to create an alternate currency for oil purchases worldwide. China, Russia, and the European Union are currently evaluating the Iranian plan to exchange oil for euros.

The IOB would compete with New York's NYMEX and London's IPE with respect to international oil trades - using a euro-denominated international oil-trading mechanism. Without some form of U.S. intervention, the euro would establish a firm foothold in the international oil trade.

The threat to the U.S.

Why does the U.S. need to keep oil priced in dollars?

With oil trade exclusively in dollars, the world's countries must maintain a certain level of U.S. currency in the reserves of their central bank to finance oil purchases.

At the end of 2000, the Bank for International Settlements estimated world dollar reserves of $1.45 trillion, or 76% of the total world reserves of $1.09 trillion.

If oil was priced in other currencies, most countries would have little need to stockpile dollars. All the currency the U.S. government has printed over the years would be of value only in the U.S. This would flood the U.S. with dollars and trigger huge inflation.

In addition, current and future trade and current account deficits would no longer be financed by non-U.S. nations who purchase American Treasury bills and other U.S.-dominated debt instruments.

In other words, the U.S. would no longer be an economic superpower and be able to finance the massive trade and budget deficits it is currently running.

The United States must borrow $665 billion annually from foreign lenders to finance the gap between payments to and receipts from the rest of the world. With no improvement in the current account deficit, the external debt of the United States will rise from 24% of total U.S. gross domestic product (GDP) at the end of 2003 to 64% by 2014.

The cost of servicing just the additional debt incurred from 2004 to 2014 will rise to 1.7% of GDP by 2014, the equivalent of $250 billion in 2004 dollars.

Oil currency and foreign policy

In a brilliant essay on this subject entitled A Macroeconomic and Geostrategic Analysis of the Unspoken Truth, economist William Clark and author of Petrodollar Warfare: Oil, Iraq and the Future of the Dollar, wrote in January 2003 that the greatest nightmare over at the Fed is that OPEC will switch from a dollar standard to a euro standard.

"Iraq actually made this switch," Clark points out. "The real reason the Bush administration wants a puppet government in Iraq or more importantly, the reason why the corporate-military-industrial network wants a puppet government in Iraq is so that it will revert back to a dollar standard."

Evidence of the U.S. acting out of concern over their dollar hegemony can be seen in the war with Iraq.

In September 2000 Iraq began selling all oil exports in euros. The euro then increased in value which added much profitability to European operations. The U.S. invaded and shortly thereafter (four months to be exact) reverted all Iraqi oil trades back to the U.S. dollar as well as nullifying previous foreign contracts.

Two months after the United States invaded Iraq, the Oil for Food Program was ended, the country's accounts were switched back to dollars, and oil began to be sold once again for U.S. dollars. No longer could the world buy oil from Iraq with the euro.

The U.S. dollar's global supremacy was restored.

Well-known Russian oil economist, Dr. Krassimir Petrov, agrees with Clark's conclusions. He says that the Chinese and the Japanese will also accept the new exchange, because it will allow them to drastically lower their enormous dollar reserves and diversify with euros, thus hedging against the depreciation of the dollar.

One portion of their dollars they will still want to hold onto; a second portion of their dollar holdings they may decide to dump outright; a third portion of their dollars they will decide to use up for future payments without replenishing those dollar holdings, but building up instead their euro reserves, Petrov predicts.
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The Russians have inherent economic interest in adopting the euro, he says: the bulk of their trade is with European countries, with the oil exporters, and with China and Japan. "Adoption of the Euro will immediately take care of the first two blocs, and will over time facilitate trade with China and Japan," he postulates. "The Russians seemingly detest holding depreciating dollars, for they have recently found a new religion with gold. Russians have also revived their nationalism, and if embracing the euro will stab the Americans, they will gladly do it and smugly watch the Americans bleed."

Moral of the story: Don't always believe what you read in the papers.

Views expressed by the author do not necessarily reflect those of Israel Insider.