Skip to comments.Petro-Euro Vs Petro-Dollar?
Posted on 07/10/2008 2:41:33 AM PDT by Vanders9
Iran has really gone and done it now. No, they haven't sent their first nuclear sub in to the Persian Gulf . They are about to launch something much more deadly -- next week the Iran Bourse will open to trade oil, not n dollars but in Euros' This apparently insignificant event has consequences far greater for the US people, indeed all for us all, than is imaginable.
Currently almost all oil buying and selling is in US-dollars through exchanges in London and New York . It is not accidental they are both US-owned.
The Wall Street crash in 1929 sparked off global depression and World War II. During that war the US supplied provisions and munitions to all its allies, refusing currency and demanding gold payments in exchange.
By 1945, 80% of the world's gold was sitting in US vaults. The dollar became the one undisputed global reserve currency -- it was treated world-wide as `safer than gold'. The Bretton Woods agreement was established.
The US took full advantage over the next decades and printed dollars like there was no tomorrow. The US exported many mountains of dollars, paying for ever-increasing amounts of commodities, tax cuts for the rich, many wars abroad, mercenaries, spies and politicians the world over. You see, this did not affect inflation at home! The US got it all for free! Well, maybe for a forest or two.
Over subsequent decades the world's vaults bulged at the seams and more and more vaults were built, just for US dollars. Each year, the US spends many more dollars abroad that at home. Analysts pretty much agree that outside the US , of the savings, or reserves, of all other countries, in gold and all currencies -- that a massive 66% of this total wealth is in US dollars!
In 1971 several countries simultaneously tried to sell a small portion of their dollars to the US for gold. Krassimir Petrov, (Ph. D. in Economics at Ohio University ) recently wrote, 'The US Government defaulted on its payment on August 15, 1971 . While popular spin told the story of `severing the link between the dollar and gold', in reality the denial to pay back in gold was an act of bankruptcy by the US Government.' The 1945 Breton Woods agreement was unilaterally smashed.
The dollar and US economy were on a precipice resembling Germany in 1929. The US now had to find a way for the rest of the world to believe and have faith in the paper dollar. The solution was in oil, in the petrodollar. The US viciously bullied first Saudi Arabia and then OPEC to sell oil for dollars only -- it worked, the dollar was saved. Now countries had to keep dollars to buy much needed oil. And the US could buy oil all over the world, free of charge. What a Houdini for the US ! Oil replaced gold as the new foundation to stop the paper dollar sinking.
Since 1971, the US printed even more mountains of dollars to spend abroad. The trade deficit grew and grew. The US sucked-in much of the world's products for next to nothing. More vaults were built.
Expert, Cóilínn Nunan, wrote in 2003, '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.' Dr Bulent Gukay of Keele University recently wrote, 'This system of the US dollar acting as global reserve currency in oil trade keeps the demand for the dollar `artificially' high. This enables the US to carry out printing dollars at the price of next to nothing to fund increased military spending and consumer spending on imports. There is no theoretical limit to the amount of dollars that can be printed. As long as the US has no serious challengers, and the other states have confidence in the US dollar, the system functions.'
Until recently, the US-dollar has been safe. However, since 1990 Western Europe has been busy growing, swallowing up central and Eastern Europe . French and German bosses were jealous of the US ability to buy goods and people the world over for nothing. They wanted a slice of the free cake too. Further, they now had the power and established the euro in late 1999 against massive US-inspired opposition across Europe , especially from Britain - paid for in dollars of course. But the euro succeeded.
Only months after the euro-launch, Saddam's Iraq announced it was switching from selling oil in dollars only, to euros only -- breaking the OPEC agreement.. Iran , Russia , Venezuela , Libya , all began talking openly of switching too -- were the floodgates about to be opened?
Then aero planes flew into the twin-towers in September 2001. Was this another Houdini chance to save the US (petro) dollar and the biggest financial/economic crash in history? War preparations began in the US But first war-fever had to be created -- and truth was the first casualty. Other oil producing countries watched-on. In 2000 Iraq began selling oil in euros. In 2002, Iraq changed all their petro-dollars in their vaults into euros. A few months later, the US began their invasion of Iraq .
The whole world was watching: very few aware that the US was engaging in the first oil currency, or petro-dollar war. After the invasion of Iraq in March 2003, remember, the US secured oil areas first. Their first sales in August were, of course, in dollars, again. The only government building in Baghdad not bombed was the Oil Ministry! It does not matter how many people are murdered -- for the US , the petro-dollar must be saved as the only way to buy and sell oil - otherwise the US economy will crash, and much more besides.
In early 2003, Hugo Chavez, President of Venezuela talked openly of selling half of its oil in euros (the other half is bought by the US ). On 12 April 2003, the US-supported business leaders and some generals in Venezuela kidnapped Chavez and attempted a coup. The masses rose against this and the Army followed suit. The coup failed. This was bad for the US .
In November 2000 the euro/dollar was at $0.82 dollars, its lowest ever, and still diving, but when Iraq started selling oil in euros, the euro dive was halted. In April 2002 senior OPEC reps talked about trading in euros and the euro shot up. In June 2003 the US occupiers of Iraq switched trading back to dollars and the euro fell against the dollar again. In August 2003 Iran starts to sell oil in euros to some European countries and the euro rises sharply. In the winter of 2003-4 Russian and OPEC politicians talked seriously of switching oil/gas sales to the euro and the euro rose. In February 2004 OPEC met and made no decision to turn to the euro -- and yes, the euro fell against the dollar. In June 2004 Iran announced it would build an oil bourse to rival London and New York , and again, the euro rose. The euro stands at $1.27 and has been climbing of late.
But matters this month became far, far worse for the US dollar. On 5th May Iran registered its own Oil Bourse, the IOB. Not only are they now selling oil in euros from abroad -- they have established an actual Oil Bourse, a global trading centre for all countries to buy and sell their oil!
In Chavez's recent visit to London ; he talked openly about supporting the Iranian Oil Bourse, and selling oil in euros. When asked in London about the new arms embargo imposed by the US against Venezuela , Chavez prophetically dismissed the US as 'a paper tiger'.
Currently, almost all the world's oil is sold on either the NYMEX, New York Mercantile Exchange, or the IPE, London's International Petroleum Exchange. Both are owned by US citizens and both sell and buy only in US dollars. The success of the Iran Oil Bourse makes sense to Europe , which buys 70% of Iran 's oil. It makes sense for Russia , which sells 66% of its oil to Europe . But worse for the US , China and India have already stated they are very interested in the new Iranian Oil Bourse.
If there is a tactical-nuclear strike on - deja-vu - `weapons of mass destruction' in Iran , who would bet against a certain Oil Exchange and more, being bombed too?
And worse for Bush. It makes sense for Europe , China , India and Japan-- as well as all the other countries mentioned above -- to buy and sell oil in Euro's. They will certainly have to stock-up on euros now, and they will sell dollars to do so. The euro is far more stable than the debt-ridden dollar. The IMF has recently highlighted US economic difficulties and the trade deficit strangling the US-- there is no way out.
The problem for so many countries now is how to get rid of their vaults full of dollars, before it crashes? And the US has bullied so many countries for so many decades around the world, that many will see a chance to kick the bully back. The US cannot accept even 5% of the world's dollars -- it would crash the US economy dragging much of the world with it, especially Britain .
To survive, as the Scottish Socialist Voice article stated, 'the US , needs to generate a trade surplus to get out of this one. Problem is it can't.' This is spot on. To do that they must force US workers into near slavery, to get paid less than Chinese or Indian workers. We all know that this will not happen.
What will happen in the US ? Chaos for sure. Maybe a workers revolution, but looking at the situation as it is now, it is more likely to be a re-run of Germany post-1929, and some form of extreme-right mass movement will emerge...
Does Europe and China/Asia have the economic independence and strength to stop the whole world's economies collapsing with the US ? Their vaults are full to the brim with dollars.
The US has to find a way to pay for its dollar-imperialist exploitation of the world since 1945.. Somehow, eventually, it has to account for every dollar in every vault in the world.
Bombing Iran could backfire tremendously. It would bring Iran openly into the war in Iraq , behind the Shiite majority. The US cannot cope even now with the much smaller Iraqi insurgency. Perhaps the US will feed into the Sunni v Shiite conflict and turn it into a wider Middle-East civil-war. However, this is so dangerous for global oil supplies. Further, they know that this would be temporary, as some country somewhere else, will establish a euro-oil-exchange, perhaps in Brussels .
There is one `solution' -- scrap the dollar and print a whole new currency for the US . This will destroy 66% of the rest of the world's savings/reserves in one swoop. Imagine the implications? Such are the desperate things now swimming around heads in the White House, Wall Street and Pentagon.
Another is to do as Germany did, just before invading Poland in 1938. The Nazis filmed a mock Polish Army attack on Germany , to win hearts and minds at home. But again, this is a finger in the dam. So, how is the US going to escape this time? The only global arena of total superiority left is military. Who knows what horrors lie ahead. A new world war is one tool by which the US could discipline its `allies' into keeping the dollar in their vaults.
The task of socialists today is to explain to as many as possible, especially our class, that the coming crisis belongs purely to capitalism and (dollar) imperialism. Not people of other cultures, not Islam, not the axis of evil or their so-called WMDs. Their system alone is to blame.
The new Iranian Oil Bourse, the IOB, is situated in a new building on the free-trade-zone island of Kish , in the Persian Gulf . It's computers and software are all set to go. The IOB was supposed to be up and running last March, but many pressures forced a postponement. Where the pressure came from is obvious. It was internationally registered on 5th May and supposed to open mid-May, but its opening was put off, some saying the oil-mafia was involved, along with much international pressure. ...........................
In 2007 Crude was trades around 60 usd. Everyone know dollar was getting weaker and weaker day by day. Than US with the help of their two NYMEX & IPE exchange started rising the price of crude by Future trading on crude( called speculation). Today crude is around 140 usd. It means whole world who were paying 60 usd, now paying 140 usd, means demand of dollar increase to 230% and dollar start again rising.
Even OPEC recently that in hike og crude, 60% contribution is due to speculation (Future market).
Moral of story is USA has & will go to destroy any nation to keep its monopoly of dollar in world.
Did a Russian write this?
Also if we had a monopoly wouldn't all nations be using the dollar?
Currency is a complicated thing and naturally it is not as simple as this article portrays it.
You can’t eat dollars and nor do they function very well in powering your automobile.
The fact that the US dollar is the world’s reserve currency is an advantage insofar as it provides cheap credit. The US can sell US treasuries for very low interest rates because the US does not have to have dollar reserves to back them up. Countries without a hard currency have to back up their debt with reserves of some currency. When that currency is mostly dollars, it is good for the US because they essentially buy dollars at a low interest rate so they can lend themselves at a higher rate.
The US has had the greatest, but not the only advantage from this. The Pound, Yen and Deutsche Mark also served this purpose - simply to a lesser extent - for the past 60 years as well. The Euro is simply taking a larger slice of the pie.
The link to oil in this article is simply a political slight of hand. The only thing that denominating oil in Euros means is that Europeans will no longer need dollars to purchase oil. It potentially weakens the US currency, but also makes US exports more attractive and investments in US assets cheaper.
If the Euro were to completely replace the dollar, it would mean that US borrowing would become more expensive - because the US would be have to keep Euros on hand. But that will not happen in the next 50 - 100 years and I think a global currency is more likely than that scenario. Moreover, the Rupiah and Remnibi should also be reserve currencies too so the dollar as the super-majority world reserve currency is anyway limited in its duration. This is neither suprising nor alarming.
Perhaps the largest single advantage of the dollar is that several hundred billion in actual bills are floating around the planet and these are essentially an interest free loan to the US treasury. Given inflation, it is like lending money the US and asking to be paid back less. Still it is not so sigificant. The only reason people are willing to keep dollars is that the US has never, ever refused to recognize he value of its currency. A new currency or devaluation would be a disaster for the US and therefore ensure the US currency would lose its status as the world reserve currency.
The article’s conclusion of what the US might do would have the exact opposite effect of what its intention would be´. In other words, it is pure garbage.
Exactly. The article raises many genuine facts and then extrapolates them wildly into conspiracy theories even a tinfoiler would have trouble with.
Genuine food for thought in this topic, but more on the origins of the situation and future implications, preferably written by someone more levelheaded.
The point the article is putting over is that all nations DO use the dollar, at least to buy oil anyway.
Thank you for the very thoughtfull answer. I’m not an economist - I don’t really understand the intracisies of the financial world.
Can I ask a couple more questions based on your answers?
“The US has had the greatest, but not the only advantage from this. The Pound, Yen and Deutsche Mark also served this purpose - simply to a lesser extent - for the past 60 years as well. The Euro is simply taking a larger slice of the pie.”
If the euro is, or will be, taking a larger slice of the pie, then logically, does it not follow that the dollar will have a smaller slice? If that is so, well I don’t believe the conspiracy aspects of this that it will lead to immediate US military intervention on a global scale, but at the same time its hardly likely to be something the US government is going to be happy about!
“The link to oil in this article is simply a political slight of hand. The only thing that denominating oil in Euros means is that Europeans will no longer need dollars to purchase oil. It potentially weakens the US currency, but also makes US exports more attractive and investments in US assets cheaper.”
I see what you mean, but as the article points out, this is dependent on the US being able to make and sell products and investments that the rest of the world wants. It seems to me that the US (and in fact most of the rest of the western world) is in a financial mess primarily because we are simply living beyond our means. The exact system used - socialist, capitalist, whatever - is largely irrelevant compared to the simple fact that any nation, just like any individual, that consistently buys more than it earns is ultimately going to be in trouble.
“The only reason people are willing to keep dollars is that the US has never, ever refused to recognize he value of its currency.”
What about the assertion in the article about the US refusing to buy back dollars for gold?
At this point, “tax cuts for the rich,” it became clear that the author had only the shallowest understaning of economics.
By this I mean that the article has some salient points, most important being if there was a shift to Euros (not even a full shift ....just a fraction of price movements in Euros) that the Dollar would be seriously hit, and the US economy would suffer detriment. Where the article becomes garbage is when it deviates and takes on the guise of conspiracy spiel. However, the fact still remains that there is some pressure for a lot of the nations to diversify their FX holdings and/or revenues to a much larger extent than they did in the past, and that there are some serious questions on the Dollar.
Another place the article softens is when it talks of the Dollar being replaced as the World's reserve currency. That will not happen, at least any time soon. What will happen is that another currency (most probably the Euro) will continue to ascend to be a major competitor as a secondary reserve currency. However a complete overthrow of the Greenback would only happen if the US was nuked to oblivion, or something of that nature, which totally turned everything topsy-turvy.
The other thing the article does is over-simplify things. A weak Dollar will not be all-bad ....it will be terrible for some sectors (e.g. those that deal with imports) of the US economy, but great for other sectors (particularly the sectors that deal with exporting American products). There are very few purely linear factors in economics, and nothing is as simple as the article makes it seem.
No need to bother with the nuke Iran conspiracies. That's tripe. (Although I do see wars in the future being fought over resources - though not necessarily oil, but oil is a major one)
If, and its a big if, countries started using Euros as the preferred exchange medium for oil, then the ramifications and fallout would have a tremendous effect on global financial system.
But you don’t send the largest economy on the planet off the rails without having a look at the consequences. No matter how badly they might hate America, the global economy is deeply intertwined with the dollar.
That may be the reason why OPEC and other countries haven’t been rushing to support this.
I only saw one question mark, but I think you asked two questions.
The first was about military intervention. The very idea that a military intervention could force someone to put trust in a given country’s currency is just absurd. The whole point of the dollar as a reserve currency is that it is the currency that is least likely to lose value and is issued by the country most likely to honor its debts. A country that devalues or goes to war to that end would give up that idea.
The issue of honoring the currency with Gold has two flaws. The first is that capitalism postulates that there is an infinite amount of wealth that can be created. To base an economic system on this theory requires a currency that can grow with that wealth. However, there is a finite amount of Gold which would either limit the amount of currency available or make the cost of Gold so high as to make its price inifite and /or eliminate all uses of Gold (and there are some) which are not linked to matching the currency.
You should also keep in mind that Gold as a preserver of value is certainly established, but not based on much other than tradition and the fact that it is pretty. Gold is mostly used in jewelry and once again you cannot eat it or burn it. It is just the oldest-accepted easily transportable holder of value.
In terms of your balancing the budget comments it is only partially true. Assuming continuous economic growth the important thing is the percentage of a deficit in respect to the overall size an economy. If the budget deficit grows slower than the economy than it will, as a percentage shrink. Of late it has been growing faster which is very, very bad. But, unlike a private individual, debtors to the US cannot come and confiscate assets. All they can really do is refrain from lending more money and/or charge higher fees (interest) for lending that money. All that really does is constrain economic growth.
1. I agree with you
2. Other than in Nigeria there will never be a war that is overtly fought over oil. There will always be some “excuse” used - in fact I believe there have already been some examples
3. There will be wars specifically fought over water for which an excuse need not be given
4. Will someone please bomb Liechtenstein.
True enough, but I want some ammunition to fight this in the minds of people who arent america haters.
Actually I thought I asked several questions.
I wasn’t asking about military intervention. I am sure that will not happen, for the same reasons you outline (and others too). What I was trying to ask is that as the dollar being the preeminent reserve country is such a good thing for the US, will the powers that be use political and or economic pressure to maintain it as such, against competition from the Euro (and indeed other currencies).
I take what you are saying about Gold but think that you miss the point. I understand Gold is a rather arbitary standard for measuring wealth but the fact is: it was an established and perfectly valid one at the time when dollars were being sold back. So why did the US not honor that debt?
I hadn’t thought of the difference between private individuals and nations. I think its quite a dangerous precedent to set though. Granted your creditors aren’t going to sieze the statue of liberty or whatever in part repayment, but if the balance of payments deficit continues to grow, then they might lose confidence in the US and its currency. That would be very bad. As you say in your very thorough answer (thank you) the whole point of the dollar is that it is the least likely currency to lose value and is issued by the country most likely to honor its debts. But what happens if that is no longer true? The value of the dollar has plummeted recently - I know, I export to the US and its become very difficult to do.
One other thing...why the downer on Lichenstein?
“...Garbage mixed with scattered iotas of truth.”
Nothing makes lies stronger than a few iotas of truth :)
As long as we are telling stories to scare the children, here is the current OPEC estimate of Peak Oil:
VIENNA (AP) — World energy needs will spike by more than 50% by 2030 but adequate oil reserves, conservation and new methods of recovery mean supply will keep pace with demand, the Organization of Petroleum Exporting Countries said Thursday.
. . .
The report projected oil demand to rise by 29 million barrels a day from 2006 through 2030 to reach a daily 113 million barrels a day - a drop of 4 million barrels a day over its predictions last year, “due in part to the higher oil price assumption” - expectations that pricey petroleum is here to stay.
New recovery methods to boost supply
A large part of that projected demand will be met by new recovery and production procedures, meaning total demand for “conventional crude” - oil pumped from wells and other methods using present day technology - will not exceed 82 million barrels a day by 2030, said OPEC.
. . .
Because I couldnt find another article that went on about dollars and petroleum and the Euro.
Just skip over the s&*t and concentrate on that.
My understanding of the economic pressure the US is able to put on other countries is less an issue of currency and more one of pure economic weight. The US is and has been the largest market for a very long time. US banks are part of almost any large transaction and anyone who has serious money to invest cannot avoid the US markets. This is a large part because the US institutions are the strongest and the regulations are the most trustworthy (de-regualtion in banking is NOT a good think. Banks need to be properly regulated because their business models are by definition fragile - they lend more money have assuming that the people who own the money won’t all come for it once. Of course over-regulation is bad too).
Thus, economic weight is less a consequence of the US dollar being the reserve currency than the US economy being the largest and, for that matter, a very large importer of goods. Just like the Fed is seen as a “lender of last resort” the US has always been an “importer of last resort”. Korea, Japan, China and many of the other Asian Tigers can thank the US consumer for their extremely rapid rates of growth. The US was able to leverage market access in exchange for political pressure (remember if those countries stopped growing, their populations would revolt so there was huge political pressure).
Europe is just learning to have similar weight, but since European countries rely on exports - especially Germany - and they lack the unity on foreign policy of the US, their weight is a lot less.
I honestly don’t see that currency play such a major role in using economic pressure. As China becomes the country to which the smaller nations export, the dynamic will inevitably change.
By the way, do not worry about Koreans buying the Chrysler building or Belgians buying Anheuser-Busch. This is a good thing and the American businessmen who will sell their assets will get a lot more than they are worth and put the capital to much better use. Besides, the Beligans make really good beer.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.