While most Americans are currently pre-occupied with the disastrous aftermath of hurricane Katrina, and the subsequent rise in domestic gasoline prices, it is possible that by next year at this time oil priced around $65 per barrel may have seemed like quite a bargain.  It appears that next year oil from the second largest OPEC oil producer could be priced on the international markets for €45 - €50 (euros) per barrel.  This event could introduce petrodollar versus petroeuro currency hedging, and fundamentally new dynamics to the biggest market in the world - global oil and gas trades. 

Contemporary warfare has traditionally involved underlying conflicts regarding economics and resources.  Today these intertwined conflicts involve not only control over oil supplies, but also international currencies.  Current events appear to be revolving around the complex nexus of the imminent peak in global oil production, and the erosion of the U.S. dollar as the World’s International Reserve currency.  International fissures between the U.S. and the European Union., Russia, and China became visible during 2002-2003, resulting in the failure of the Bush administration to gain U.N. authorization for the impending invasion of Iraq.

 Indeed, current geopolitical tensions between the United States and Iran extend beyond the publicly stated concerns regarding Iran’s nuclear intentions, and likely include a proposed Iranian “petroeuro” system for oil trade.  Similar to the Iraq war, prospective military operations against Iran relate to the macroeconomics of ‘petrodollar recycling’ and the unpublicized but real challenge to U.S. dollar supremacy from the euro as an alternative oil transaction currency.

Understanding these underlying issues of global oil production and oil transaction currency is critical if one wishes to understand recent events in Iraq — and current U.S. antagonism towards Iran.  Although completely censored by the five U.S. media conglomerates, in mid-2003 Iran broke from traditional and began accepting euros as payment for it oil exports from its E.U. and Asian customers.[1] 

Once the petrodollar recycling system begins to erode via the emergence of a broad-based petroeuro transaction exchange, the Federal Reserve will no longer be able to effortlessly expand its debt-financing via issuance of Treasury bills, and the dollar’s international demand/liquidity value will begin to fall. This will ultimately force the U.S. to significantly change its current tax, debt, trade, and energy policies, all of which are severely unbalanced. 

Saddam Hussein attempted a similar bold step back in 2000, and it remains a quasi-state secret within American society that the major U.S. petroleum conglomerates continued to purchase about 65% of Iraqi’s oil exports from 2001 to early 2003 – but with euros – not dollars.[2]  As I hypothesized in 2002, this was unacceptable, and Saddam’s decision was ultimately met with a devastating reaction from the U.S. government via a “shock and awe” campaign [3]  Upon toppling Iraq, the Bush administration immediately dismantled the Oil-For-Food program and quietly re-converted Iraq’s oil transaction currency back to the U.S. dollar – which had the rather adverse effect of wiping out 13% of Iraq’s oil export profits due to the euro’s higher valuation to the dollar in mid-2003. [4]  While Iraq was given no choice about using U.S. dollars for its oil sales, Iran is about to commit a far greater “offense” 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.”[5] The vast majority of the world’s oil is traded on the New York NYMEX (Mercantile Exchange) and the London IPE (International Petroleum Exchange), both of which are operated by an Atlanta-based U.S. conglomerate. These oil exchanges transact oil trades in the dollar. Tehran’s plan to open an oil exchange that utilized the euro for global oil trades represents a significant obstacle towards stated neoconservative goals of U.S. global domination.  

Moreover, the euro’s higher valuation relative the dollar also explains why Russia, Venezuela and perhaps even Saudi Arabia have expressed interest in moving towards a petroeuro system for oil transactions.[6][7] Without a doubt, a successful Iranian oil bourse may create a shift away from U.S. dollars and towards euros in the oil market.  The drop in demand for petrodollars would cause the value of the dollar to plummet further, thereby undermining the U.S. position as the global economic leader.

Further evidence of the dollar’s erosion the global financial markets occurred in July 2005 when China announced that it was slightly re-valuing the yuan/RNB currency.  While the Bush administration indicated this was a “step in the right direction,” China’s re-valuation was not nearly as important as its decision to divorce itself from a dollar peg by moving towards a “basket of currencies” – likely to include the yen, euro, and dollar.[8]  Incidentally, the Chinese re-valuation immediately lowered their monthly imported “oil bill” by 2%, given that oil trades are still priced in dollars, but it is unclear how much longer this monopoly will last.

Concerning Iran, the irony is that leaked reports of U.S. plans for intervening either covertly or overtly in Iran – including a potential aerial attack on suspected nuclear facilities – would likely put pressure on the Chinese to abandon their support of the dollar. 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 $650 billion in dollar assets).

In October 28, 2004, Iran and China signed a huge oil and gas trade agreement, valued between $70 - $100 billion dollars.[9]   It should also be noted that China currently receives 13% of its oil imports from Iran, and with this deal the Chinese government effectively drew a “line in the sand” around Iran.  Despite desires by U.S. elites to enforce the monopoly petrodollar recycling system, the geopolitical risks of a U.S. aerial attack on Iran’s nuclear facilities – while simultaneously attempting to prevent the Iranian oil Bourse from initiating a euro-based system for oil trades – would surely create a crisis between Washington and Beijing. Given the Bush administration’s complete lack of interest or skill regarding “soft power” diplomacy, it seems unlikely they could use the U.N. Security Counsel to thwart the opening of the Iranian bourse in 2006.

In recent years an interesting conceptual bias has gained prominence in stateside commentary, especially within right-wing ideology, that appears to manifest on two levels.  On the one hand, there’s a singular fixation with the US military element of geopolitical relations, to the relative disregard for the economic dimension. On the other hand, there’s a certain presumption that the U.S. can pursue its geopolitical aims with impunity, while other nations will be restrained by economic considerations. 

This segues into the more long-standing assumption that other major powers would be unable to overcome their own rivalries in such manner as to present effective opposition to U.S. interests; assuming that America will be able to play one against the other to our own advantage, in perpetuity. During 2002-2003 this flawed logic failed miserably when the Bush administration was unable to manipulate the members of the EU, Turkey, Mexico, Russia and China over U.S. plans to remove Saddam Hussein by military force.[10]  Tragically, we are still paying the price in blood and treasure for their arrogance.

In reality, given the events in Iraq before, during, and after the war, this belief may prove to be the key false assumption being made by the Bush administration and various neoconservative “strategists.” Based on my analysis of statements by various governments, it is clear the E.U., China, Russia and much of the world view neoconservatives as pursuing destabilizing and dangerous policies.[11]  Advocates of the Project for a New American Century (PNAC) and other far-right think tanks such as the American Enterprise Institute (AEI) openly call for U.S. “global leadership” based upon an overt U.S. military deployments designed to further solidify our hegemonic position by seizing control of the Middle East’s energy supply, establishing satellite military bases around Russia and the Caspian region, conducting belligerent naval maneuvers off the coast of China, undermining the emergence of a cohesive, powerful E.U. rival, while at the same time ignoring international law and abandoning multiple international treaties. 

Yet, from all appearances this neoconservative geostrategy is being recklessly pursued without analysis, or even tacit recognition, of the subsequent unfolding economic and geopolitical consequences. 

The ugly truth of the matter is that if China ever becomes sufficiently perturbed by our current antagonistic naval activities (i.e. Summer Pulse ’04) [13], they could afford to stop buying billions of our debt every month, or if really upset by a US aerial attack on their principle oil export partner (Iran), they could afford to show their displeasure by suddenly unloading perhaps $300 billion of their surplus dollars.  The immediate effect would create a global dollar crisis, if not a dollar crash, likely forcing Russia and OPEC to abandon the dollar for a monopoly “petroeuro” oil pricing and transaction currency.  A punitive, collective switch, would ultimately render the US Navy in a similar state to the once mighty Soviet Fleet – rusting in port due to a collapsed economy.  

Clearly, a unilateral military strike on Iran without solid proof of a nuclear weapons program 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.  Global oil production is reportedly “flat out,” and is projected to begin slowly declining after 2007.[14]  Therefore, the world community will not tolerate the U.S. government unleashing a proxy military operation against Iran that could make the recent disaster wrought by hurricane Katrina insignificant in comparison.

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 as a desperate attempt 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. Logically, the most appropriate U.S. strategy is compromise with the E.U. and OPEC towards a dual-currency system for international oil trades.  Another imperative is an International treaty to allocate oil depletion in the post-Peak Oil period.  The Association for the Study of Oil and Gas Depletion (ASPO) has developed the foremost oil Depletion Protocol, also known as the Uppsala or Rimini Protocol [15].

As outlined in Petrodollar Warfare, my analysis of current U.S. geostrategic, monetary, and energy polices suggests that the 21^st century will be much different from the previous century, with one possible exception. The first half of the 20^th century was filled with unprecedented levels of violence and warfare on a global scale (15 million killed in WW I, 55 million in WW II). The first two decades of the 21^st century present challenges that could also result in the unleashing of another period of catastrophic human suffering and destruction. In the post-nuclear age, this must not be allowed to transpire. In order to avoid such a terrible fate in this new century, American citizens, more than any others, must accept and undertake sacrifices for the betterment of humanity; we must once again begin living within our means relative to both fiscal and energy policies. It is my hope the beginning of the 21^st century may be crafted by the international community into a more energy sustainable, economically stable, and less violent period than the opening decades of the previous century. Humanity and morality demand nothing less.

“The significant problems we face can not be solved at the same level of thinking we were at when we created them.”

– Albert Einstein

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Footnotes:

[1]           C. Shivkumar, “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

[2]           Faisal Islam , “When Will We Buy Oil in Euros?,” [UK] Observer, February 23, 2003

http://observer.guardian.co.uk/business/story/0,6903,900867,00.html

[3]           William Clark, “Revisited - The Real Reasons for the Upcoming War with Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth,” January 2003 (updated January 2004) http://www.ratical.org/ratville/CAH/RRiraqWar.html               

[4]           Carol Hoyos and Kevin Morrison, "Iraq returns to the international oil market," Financial Times, June 5, 2003

Also see: Faisal Islam, “Iraq nets handsome profit by dumping dollar for euro,” [UK] Guardian, February 16, 2003
http://observer.guardian.co.uk/iraq/story/0,12239,896344,00.html

[5]           “Oil bourse closer to reality,” IranMania.com, December 28, 2004.  Also see: “Iran oil bourse wins authorization,” Tehran Times, July 26, 2005

[6]           Coilin Nunan, “Petrodollar or Petroeuro? A New source of global conflict,” Feasta Review 2, 2004, http://www.feasta.org/documents/review2/nunan.htm.

Also see: Catherine Belton, “Putin: Why Not Price Oil in Euros?” Moscow Times, October 10, 2003, http://www.moscowtimes.ru/stories/2003/10/10/001.html or archived, http://www.globalpolicy.org/socecon/crisis/2003/1010oilpriceeuro.htm

[7]           James McInerney, “Saudi Sees Stronger Euro Role,” Middle East Finance and Economy, AME Info, January 12, 2005, http://www.ameinfo.com/news/Detailed/52008.html

[8]           Richard S. Appel, “The Repercussions from the Yuan’s Revaluation,” kitco.com, July 27, 2005

http://www.kitco.com/ind/appel/jul272005.html

[9]           “China, Iran sign biggest oil & gas deal,” China Daily, October 31, 2004.  Online:  http://www.chinadaily.com.cn/english/doc/2004-10/31/content_387140.htm

[10]         Novakeo, “Currency Wars: Euro vs. Dollar,” Etherzone.com, May 12, 2003

http://www.etherzone.com/2003/nova051203.shtml

Also see: “The Strategy Behind Paris-Berlin-Moscow Tie,” Intelligence, 447, February 20, 2003, www.intelligence.com.

[11]         Pat Rabbitte, “Iraq Being Used by the US to Flex Its Political Muscles,” Irish Times, March 31, 2003 http://www.ireland.com/focus/iraq/comment/comment3103b.htm 

Also see: “China Lays Into ‘Bush Doctrine,’ ahead of US Poll,” Reuters, October 31, 2004.

[12]         John M. Glionna, “China, US Each Hold Major War Exercises,” Global Policy Forum, July 20, 2004, http://www.globalpolicy.org/empire/intervention/2004/0721chinaus.htm

[13]         Robert D. Kaplan, “How We Would Fight China,” The Atlantic, June 2005

http://www.theatlantic.com/doc/prem/200506/kaplan

[14]         “New Oil Projects Cannot Meet World Needs This Decade,” Oil Depletion Analysis Center (ODAC), November 16, 2004

                http://www.odac-info.org/bulletin/documents/MegaProjRelease16-11-04.pdf

[15]         Association for the Study of Oil and Gas Depletion (ASPO), International Workshop IV, May 19-20, 2005, Lisbon, Portugal

http://www.cge.uevora.pt/aspo2005/topics.php

About the Author: William Clark has received two Project Censored awards for his research on oil currency conflict, and has recently published a book, Petrodollar Warfare: Oil, Iraq and the Future of the Dollar (New Society Publishers, 2005).  He is an Information Security Analyst, and holds a Master of Business Administration and Master of Science in Information and Telecommunication Systems from Johns Hopkins University.  He lives in Maryland.  Website: www.petrodollarwarfare.com

Copyright © 2003-2005 William Clark
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