Raise the Hammer
In a move seven years in the making, Iran has stopped all sales of oil in US dollars, electing to sell other countries instead.
Iran has been selling oil for other currencies for a few years, but it is taking the next step and phasing out dollar sales completely. If you want to buy oil from Iran, you will need euros or yen.
To understand just how significant this is, look at this table of current account balances by country.
The US, with four percent of the world's population, has a current accounts deficit of $829 billion.
A nation's current accounts is the difference between the value of goods and services it exports and the value of goods and services it imports. A deficit means a country imports more than it exports.
The US current accounts deficit is ten times higher than the country with the next highest deficit (Spain) and double the total current accounts deficits of the other 89 countries with deficits.That's right: the US is singlehandedly responsible for two thirds of the entire planet's current accounts deficits.
Of the 60 countries with current accounts surpluses, the top two are Japan and China, with surpluses of $165.5 billion and $160.8 billion, respectively.
These two countries are major holders of dollar-denominated securities, and both have been slowly, quietly reducing their dollar holdings.
So how is Iran refusing to sell oil for dollars is connected to the US current accounts deficit?
Normally, when a country runs a current accounts deficit, it must pay the difference in cash. However, since the early 1970s, the US has had a special deal.
When OPEC formed, the US government negotiated a deal that all OPEC countries would only sell oil for dollars and dollar denominated securities. In other words, if you want to buy oil from an OPEC country, you need to buy dollars first.
This was a great deal for the US because it could essentially print dollars and sell them abroad to cover its trade shortfalls. Other countries had to buy those dollars so they could buy oil.
The OPEC countries, in turn, tended to invest their wealth back into the US (this is called petrodollar recycling) so the US economy could essentially enjoy its benefits without actually having to produce anything to earn it.
The run-up in oil prices since 2000 has been a bonanza for the US economy despite higher prices at the pump since the international demand for US dollars has grown in lockstep. This has allowed the US current accounts deficit to reach its present state of unimaginable bloat.
If OPEC changed its policy and allowed people to buy oil with other currencies, it would be a disaster for the US economy, because international demand for all those little green pieces of paper would evaporate.
Despite the high oil prices, the value of the dollar has been flagging against the euro since 1999 when the common European courrency was first introduced. This reflects the poor fundamentals of the US economy - other than the petrodollar system, US currency isn't backed by any real economic foundation.
For a much more in-depth examination of what's at stake, I highly recommend William Clark's book Petrodollar Warfare (reviewed in RTH).
Back in 2005, I wrote that the American sabre-rattling against Iran had less to do with its plan to develop nuclear power, which it is legally entitled to do under the Non Proliferation Treaty, than with its plan to launch a euro-based oil bourse, or stock exchange for trading energy.
(The article generated some interest and even landed me an interview on the Sky documentary Conspiracies: Iraq. A low-res version in Real Media format is available for download.)
The plan to launch the bourse seems to be on indefinite hold, but otherwise, Iran is still proceeding with its strategy of undermining petrodollar hegemony by making long-term energy deals with China and refusing to trade oil for dollars.
While pundits hollar at each other over whether Iran is trying to acquire nuclear weapons, the country has quietly lit the fuse to a financial time bomb that could leave the US economy looking like a war zone once its staggering trade obligations are called in.
Amazingly, almost no one seems to have noticed. The International Herald-Tribune carried a story about it, but the New York Times, which owns the Tribune, did not.
The next time you read or hear someone claiming Iran is a threat, remember that the real threat is that Iran's actions might trigger the collapse of the American economic house of cards.
By jwl (anonymous) | Posted April 14, 2007 at 06:36:57
Compared with the "rebuilding", home and abroad, after ww2, it'll be rather easy for USA to recover from that financial heck-up (the hole concept of "petrodollars").
By R Conners (anonymous) | Posted April 16, 2007 at 11:56:38
I have tried to convince people for years that America is living way beyond her means and that her economy is a house of cards. But no one wants to hear that.
That is part of the problem with our current political system. As a politician, if you want to get re-elected, you cannot be the bearer of bad news.
By brent (anonymous) | Posted April 16, 2007 at 12:58:04
Some would digress-
'Why Iran`s Oil Bourse can`t break the Buck'
F. William Engdahl, 10 March 2006
Exceptional!
By brent (anonymous) | Posted April 16, 2007 at 13:02:25
I can't post the link because it looks like spam. Google search F W Engdahl.
By Mats (anonymous) | Posted April 18, 2007 at 05:09:55
The GCC will launch its common currency named the “Gulf Dinar” soon and the monetary union will be in effect as of 2010. Allready rumours are spread of a Gulf Petroleum Exchange that will trade oil in the Gulf Dinar. This will lead to a loss of the grip on the oil trade for the US and that the dollar will lose its power. When you read news like this it is time to worry:
Gulf oil bourse to open soon
The Gulf Petroleum Exchange will begin operating in the near future, said the Saudi Oil Minister Ali Naimi after a meeting of the GCC sunday.
Ali Naimi said Saudi Arabia and the Gulf Cooperation Council have decided to establish a Gulf Dinar based oil exchange on the Persian Gulf in Dubai, UAE, because “there was no such oil trading body in the region.”
“The GPEX could help many countries transact petroleum under more favorable conditions,” he said.
He did not say exactly when the GPEX oil bourse would open.
The official also said that senior officials from the Oil Ministry and the Gulf Cooperation Council will meet with members of the GCC Energy Commission in the near future to discuss issues related to making the groundbreaking project operational.
Naimi said the Saudi Oil Ministry and a number of other GCC bodies have made large investments in the project.
The oil bourse would transact petroleum, petrochemicals and gas in various non-dollar currencies, primarily the Gulf Dinar. It would also establish a Gulf Dinar based pricing mechanism for oil trading, or oil marker as it is called by traders.
The three current oil markers are all US-dollar denominated.
The two major oil bourses are the New York Mercantile Exchange (NYMEX) in New York City and the International Petroleum Exchange (IPE) in London. The Gulf Petroleum Exchange (GPEX) in Dubai would establish a fourth oil marker, denominated by the Gulf Dinar.
By Neville Parker 1 April 2007
Khaleej Times
By Jack (registered) | Posted April 19, 2007 at 22:25:04
Any news on alternate fuel. I believe is getting there. That will get us out of this mess so we no longer need Iran's oil!
By David (anonymous) | Posted April 20, 2007 at 03:52:13
Jack,
Without oil sales, on which the Dollar is based now in lieu of gold, the dollar would crumble like a rock - it depends on oil sales, not alternative fuels. The US is a lot more worried about supporting the Dollar than it is prices at the pump.
Everyone needs to see that video Ryan posted above to be brought up to speed.
Ryan... a newspaper article I read indicated that suddenly - a major reversal from their position 2 years ago - almost all of the Middle East is interested in Nuclear power, including Saudi Arabia. Some believe this is to be in competition with Iran's progress on the issue, but other word has it that the Saudis say it is to be prepared for the day oil ceases to flow - and Matt Simmons says their fields are already in decline. It really gave Iran's claim about nuclear power pretenses some credibility. Perhaps the whole issue generated by the US about nuclear weapons in Iran is conpletely manufactured. And if the article is true about the oil connection, it confirms Simmon's analysis.
With the whole world embracing Iran's plan to move away from the Dollar in oil sales, the US may be too late to do anything about it, or generate a lot of world dissent if they try.
By reason (anonymous) | Posted May 05, 2007 at 13:45:15
Desperate times call for desperate measures!!
I fear for the future.
How far is America prepared to go?
How many lives will it again sacrifice to maintain the "status Quo" and "freedom"?
This could lead to conflict not seen for 60 years.
By kurisu (anonymous) | Posted May 20, 2007 at 17:01:12
there are 2 outcomes in to this situation. Either the united states somehow convinces these nations to stay on the dollar or their economy faces a collapse similar to the german economy of the 1920's and thirtys.
but you need not worry the government has already taken action! in 2001 iraq changed from selling oil in Dollars to Euros's lunkily it was suddenly decided that they need to be "liberated" and a new democratic pro-dollar goverment was inserted.
By Jack (registered) | Posted May 28, 2007 at 12:20:52
Collapsing dollar can be blessing in disguise. There is no way that dollar can goes up forever. Once it overpriced, it will fall. Remember, what goes up must come down. I think it is about time that Dollar take a hit in order to give some room for breathing and regrouping. When dollar is high, less people wanted to buy American goods and services and that is why you see jobs are fleeing oversea. This is not good for US and a falling dollar is one way to fix this. Bring some of this job back and at the same time expanding globally will ensure success in the long run.
By Jack (registered) | Posted May 28, 2007 at 14:45:09
Collapsing dollar can be blessing in disguise. There is no way that dollar can goes up forever. Once it overpriced, it will fall. Remember, what goes up must come down. I think it is about time that Dollar take a hit in order to give some room for breathing and regrouping. When dollar is high, less people wanted to buy American goods and services and that is why you see jobs are fleeing oversea. This is not good for US and a falling dollar is one way to fix this. Bring some of this job back and at the same time expanding globally will ensure success in the long run.
By Jack (registered) | Posted May 28, 2007 at 18:18:28
Collapsing dollar can be blessing in disguise. There is no way that dollar can goes up forever. Once it overpriced, it will fall. Remember, what goes up must come down. I think it is about time that Dollar take a hit in order to give some room for breathing and regrouping. When dollar is high, less people wanted to buy American goods and services and that is why you see jobs are fleeing oversea. This is not good for US and a falling dollar is one way to fix this. Bring some of this job back and at the same time expanding globally will ensure success in the long run.
By Expression of British (anonymous) | Posted November 19, 2007 at 07:32:15
USA is a bully and should be dealt with economically and militarily.
Only 4% of the world populations using 35% of the world resources and wants to control the world with their way of life. And what is their way of life?
You must be logged in to comment.
There are no upcoming events right now.
Why not post one?