by Flemming Funch
Excellent article by Cóilín Nunan:
"Oil,
Currency and the War on Iraq".
It seems to have disappeared
from the site, so I'll include it at the bottom as well.
Fascinating explanation of some major economic mechanisms
involving dollars and euros and oil. A very big reason that
the United States is such an economically and militarily
dominating country is apparently that U.S. dollar is the de
facto world reserve currency. Lots of things are counted in
dollars and some goods are only sold for dolars. That means
that foreign governments and corporations and banks are
keeping large dollar reserves. That essentially amounts to a
huge loan the rest of the world is giving to the United
States, which will subsidize the U.S. economy. In order to
acquire those dollars, the rest of the world has to provide
goods and services for those dollars. That allows the U.S. to
have a huge import/export imbalance. Last November, 48% more
imports than exports. It would be untennable for any other
country to run such a deficit.
Next major point is that one of the reasons everybody has to
have dollars is that the OPEC oil producting countries only
accept dollars for oil. Well, not all of them. The only one
that does something different is Iraq, which only accepts
Euros for their oil, since 2000. And Iran is considering it as
well. And the thing is that it might just as well be Euros
that everybody used as a reserve currency. It would apparently
be a better choice in many ways, because the European
economies are more balanced, and the OPEC countries would end
up getting more value for their oil. So, now, what would
happen if Euros became the only choice for buying oil? Most
likely the U.S. economy would plunge, because it would no
longer be subsidized in that manner. And EU would probably be
quite happy being subsidized in its place. Anybody thinks all
this might have something to do with the great urgency to take
over Iraq? And why would Britain support it?
Cóilín Nunan: Oil, Currency and the War on Iraq
It will not come as news to anyone that the US dominates the
world economically and militarily. But the exact mechanisms by
which American hegemony has been established and maintained
are perhaps less well understood than they might be. One tool
used to great effect has been the dollar, but its efficacy has
recently been under threat since Europe introduced the euro.
The dollar is the de facto world reserve currency: the US
currency accounts for approximately two thirds of all official
exchange reserves. More than four-fifths of all foreign
exchange transactions and half of all world exports are
denominated in dollars. In addition, all IMF loans are
denominated in dollars.
But the more dollars there are circulating outside the US, or
invested by foreign owners in American assets, the more the
rest of the world has had to provide the US with goods and
services in exchange for these dollars. The dollars cost the
US next to nothing to produce, so the fact that the world uses
the currency in this way means that the US is importing vast
quantities of goods and services virtually for free.
Since so many foreign-owned dollars are not spent on American
goods and services, the US is able to run a huge trade deficit
year after year without apparently any major economic
consequences. The most recently published figures, for
example, show that in November of last year US imports were
worth 48% more than US exports. No other country can run such
a large trade deficit with impunity. The financial media tell
us the US is acting as the ‘consumer of last resort’ and
the implication is that we should be thankful, but a more
enlightening description of this state of affairs would be to
say that it is getting a massive interest-free loan from the
rest of the world.
While the US’ position may seem inviolable, one should
remember that the more you have, the more you have to lose.
And recently there have been signs of how, for the first time
in a long time, the US may be beginning to lose.
One of the stated economic objectives, and perhaps the primary
objective, when setting up the euro was to turn it into a
reserve currency to challenge the dollar so that Europe too
could get something for nothing.
This however would be a disaster for the US. Not only would
they lose a large part of their annual subsidy of effectively
free goods and services, but countries switching to euro
reserves from dollar reserves would bring down the value of
the US currency. Imports would start to cost Americans a lot
more and as increasing numbers of those holding dollars began
to spend them, the US would have to start paying its debts by
supplying in goods and services to foreign countries, thus
reducing American living standards. As countries and
businesses converted their dollar assets into euro assets, the
US property and stock market bubbles would, without doubt,
burst. The Federal Reserve would no longer be able to print
more money to reflate the bubble, as it is currently openly
considering doing, because, without lots of eager foreigners
prepared to mop them up, a serious inflation would result
which, in turn, would make foreigners even more reluctant to
hold the US currency and thus heighten the crisis.
There is though one major obstacle to this happening: oil. Oil
is not just by far the most important commodity traded
internationally, it is the lifeblood of all modern
industrialised economies. If you don’t have oil, you have to
buy it. And if you want to buy oil on the international
markets, you usually have to have dollars. Until recently all
OPEC countries agreed to sell their oil for dollars only. So
long as this remained the case, the euro was unlikely to
become the major reserve currency: there is not a lot of point
in stockpiling euros if every time you need to buy oil you
have to change them into dollars. This arrangement also meant
that the US effectively part-controlled the entire world oil
market: you could only buy oil if you had dollars, and only
one country had the right to print dollars - the US.
If on the other hand OPEC were to decide to accept euros only
for its oil (assuming for a moment it were allowed to make
this decision), then American economic dominance would be
over. Not only would Europe not need as many dollars anymore,
but Japan which imports over 80% of its oil from the Middle
East would think it wise to convert a large portion of its
dollar assets to euro assets (Japan is the major subsidiser of
the US because it holds so many dollar investments). The US on
the other hand, being the world's largest oil importer would
have, to run a trade surplus to acquire euros. The conversion
from trade deficit to trade surplus would have to be achieved
at a time when its property and stock market prices were
collapsing and its domestic supplies of oil and gas were
contracting. It would be a very painful conversion.
The purely economic arguments for OPEC converting to the euro,
at least for a while, seem very strong. The Euro-zone does not
run a huge trade deficit nor is it heavily endebted to the
rest of the world like the US and interest rates in the
Euro-zone are also significantly higher. The Euro-zone has a
larger share of world trade than the US and is the Middle
East’s main trading partner. And nearly everything you can
buy for dollars you can also buy for euros - apart, of course,
from oil. Furthermore, if OPEC were to convert their dollar
assets to euro assets and then require payment for oil in
Euros, their assets would immediately increase in value, since
oil importing countries would be forced to also convert part
of their assets, driving the prices up. For OPEC, backing the
euro would be a self-fulfilling prophesy. They could then at
some later date move to some other currency, perhaps back to
the dollar, and again make huge profits.
But of course it is not a purely economic decision.
So far only one OPEC country has dared switch to the euro:
Iraq, in November 2000. There is little doubt that this was a
deliberate attempt by Saddam to strike back at the US, but in
economic terms it has also turned out to have been a huge
success: at the time of Iraq's conversion the euro was worth
around 83 US cents but it is now worth over $1.05. There may
however be other consequences to this decision.
One other OPEC country has been talking publicly about
possible conversion to the euro since 1999: Iran, a country
which has since been included in the George W. Bush’s
‘axis of evil’.
A third OPEC country which has recently fallen out with the US
government is Venezuela and it too has been showing disloyalty
to the dollar. Under Hugo Chavez’s rule, Venezuela has
established barter deals for trading its oil with 12 Latin
American countries as well as Cuba. This means that the US is
missing out on its usual subsidy and might help explain the
American wish to see the back of Chavez. At the OPEC summit in
September 2000, Chavez delivered to the OPEC heads of state
the report of the 'Interrnational Seminar on the Future of
Energy’, a conference called by Chavez earlier that year to
examine the future supplies of both fossil and renewable
energies. One of the two key recommendations of the report was
that ‘OPEC take advantage of high-tech electronic barter and
bi-lateral exchanges of its oil with its developing country
customers’, i.e. OPEC should avoid using both the dollar and
the euro for many transactions.
And last April, a senior OPEC representative gave a public
speech in Spain during Spain’s presidency of the EU during
which he made clear that though OPEC had as yet no plans to
make oil available for euros, it was an option that was being
considered and which could well be of economic benefit to many
OPEC countries, particularly those of the Middle East.
As oil production is now in decline in most oil producing
countries, the importance of the remaining large oil
producers, particularly those of the Middle East, is going to
grow and grow in years to come.
Iraq, whose oil production has been severely curtailed by
sanctions, is one of a very small number of countries which
can help ease this looming oil shortage. Europe, like most of
the rest of the world, wishes to see a peaceful resolution of
the current US-Iraqi tensions and a gradual lifting of the
sanctions - this would certainly serve its interests best. But
as Iraqi oil is denominated in euros, allowing it to become
more widely available at present could loosen the dollar
stranglehold and possibly do more damage than good to US
economic health.
All of this is bad news for the US economy and the dollar. The
fear for Washington will be that not only will the future
price of oil not be right, but the currency might not be right
either. Which perhaps helps explain why the US is increasingly
turning to its second major tool for dominating world affairs:
military force.
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