10.03.2006
Why Iran's oil bourse can't
break the buck
By F William Engdahl
A number of writings have recently appeared
with the thesis that the announced plans of the Iranian government to institute
a Tehran oil bourse, perhaps as early as this month, is the real hidden reason
behind the evident march to war on Iran by the Anglo-American powers. The
thesis is simply wrong for many reasons, not least that war on Iran has been in
planning since the 1990s as an integral part of the United States' Greater
Middle East strategy.
More significant, the oil-bourse argument
is a red herring that diverts attention from the real geopolitical grounds
behind the march toward war that have been detailed on this website, including
in my piece, A high-risk game of nuclear chicken, which appeared in Asia Times
Online on January 31.
In 1996, Richard Perle and Douglas Feith,
two neo-conservatives later to play an important role in formulation of Bush
administration's Pentagon policy in the Middle East, authored a paper for then
newly elected Israeli prime minister Benjamin Netanyahu. That advisory paper,
"A Clean Break: A New Strategy for Securing the Realm", called on
Netanyahu to make a "clean break from the peace process". Perle and
Feith also called on Netanyahu to strengthen Israel's defenses against Syria
and Iraq, and to go after Iran as the prop of Syria.
More than a year before President George W
Bush declared his "shock and awe" operation against Iraq, he made his
now-infamous January 2002 State of the Union address to Congress in which he
labeled Iran, along with Iraq and North Korea, as a member of the "axis of
evil" trio. This was well before anyone in Tehran was even considering
establishing an oil bourse to trade oil in various currencies.
The argument by those who believe the
Tehran oil bourse would be the casus belli, the trigger pushing Washington down
the road to potential thermonuclear annihilation of Iran, seems to rest on the
claim that by openly trading oil to other nations or buyers in euros, Tehran
would set into motion a chain of events in which nation after nation, buyer
after buyer, would line up to buy oil no longer in US dollars but in euros.
That, in turn, goes the argument, would lead to a panic selling of dollars on
world foreign-exchange markets and a collapse of the role of the dollar as
reserve currency, one of the "pillars of Empire". Basta! There goes
the American Century down the tubes with the onset of the Tehran oil bourse.
Some
background considerations
That argument fails to convince for a
number of reasons. First, in the case of at least one of the oil-bourse
theorists, the argument is based on a misunderstanding of the process I
described in my book, A Century of War, regarding the creation in 1974 of
"petrodollar recycling", a process with which then-US secretary of
state Henry Kissinger was deeply involved, in the wake of the 400% oil-price
hike orchestrated by the Organization of Petroleum Exporting Countries (OPEC).
The US dollar then did not become a
"petrodollar", although Kissinger spoke about the process of
"recycling petrodollars". What he was referring to was the initiation
of a new phase of US global hegemony in which the petrodollar export earnings
of OPEC oil lands would be recycled into the hands of the major New York and
London banks and re-lent in the form of US dollar loans to oil-deficit
countries such as Brazil and Argentina, creating what soon came to be known as
the Latin American debt crisis.
The dollar at that time had been a fiat
currency since August 1971 when president Richard Nixon first abrogated the
Bretton Woods Treaty and refused to redeem US dollars held by foreign central
banks for gold bullion. The dollar floated against other major currencies,
falling more or less until it was revived by the 1973-74 oil-price shock.
What the oil shock achieved for the sagging
dollar was a sudden injection of global demand from nations confronted with
400% higher oil-import bills. At that time, by postwar convention and
convenience, as the dollar was the only reserve currency held around the world
other than gold, oil was priced by all OPEC members in dollars as a practical
exigency.
With the 400% price rise, nations such as
France, Germany and Japan suddenly found reason to try to buy their oil directly
in their own currencies - French francs, Deutschmarks or Japanese yen - to
lessen the pressure on their rapidly declining reserves of trade dollars. The
US Treasury and the Pentagon made certain that did not happen, partly with some
secret diplomacy by Kissinger, bullying threats, and a whopping-big US military
agreement with the key OPEC producer, Saudi Arabia. At that time it helped that
the shah of Iran was seen in Washington to be a vassal of Kissinger.
The point was not that the US dollar became
a "petro" currency. The point was that the reserve status of the
dollar, now a paper currency, was bolstered by the 400% increase in world
demand for dollars to buy oil. But that was only a part of the dollar story. In
1979, after the accession to power of the ayatollah Ruhollah Khomeini in Iran,
oil prices shot through the roof for the second time in six years. Yet,
paradoxically, later that year the dollar began a precipitous free-fall, not a
rise. It was no "petrodollar".
Foreign dollar-holders began dumping their
dollars as a protest against the foreign policies of the administration of US
president Jimmy Carter. It was to deal with that dollar crisis that Carter was
forced to bring in Paul Volcker to head the Federal Reserve in 1979. In October
1979 Volcker gave the dollar another turbocharge by allowing interest rates in
the US to rise some 300% in weeks, to well over 20%. That in turn forced global
interest rates through the roof, triggered a global recession, mass
unemployment and misery. It also "saved" the dollar as sole reserve
currency. The dollar was not a "petrodollar". It was the currency of
issue of the greatest superpower, a superpower determined to do what it needed
to keep it that way.
The
F-16 dollar backing
Since 1979 the US power establishment, from
Wall Street to Washington, has maintained the status of the dollar as
unchallenged global reserve currency. That role, however, is not a purely
economic one. Reserve-currency status is an adjunct of global power, of the US
determination to dominate other nations and the global economic process. The
United States didn't get reserve-currency status by a democratic vote of world
central banks, nor did the British Empire in the 19th century. They fought wars
for it.
For that reason, the status of the dollar
as reserve currency depends on the status of the United States as the world's
unchallenged military superpower. In a sense, since August 1971 the dollar is
no longer backed by gold. Instead, it is backed by F-16s and Abrams battle
tanks, operating in some 130 US bases around the world, defending liberty and
the dollar.
A
euro challenge?
For the euro to begin to challenge the
reserve role of the US dollar, a virtual revolution in policy would have to
take place in Euroland. First the European Central Bank (ECB), the
institutionalized, undemocratic institution created by the Maastricht Treaty to
maintain the power of creditor banks in collecting their debts, would have to
surrender power to elected legislators. It would then have to turn on the printing
presses and print euros like there was no tomorrow. That is because the size of
the publicly traded Euroland government-bond market is still tiny in comparison
with the huge US Treasury market.
As Michael Hudson explains in his brilliant
and too-little-studied work Super Imperialism, the perverse genius of the US
global dollar hegemony was the realization, in the months after August 1971,
that US power under a fiat dollar system was directly tied to the creation of
dollar debt. The US debt and the trade deficit were not the
"problem", they realized. They were the "solution".
The US could print endless quantities of
dollars to pay for foreign imports of Toyotas, Hondas, BMWs or other goods in a
system in which the trading partners of the United States, holding paper
dollars for their exports, feared a dollar collapse enough to continue to
support the dollar by buying US Treasury bonds and bills. In fact in the 30
years since abandoning gold exchange for paper dollars, the US dollars in
reserve have risen by a whopping 2,500%, and the amount grows at double-digit
rates today.
This system continued into the 1980s and
1990s unchallenged. US policy was one of crisis management coupled with
skillful and coordinated projection of US military power. Japan in the 1980s,
fearful of antagonizing its US nuclear-umbrella provider, bought endless
volumes of US Treasury debt even though it lost a king's ransom in the process.
It was a political, not an investment, decision.
The only potential challenge to the reserve
role of the dollar came in the late 1990s with the European Union decision to
create a single currency, the euro, to be administered by single central bank,
the ECB. Europe appeared to be emerging as a unified, independent policy voice
of what French President Jacques Chirac then called a multipolar world. Those
multipolar illusions vanished with the unpublicized decision of the ECB and
national central banks not to pool their gold reserves as backing for the new
euro. That decision not to use gold as backing came amid a heated controversy
over Nazi gold and alleged wartime abuses by Germany, Switzerland, France and
other European countries.
Since the shocks of September 11, 2001, and
the ensuing declaration of a US "global war on terror", including a
unilateral decision to ignore the United Nations and the community of nations and
go to war against a defenseless Iraq, few countries have even dared to
challenge dollar hegemony. The combined defense spending of all nations of the
EU today pales by comparison with the total of current US budgeted and
unbudgeted military spending. US defense outlays will reach an official,
staggering level of US$663 billion in the 2007 fiscal year. The combined annual
EU spending amounts to a mere $75 billion, and is tending to decline, in part
because of ECB Maastricht deficit pressures on its governments.
So today, at least for the present, there
are no signs of Japanese, EU or other dollar holders engaging in dollar-asset
liquidation. Even China, unhappy as it is with Washington's bully politics,
seems reluctant to rouse the American dragon to fury.
The
origins of the oil bourse
The idea of creating a new trading platform
in Iran to trade oil and to create a new crude-oil benchmark apparently
originated with the former director of the London International Petroleum
Exchange, Chris Cook. In a January 21 article in Asia Times Online (What the
Iran 'nuclear issue' is really about), Cook explained the background.
Describing a letter he had written in 2001 to the governor of the Iranian
Central Bank, Dr Mohsen Nourbakhsh, Cook explained what he advised then:
In this letter I pointed out that the structure of global oil markets
massively favors intermediary traders and particularly investment banks, and
that both consumers and producers such as Iran are adversely affected by this.
I recommended that Iran consider as a matter of urgency the creation of a
Middle Eastern energy exchange, and particularly a new Persian Gulf benchmark
oil price.
It is therefore with wry amusement that I have seen a myth being widely
propagated on the Internet that the genesis of this "Iran bourse"
project is a wish to subvert the US dollar by denominating oil pricing in
euros.
As anyone familiar with the Organization of Petroleum Exporting
Countries will know, the denomination of oil sales in currencies other than the
dollar is not a new subject, and as anyone familiar with economics will tell
you, the denomination of oil sales is merely a transactional issue: what
matters is in what assets (or, in the case of the United States, liabilities )
these proceeds are then invested.
A full challenge to the domination of the
US dollar as the world central-bank reserve currency entails a de facto
declaration of war on the "full-spectrum dominance" of the United
States today. The mighty members of the European Central Bank Council well know
this. The heads of state of every EU country know this. The Chinese leadership
as well as the Japanese and Indians know this. So does Russian President
Vladimir Putin.
Until some combination of those Eurasian
powers congeal in a cohesive challenge to the unbridled domination of the
United States as sole superpower, there will be no euro or yen or even Chinese
yuan challenging the role of the dollar. The issue is of enormous importance,
as it is vital to understand the true dynamics bringing the world to the brink
of possible nuclear catastrophe today.
As a small ending note, a good friend in Oslo recently forwarded me an article from the Norwegian press. At the end of December, Sven Arild Andersen, director of the Oslo bourse, announced he was fed up with depending on the London oil bourse trading oil in dollars. Norway, a major oil producer, selling most of its oil into euro countries in the EU, he said, should set up its own oil bourse and trade its oil in euros. Will Norway - a member of the North Atlantic Treaty Organization - become the next target for the wrath of the Pentagon?