My latest short essay on unspoken petrodollar vs. petroeuro war in Iraq

[Petrodollar Warfare]

(For those who remember my earlier essay on this subject, here's my short essay with some commnents at the end by Michel Chossudovsky)


August 3, 2003

The Unspoken Oil Currency War:
U.S. Geostrategy and Macroeconomics behind the Iraq War

"If a nation expects to be ignorant and free, it expects what never was and never will be . . . The People cannot be safe without information. When the press is free, and every man is able to read, all is safe."

Those words by Thomas Jefferson embody the unfortunate state of affairs that have beset our nation. It is a disturbing prospect that the U.S.-led war against Iraq appears to have been waged under fraudulent premises. In May 2003 it was reported in the Washington Post the elite US military unit in charge of searching for Iraq’s elusive Weapons of Mass Destruction (WMD) was heading home empty handed. According to the article, the commander of this “frustrated” unit did not find any evidence of WMD. <1> It is increasingly obvious that Saddam did not possess an imminent or viable threat to the United States, but like his illusionary ties to Al Qaeda and 9/11, this administration did not let such facts get in their way.

Although hidden behind the massive propaganda campaign, one of the answers behind the Iraq enigma was the US dollar. Indeed, a core reason for the war was this administration's goal of preventing further Organization of the Petroleum Exporting Countries (OPEC) momentum towards the euro as an oil transaction currency standard. However, in order to pre-empt OPEC, the U.S. needed to gain geo-strategic control of Iraq along with its 2nd largest proven oil reserves. Moreover, U.S. Geostrategic control of Iraq’s vast oil reserves before the onset of global ‘Peak Oil’ was a second coalescing factor influencing the war (predicted to occur around 2010). During the 1990s, France, Russia and China obtained contracts from Saddam to explore Iraqi’s unclaimed oil fields once the UN sanctions were lifted. Their objections to the Iraq war may have been based on their own geostrategy regarding access to energy. The US led war in Iraq had less to do with any threat from Saddam’s old WMD program and certainly less to do to do with fighting terrorism than it had to do with the almighty dollar and securing Iraq’s oil. The Iraq war was a Geostrategic oil currency war – a war designed to keep the euro from becoming an alternative oil transaction currency, and to ensure US control of Iraq’s vast oil reserves.

Origins of the oil currency war

Various policy papers written by the neoconservative members of the Project for a New American Century (PNAC) have long advocated toppling Saddam Hussein. In 1998, Donald Rumsfeld, Paul Wolfowitcz and other PNAC members wrote a letter to President Clinton advocating regime change in Baghdad. These radical PNAC members later became the main architects of President Bush’s foreign policies. Moreover, it appears that Saddam sealed his fate with the neoconservatives in the Bush administration when he announced on September 24, 2000 that Iraq was no longer going to accept dollars for its oil sales, and price Iraqi oil in euros instead. Given that in the fall of 2000 the euro was at it’s lowest point to the dollar (82 cents), many analysts were rather surprised that Saddam was willing to give up approximately $270 million in annual oil revenue for what was essentially a political statement. <2> Nonetheless, pricing oil in euros was his symbolic way of protesting continued U.S. support of the 1991 U.N. sanctions against Iraq.

On November 6th, 2000 the U.N. administered “oil for food” program switched the currency accepted for Iraq’s oil sales from dollars to euros. <2> Saddam subsequently converted Iraq’s $10 billion reserve fund into euros as well. Since November 2000 Iraq’s oil purchases were routed into the U.N.’s “oil for food program,” and then into a euro-denominated account with a French bank. Somewhat ironically, the steady depreciation of the US dollar since late 2001 means that Saddam’s switch to the euro currency actually provided Iraqi’s ‘oil for food’ program with windfall profits totaling hundred of millions of euros. <3> However, this crucial detail appears to be a “quasi-state secret” within the U.S. government, as it exposes one of the core reasons for the war. The week after “major actions” in Iraq were declared over, the U.S. proposed U.N. Resolution #1483. This resolution passed on May 22, 2003, which achieved a number of goals: 1) lifted the 1991 sanctions despite that UN inspectors were not able to declare Iraq “free of WMD”, 2) phased out the ‘oil for food’ program, 3) provided US/UK control of Iraq’s oil revenue, and 4) created the “Iraqi Assistance Fund” that quietly converted Iraq’s oil currency back to the dollar. Incidentally, it appears that Saddam’s 1990s oil exploration contracts with France, Russia and China are now void.

Perhaps the urgency for the Iraq war was heightened by Iran, which in 2002 moved the majority of its reserve funds to euros. Given its strong trade relationship with the European Union, it would be logical for Iran to make the switch to euro oil pricing, if only from a purely monetary and economic perspective. Iran has discussed switching their oil pricing from the dollar to the euro for years, but it was somewhat surprising when Iran actually made the switch to euros during the 2003 Iraq war. <5> Furthermore, various foreign news sources have recently reported that Russia and Venezuela may soon switch their oil export pricing to the euro as well. <6><7> Due to the lack of US media coverage regarding these crucial “details,” one might wonder about “censorship” within our seven corporate-controlled media conglomerates?

Unfortunate structural imbalances within the U.S. economy

The U.S. economy has acquired significant structural imbalances, including our record-high $503 billion trade account deficit (5 % of GDP), a $6.5 trillion dollar deficit (60% of GDP), and the creation of record budget deficits of $455 and $475 billion over the next two years. The U.S. has unfortunately lost much of its manufacturing capability to foreign competition, and our economy appears to have simultaneous real estate and credit bubbles. These imbalances are being exacerbated by this administration’s ideologically driven tax cut and massive spending policies, further increasing our national debt. Why is the dollar still predominant despite these significant structural imbalances? While many Americans assume the strength of the dollar merely rests on our economic output (GDP), the ruling elites understand the dollar’s strength is founded on its two fundamentally unique advantages relative to all other hard currencies.

The majority of Americans are not cognizant to the fact that the ‘strength’ of our current economy is founded on the dollar’s two pivotal advantages following the ’Bretton Woods Conferences’ of 1944-45. First is the dollars role as the world’s dominant international reserve currency, which affords the US market with its “safe harbor” international status. The second crucial factor is the dollar’s role as the fiat and sole currency for global oil transactions. While the dollar’s role as the World’s International Reserve currency is well understood, the effects of the dollar as the monopoly currency for international oil transactions is rarely discussed. Nonetheless, one of the Federal Reserve’s worst nightmares would consist of an OPEC switch from dollars to euros as the international currency standard for oil purchases.

Origins of the Petrodollar

The valuation of the U.S. dollar was rather shaky after August 1971 when the Nixon had to “de-link” the dollar from the $35 per oz. “gold standard.” According to Dr. David Spiro’s research on this issue, in 1973-74 the Nixon administration sought to alleviate this situation by negotiating assurances from King Saud of Saudi Arabia to price oil in dollars only, and to invest their surplus oil proceeds in U.S. Treasury Bills. <7> In return the U.S. would protect the Saudi regime. These agreements created the phenomenon known as “petrodollar recycling,” and ensured a steady flow of oil and dollar denominated investments from Saudi Arabia. The U.S. prints billions of fiat dollars that U.S. consumers provide to other nations via trade when we purchase their imported goods. Hundreds of billions of these dollars become ‘petrodollars’ when used by nations to purchase oil/energy from OPEC producers. Approximately $600 to $800 billion petrodollars are annually re-cycled from OPEC sales and invested back into the U.S. via Treasury Bills or other U.S. dollar-denominated assets. This recycling bolsters the dollar’s international “liquidity” value.

The fact that all buyers of oil must first buy dollars to pay for the oil supports the U.S. dollar as the world’s reserve currency, and eliminates our currency risk for oil. Oil priced in “petrodollars” and the dollar as the world’s reserve currency has supported the value of our currency which by normal economic logic, given America’s trillions of dollars in trade deficits over the past decade, should have much less purchasing power than it currently possesses. An enlarged E.U. and a strong euro are challenging this arrangement.

However, as long as the dollar remains the monopoly oil transaction currency, its “storage of wealth” is theoretically derived from the simple fact that it purchases between 1.5 and 1.9 gallons of crude oil. (Using OPEC price range of $22-$28 per barrel, and 42 gallons in a production barrel). No other hard currency in the world can be used to directly purchase the most valuable commodity in the world – oil. This unique geo-political agreement with Saudi Arabia has worked to our favor for the past 30 years by eliminating any fluctuation (currency risk) in our oil purchases in relation to the dollar’s valuation, raising the entire asset value of all dollar denominated assets/properties, and facilitating the Federal Reserve in creating a truly massive debt and credit expansion (or `credit bubble' in the view of some economists). In effect, global oil consumption via OPEC “petrodollar recycling” provides a subsidy to the U.S. economy.

OPEC, the Euro, and E.U. enlargement

It is no secret that the Europeans created the E.U. in an effort to create a huge trading bloc and common currency that could directly compete with the large U.S. economy. Hence, the goals of the E.U. include the euro becoming an alternative international reserve currency. To facilitate that goal, the euro would have to become an alternative “storage of wealth” for oil transactions. Obviously the E.U. would like their oil purchases to be priced in the euro, as that would eliminate their currency risk, and stabilize their oil bill. Moreover, in December 2002 ten additional countries were approved for membership into the EU, which in 2004 will result in an aggregate GDP of $9.6 trillion - directly comparable to the U.S. s’ $10 trillion GDP.

Indeed, in a visit to Spain in April 2002, Mr Javad Yarjani, Head of OPEC's Market Analysis Department, illustrated the new dynamics of the E.U. and the euro currency in an important speech. He stated, “In the short-term, OPEC Member Countries (MCs), with possibly a few exceptions, are expected to continue to accept payment in dollars. Nevertheless, I believe that OPEC will not discount entirely the possibility of adopting euro pricing and payments in the future.” <8> Based on the details of this candid speech, momentum for OPEC to consider switching to the euro will grow once the E.U. expands in 2004 to 450 million people with the inclusion of 10 additional member states, and when the UK finally adopts the euro.

What would a collective switch by OPEC to pricing oil in euros instead of U.S. dollars mean to the US economy? Although a collective switch by OPEC would be extremely unlikely barring a dollar panic, it would cause oil-consuming nations to flush dollars out of their central bank reserve funds and replace these with euros. That event could cause an additional dollar devaluation anywhere from 20 to 40% (the dollar has already fallen 27% against the euro since late 2001). The consequences of such devaluation would be those one could expect from any currency collapse. Americans would pay dramatically more for the billions of dollars of our imported goods. Americans would pay dramatically more for energy – the cost to fly our planes, run our factories, heat our homes, and drive our cars. Our economy would grind into a deep recession, or possibly much worse. Perhaps fear of decreased investor and consumer confidence was the reason this issue regarding Iraq and euro is never discussed in the U.S. media.

Post-war Iraq

We are in the early stages of the occupation of Iraq, but the initial reaction of the Iraqi people does not inspire confidence. Undeterred by the emergence of guerilla warfare by nationalistic Iraqis and the resulting daily deaths of US soldiers, the neoconservatives are attempting to achieve their bold yet simple agenda - to use our new position in Iraq and the perpetual `war on terror' to deter other OPEC members from challenging the dollar’s “petrodollar” role. I hypothesize President Bush toppled Saddam in a pre-emptive attempt to thwart further movement by OPEC towards the euro, install a US puppet in Baghdad, rebuild Iraq’s oil production capability, initiate massive Iraqi oil production in far excess of OPEC quotas, to reduce global oil prices, and dissolve the OPEC cartel’s price controls. Removing Saddam was more of a victory for dollar hegemony and Bush’s re-election campaign than a victory in the fight against terrorism.

How does the Bush administration intend to break-up the OPEC cartel's price controls in a post-Saddam Iraq? First, Paul Bremer, the US installed proconsul is phasing-out the UN’s oil for food program, and implementing the ‘Iraqi Assistance Fund,’ which converted Iraq’s oil pricing back to the dollar. The next step of the U.S. rulers involves massive repairs and upgrades to Iraq’s oil production capability (via Halliburton), ultimately allowing a huge increase in oil production from about 2 million barrels per day to eventually 6 or 7 million by the end of this decade. Analysts have suggested such massive Iraqi oil production could lead to a reduction in the price of oil to the $15 per barrel range. This would result in the collapse of the OPEC cartel, and possibly negate their ability to switch oil transaction currencies.

An interesting piece of news regarding the dollar/euro issues and the potential political fallout from the Iraq war relates to Indonesia, a small OPEC producer with a Muslim majority. In April 2003 Indonesia’s state oil company, Pertamina, indicated that it may soon drop the US dollar for the euro regarding its oil and gas trades. <9> Additionally, other countries such as Malaysia and Libya may be considering dropping the dollar in favor of the euro. Perhaps these countries perceive that switching to the euro will eventually diminish the ability of the neoconservatives to pursue their militant global Imperialist goals. Indeed, a troubling “anti-dollar” movement may be slowly spreading. To illustrate, a Wall Street Journal reporter witnessed an anti-war street protest in Nigeria where the crowd shouted “Euro Yes! Dollar No!” <10>

The Petrodollar Paradox

The Bush administration probably believes that the occupation of Iraq and the installation of a large and permanent U.S. military presence in the Persian Gulf region will stop other OPEC producers from even considering switching the denomination of their oil sales from dollars to euros. However, using the military to enforce dollar hegemony for oil transactions strikes me as a rather unwieldy and inappropriate strategy. Despite the media reporting otherwise, the current wave of ‘global anti-Americanism’ is not against the American people or against American values - but against the hypocrisy of militant American Imperialism. Regrettably, President Bush and his neo-conservative advisors have chosen to apply a military option to a U.S. economic problem that requires a multilateral treaty. History may not look kindly upon their actions.

Paradoxically, for a variety of economic and political reasons, it appears that a growing number of OPEC producers in the Middle East, South America, and Russia may wish to transition their oil pricing from dollars to euros. Furthermore, we may be witnessing the regrettable emergence of a Euro-Russian-Sino-OPEC alliance in an effort to counter American expansionism. Hence, it is plausible that several OPEC members and non-OPEC producers such as Norway may re-denominate to the euro during this decade. In conclusion, the structural imbalances in the U.S. economy, along with the Bush administration's flawed tax, economic and most principally their overtly Imperialist foreign polices could jeopardize - or at least significantly diminish - the dollar's status as the “worlds reserve currency” and monopoly oil transaction currency. In the event this hypothesis materializes, the U.S. economy will require restructuring in some manner to account for the reduction of either of these two pivotal advantages. This will be an exceedingly painful process if it occurs in a disorderly manner, perhaps reminiscent of 1930’s Great Depression.

What is needed is a multilateral meeting of the G-8 nations to reform the international monetary system. Given that future wars will become more likely over oil and the currency of oil, the author advocates the global monetary system be reformed without delay. This would include the dollar and euro designated as equal international reserve currencies at parity, placed within an exchange band, and the creation of a dual-OPEC oil transaction currency standard. Additionally, the G-8 nations should also explore a future third reserve currency option regarding a yen/yuan bloc for East Asia. A compromise on the euro/oil issues via a multilateral treaty with a gradual phase-in of a dual-OPEC currency transaction standard seems inevitable. While these multilateral reforms may lower our excessive oil consumption and force the US government to actually engage in fiscally responsible policies, perhaps the benefits might also include reducing some of our global military presence, thereby reducing animosity towards U.S. foreign policies.

Secondly, it is hoped such reforms could improve the quality of our lives, and that of our children by motivating the U.S. to finally become more energy efficient. Creating balanced domestic fiscal polices while rebuilding our alliances with the E.U. and the world community is in the long-term national security interest of the U.S. Hopefully global monetary reform could mitigate future armed or economic warfare over oil, ultimately fostering a more stable, safer, and prosperous global economy in the 21st century.

Saving the American Experiment

Only time will tell what will happen in the aftermath of the Iraq war and U.S. occupation, but I am hopeful my research will contribute to the historical record and help others understand one of the important but hidden reasons for why we conquered Iraq. Until the U.S. agrees to negotiate a more balanced Global Monetary system and embarks on a viable National Energy Strategy, our nation will continue to pursue a hypocritical foreign policy that is incompatible with the ideas of the founding fathers regarding freedom and liberty. The current neoconservative foreign policies are creating “blowback” and “anti-American” sentiments around the world, and deep divisions with nations that are traditionally strong U.S. allies.

Compounding these foreign policy issues is the ongoing domestic political strategy of this administration to discourage dissent, and diminish our Constitutional rights through the so-called Patriot Acts I & II and various Executive Orders. <12> Quite frankly, in order to save the American Experiment and stop our slide towards an isolated Authoritarian State, we must elect an enlightened administration in 2004. The four difficult challenges of the next U.S. administration include; 1) negotiating global monetary reform, 2) broadly re-organizing U.S. fiscal policies, 3) developing a National Energy Strategy, and 4) attempting to repair our damaged foreign relationships with the UN, EU, Russia, and the Middle East. Sadly, the next U.S. President will have to undertake these challenges from a weakened position both economically and diplomatically. I do not envy the arduous journey that awaits the 44th President of the United States.

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References:

1. Gellman, Barton, ‘Frustrated, U.S. Arms Team to Leave Iraq: Task Force Unable To Find Any Weapons,’ Washington Post (May 11, 2003)
http://www.washingtonpost.com/wp-dyn/articles/A40212-2003May10.html

2 Recknagel, Charles, "Iraq: Baghdad Moves to Euro," Radio Free Europe (November 1, 2000)
http://www.rferl.org/nca/features/2000/11/01112000160846.asp

3. Neisloss, Liz, ‘Details of resolution to lift Iraq sanctions,’ CNN (May 8, 2003) http://www.cnn.com/2003/WORLD/meast/05/08/iraq.sanctions/

4 Islam, Faisal, Iraq nets handsome profit by dumping dollar for euro, The Observer (February 23, 2003)
http://politics.guardian.co.uk/Print/0,3858,4606565,00.html

5. ‘Iran offers oil to Asian union on easier terms,’ The Hindu Business Line’ (June 16, 2003)
http://www.thehindubusinessline.com/bline/2003/06/17/stories/2003061702380500.htm

6 ‘Russia Energy Export may soon shift from dollar to euro’ (German, Russian media, July 21-22) http://www.rumormillnews.com/cgi-bin/forum.cgi?read=34572

7. Zakaria, Tamin, ‘ Switch to euro may lead to global insecurity, ‘ Malaysiakini (June 18, 2003) http://www.malaysiakini.com/letters/200306180034650.php

8. Spiro, David E., ‘The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets,’ Cornell University Press, (1999)

9. ‘The Choice of Currency for the Denomination of the Oil Bill," Speech given by Javad Yarjani, Head of OPEC's Petroleum Market Analysis Dept, on The International Role of the Euro (Invited by the Spanish Minister of Economic Affairs during Spain's Presidency of the EU) (April 14, 2002, Oviedo, Spain)
http://www.opec.org/NewsInfo/Speeches/sp2002/spAraqueSpainApr14.htm

10. Pesek Jr., William, 'Indonesia May Dump Dollar; Rest of Asia Too?" Bloomberg, (April 17, 2003)
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_pesek&sid=anZbHuX9q8gI

11. Geewax, Marilyn, ‘Muslims eye euro as new oil currency’ (April 22, 2003)
http://www.smh.com.au/cgi-bin/common/popupPrintArticle.pl?path=/articles/2003/04/21/1050777210439.html

12. Patriot Act II analysis, Electronic Privacy Information Center (EPIC), (February 7, 2003)
http://www.epic.org/privacy/terrorism/patriot2.html


Copyright © 2003 W. Clark
Reprinted for Fair Use Only

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Further Commentary on the Dollar vs. Euro Issues:

Professor Michel Chossudovsky, the director of Canada’s Centre for Research on Globalization recently published a shortened version of the above essay in his organization’s magazine, Global Outlook, Issue #5. As an Afterward to my essay, he summarized the above complex issues with the following quote, and provided excerpts from his 2002 book: ‘War and Globalization, the Truth behind Sept 11’

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“The euro encroaches upon the hegemony of the US dollar. Wall Street is clashing with competing Franco-German financial interests. The war in Iraq pertains not only to control over oil reserves, but also the control over currency, money creation and credit.”

Euro versus Dollar: Rivalry Between America and “Old Europe”

By Michel Chossudovsky

The European common currency system has a direct bearing on strategic and political divisions. London’s decision not to adopt the common currency is consistent with the integration of British financial and banking interests with those of Wall Street, not to mention the Anglo-American alliance in the oil industry (BP, Exxon-Mobil, Texaco Chevron, Shell) and weapons production (by the “Big Five” US weapons producers plus British Aerospace Systems). This shaky relationship between the British pound and the US dollar is an integral part of the Anglo-American military axis.

What is at stake is the rivalry between two competing global currencies: the euro and the US dollar, with Britain’s pound being torn between the European and the US- dominated currency systems. In other words, two rival financial and monetary systems are competing worldwide for the control over money creation and credit. The geopolitical and strategic implications are far-reaching because that are also marked by splits on the Western defense industry and the oil business.

In both Europe and America, monetary policy, although formally under State jurisdiction, is largely controlled by the private banking sector. The European Central Bank based in Frankfurt – although officially under the jurisdiction of the EU – is, in practice, overseen by a handful of private European banks including Germany’s largest banks and business conglomerates.

The Federal Reserve Board is formally under State supervision – marked by a close relationship to the US Treasury. Distinct from the European Central Bank, the 12 Federal Reserve banks (of which the Federal Reserve Bank of New York is the most important) are controlled by their shareholders, which are private banking institutions. In other words, “the Fed” as it is known in the US, which is responsible for monetary policy and hence money creation for the nation, is actually controlled by private interests on Wall Street.

Currency Systems and ‘Economic Conquest’

Ultimately, control over national currency systems is the basis upon which countries are colonized. While the US dollar prevails throughout the Western Hemisphere, the euro and the US dollar are clashing in the former Soviet Union, the Balkans, Central Asia, sub-Saharan Africa and the Middle East.

In the Balkans and the Baltic States, central banks largely operate as colonial style ‘currency boards’ invariably using the euro as a proxy currency. What thus means is: German and European financial interests are in control of money creation and credit. That is, the pegging of the national currency to the euro – rather than the US dollar – means that both the currency and the monetary system will be in the hands of German-EU banking interests.

More generally, the euro dominates in Germany’s hinterland: Eastern Europe, the Baltic States and the Balkans, whereas the US dollar tends to prevail in the Caucasus and Central Asia. In these countries (which have military cooperation agreements with Washington) the dollar tends (with the exception of the Ukraine) to overshadow the euro.

The ‘Dollarization’ of national currencies is an integral part of America’s Silk Road Strategy. The latter consists in first destabilizing and then replacing national currencies with the American greenback over an area extending from the Mediterranean to China’s Western border. The underlying objective is to extend the dominion of the Federal Reserve System – namely, Wall Street – over a vast territory.

What we are dealing with is an ‘imperial’ scramble for control over national economies and currency systems, they seem to have also agreed on “sharing the spoils” - ie. establishing their respective “sphere of influence.” Reminiscent of the policies of ‘partition’ in the late 19th Century, the US and Germany have agreed upon the division of the Balkans; Germany has gained control over national currencies in Croatia, Bosnia and Kosovo where the euro is King. The US has established a permanent military presence in the region (i.e. the Bondsteel military base in Kosovo).
The above excerpts are from Michel Chossudovsky’s War and Globalization, the Truth behind Sept 11, Global Outlook, 2002.

[TrogL]

1. This supports my argument

that Canada should be thinking towards the Euro, not linking to the greenback.