Iran’s New Oil Trade System Challenges U.S. Currency
Source: GlobalResearch.ca, October 27
Title: “Iran Next U.S. Target”
Author: William Clark
Faculty Evaluator: Phil Beard, Ph. D.
Student Researcher: Brian Miller
The U.S. media tells us that Iran may be the next target of U.S. aggression. The anticipated excuse is Iran’s alleged nuclear weapons program. William Clark tells us that economic reasons may have more to do with U.S. concerns over Iran than any weapons of mass destruction.
In mid-2003 Iran broke from tradition and began accepting eurodollars as payment for its oil exports from its E.U. and Asian customers. Saddam Hussein attempted a similar bold step back in 2000 and was met with a devastating reaction from the U.S. Iraq now has no choice about using U.S. dollars for oil sales (Censored 2004 #19). However, Iraq's plan to open an international oil exchange market for trading oil in the euro currency is a much larger threat to U.S. dollar supremacy than Iraq’s switch to euros.
While the dollar is still the standard currency for trading international oil sales, in 2006 Iran intends to set up an oil exchange (or bourse) that would facilitate global trading of oil between industrialized and developing countries by pricing sales in the euro, or “petroeuro.” To this end, they are creating a euro-denominated Internet-based oil exchange system for global oil sales. This is a direct challenge to U.S. dollar supremacy in the global oil market. It is widely speculated that the U.S. dollar has been inflated for some time now because of the monopoly position of “petrodollars” in oil trades. With the level of national debt, the value of the dollar has been held artificially high compared to other currencies.
The vast majority of the world’s oil is traded on the New York NYMEX (Mercantile Exchange) and the London IPE (International Petroleum Exchange), and, as mentioned by Clark, both exchanges are owned by U.S. corporations. Both of these oil exchanges transact oil trades in U.S. currency. Iran’s plan to create a new oil exchange would facilitate trading oil on the world market in euros. The euro has become a somewhat stronger and more stable trading medium than the U.S. dollar in recent years. Perhaps this is why Russia, Venezuela, and some members of OPEC have expressed interest in moving towards a petroeuro system for oil transactions. Without a doubt, a successful Iranian oil bourse may create momentum for other industrialized countries to stop exchanging their own currencies for petrodollars in order to buy oil. A shift away from U.S. dollars to euros in the oil market would cause the demand for petrodollars to drop, perhaps causing the value of the dollar to plummet. A precipitous drop in the value of the U.S. dollar would undermine the U.S. position as a world economic leader.
China is a major exporter to the United States, and its trade surplus with the U.S. means that China has become the world’s second largest holder of U.S. currency reserves (Japan is the largest holder with $800 billion, and China holds over $600 billion in T-bills). China would lose enormously if they were still holding vast amounts of U.S. currency when the dollar collapsed and assumed a more realistic value. Maintaining the U.S. as a market for their goods is a pre-eminent goal of Chinese financial policy, but they are increasingly dependent on Iran for their vital oil and gas imports. The Chinese government is careful to maintain the value of the yuan linked with the U.S. dollar (8.28 yuan to 1 dollar). This artificial linking makes them, effectively, one currency. But the Chinese government has indicated interest in de-linking the dollar-yuan arrangement, which could result in an immediate fall in the dollar. More worrisome is the potentiality of China to abandon its ongoing prolific purchase of U.S. Treasuries/debt—should they become displeased with U.S. policies towards Iran.
Unstable situations cannot be expected to remain static. It is reasonable to expect that the Chinese are hedging their bets. It is unreasonable to expect that they plan to be left holding devalued dollars after a sudden decline in their value. It is possible that the artificial situation could continue for some time, but this will be due largely to the fact that the Chinese want it that way. Regardless, China seems to be in the process of unloading some of its U.S. dollar reserves in the world market to purchase oil reserves, and most recently attempted to buy Unocal, a California-based oil company.
The irony is that apparent U.S. plans to invade Iran put pressure on the Chinese to abandon their support of the dollar. Clark warns that “a unilateral U.S. military strike on Iran would further isolate the U.S. government, and it is conceivable that such an overt action could provoke other industrialized nations to abandon the dollar en masse.” Perhaps the U.S. planners think that they can corner the market in oil militarily. But from Clark's point of view, “a U.S. intervention in Iran is likely to prove disastrous for the United States, making matters much worse regarding international terrorism, not to mention potential adverse effects on the U.S. economy.” The more likely outcome of an Iran invasion would be that, just as in Iraq, Iranian oil exports would dry up, regardless of what currency they are denominated in, and China would be compelled to abandon the dollar and buy oil from Russia—likely in euros. The conclusion is that U.S. leaders seem to have no idea what they are doing. Clark points out that, “World oil production is now flat out, and a major interruption would escalate oil prices to a level that would set off a global depression.”
Update by William Clark: Following the completion of my essay in October 2004, three important stories appeared that dramatically raised the geopolitical stakes for the Bush Administration. First, on October 28, 2004, Iran and China signed a huge oil and gas trade agreement (valued between $70 and $100 billion dollars.)1 It should also be noted that China currently receives 13 percent of its oil imports from Iran. The Chinese government effectively drew a “line in the sand” around Iran when it signed this huge oil and gas deal. Despite desires by U.S. elites to enforce petrodollar hegemony by force, the geopolitical risks of a U.S. attack on Iran’s nuclear facilities would surely create a serious crisis between Washington and Beijing.
An article that addressed some of the strategic risks appeared in the December 2004 edition of the Atlantic Monthly.2 This story by James Fallows outlined the military war games against Iran that were conducted during the summer and autumn of 2004. These war-gaming sessions were led by Colonel Sam Gardiner, a retired Air Force colonel who for more than two decades ran war games at the National War College and other military institutions. Each scenario led to a dangerous escalation in both Iran and Iraq. Indeed, Col. Gardiner summarized the war games with the following conclusion, “After all this effort, I am left with two simple sentences for policymakers: You have no military solution for the issues of Iran. And you have to make diplomacy work.”3
The third and final news item that revealed the Bush Administration’s intent to attack Iran was provided by investigative reporter Seymour Hersh. The January 2005 issue of The New Yorker (“The Coming Wars”) included interviews with high-level U.S. intelligence sources who repeatedly told Hersh that Iran was indeed the next strategic target.4 However, as a permanent member of the UN Security Council, China will likely veto any U.S. resolution calling for military action against Iran. A unilateral military strike on Iran would isolate the U.S. government in the eyes of the world community, and it is conceivable that such an overt action could provoke other industrialized nations to abandon the dollar in droves. I refer to this in my book as the “rogue nation hypothesis.”
While central bankers throughout the world community would be extremely reluctant to “dump the dollar,” the reasons for any such drastic reaction are likely straightforward from their perspective—the global community is dependent on the oil and gas energy supplies found in the Persian Gulf. Numerous oil geologists are warning that global oil production is now running “flat out.” Hence, any such efforts by the international community that resulted in a dollar currency crisis would be undertaken—not to cripple the U.S. dollar and economy as punishment towards the American people per se—but rather to thwart further unilateral warfare and its potentially destructive effects on the critical oil production and shipping infrastructure in the Persian Gulf. Barring a U.S. attack, it appears imminent that Iran’s euro-denominated oil bourse will open in March, 2006.5 Logically, the most appropriate U.S. strategy is compromise with the E.U. and OPEC towards a dual-currency system for international oil trades.
For additional information: Readers interested in learning more about the dollar/euro oil currency conflict and the upcoming geological phenomenon referred to as Peak Oil can read William Clark’s new book, Petrodollar Warfare: Oil, Iraq and the Future of the Dollar. Available from New Society Publishers: www.newsociety.com, www.amazon.com or from your local book store.
1. “China, Iran sign biggest oil & gas deal,” China Daily, October 31, 2004. http://www.chinadaily.com.cn/english/doc/2004-10/31/content_387140.htm.
2. James Fallows, “Will Iran be Next?,” Atlantic Monthly, December 2004, pgs. 97-110.
3. James Fallows, ibid.
4. Seymour Hersh, “The Coming Wars,” The New Yorker, January 24th-31st issue, 2005, pgs. 40-47. Posted online January 17, 2005. Online: http://www.newyorker.com/fact/content/?050124fa_fact
5. “Oil bourse closer to reality,” IranMania.com, December 28, 2004. Online: http://www.iranmania.com/News/ArticleView/Default.asp?ArchiveNews=Yes&NewsCode=28176&NewsKind=BusinessEconomy.