Today, most oil trading takes place on the New York Mercantile Exchange (NYMEX) and the London-based International Petroleum Exchange (IPE). Since the 1970s, OPEC countries have all agreed to sell oil for US dollars only. This means every country that wants to buy oil must first acquire enough US dollars to buy what it needs--creating a huge worldwide demand for the US dollar and any excess dollars eventually get recycled back to the US.
Year after year, America imports much more than it exports and it must pay out that difference (its current accounts deficit) in printed dollars. In 2006 that deficit was > $850 Billion; 2007 was > $700B; this year, we will see similar figures.
From 1999 though the end of 2006, the United States financed a string of large current account deficits by borrowing $4.4 trillion from other countries—a sum amounting to 85 percent of total net borrowing worldwide (in other words: we sucked up 85% of the worlds excess savings).
Now, if there were no good reasons for other countries to buy all those American dollars, the dollar would decline in value until the US economy could no longer afford to import goods from abroad. Additionally, this excess foreign savings that America has grown used to would also dry up—putting us in quite the predicament.
The deal with OPEC however, means other countries have no choice but to buy all those excess American dollars, which props up the value of the dollar and allows the American "import economy" to go on year after year.
Effectively, America's main export is US dollars, and it is absolutely imperative to preserve a captive market for those dollars among oil-consuming countries--the continued viability of the US economy depends on it. Americans today can still afford to consume because the economy is inundated with cheap imports, but a continued falling dollar (already at its lowest levels in history and bound to drop much further due to Fed & PPT policy of printing money to bail out our banking/financial sectors) will significantly raise the prices of imported goods and our cost of living.
How important is it that oil continues to be denominated in dollars?
The answer to this question could come as early as this week, since the long-awaited Iranian Oil Bourse is scheduled to open Sunday. According to Iran's Finance Minister Davoud Danesh-Jafari, “All preparations have been made to launch the bourse; it will open during the 10-day Dawn (the ceremonies marking the victory of the 1979 Islamic Revolution in Iran) The bourse is considered a direct threat to the continued global dominance of the dollar because it will require that Iranian “oil, petrochemicals and gas” be traded in “non-dollar currencies”. (Press TV, Iran)
The petrodollar system is no different than the gold standard. Today's currency is simply underwritten by the one vital source of energy upon which every industrialized society depends---oil. If the dollar is de-linked from oil; it will no longer serve as the de-facto international currency and the US will be forced to reduce its massive trade deficits, rebuild its manufacturing capacity, and become an export nation again. The only alternative is to create a network of client regimes that repress the collective aspirations of their people so they can faithfully follow directives from Washington.
As to whether the Bush administration would start a war to defend dollar hegemony; that's a question that should be asked of Saddam Hussein. Iraq was invaded just six months after Saddam converted to the euro. The message is clear; the Empire will defend its currency.
Similarly, Iran switched from the dollar in 2007 and has insisted that Japan pay its enormous energy bills in yen. The “conversion” has infuriated the Bush administration and made Iran the target of US belligerence ever since. In fact, even though 16 US Intelligence agencies issued a report (NIE) saying that Iran was not developing nuclear weapons; and even though the UN's nuclear watchdog, the IAEA, found that Iran was in compliance with its obligations under the Nuclear Nonproliferation (NPT) Treaty; a preemptive US-led attack on Iran still appears likely.
And, although the western media now minimizes the prospects of another war in the region; Israel is taking the precautions that suggest that the idea is not so far-fetched. “Israel calls for shelter rooms to be set up in a bid to prepare the public for yet another war, this time, one of raining missiles.” (Press TV, Iran)
The Iranian Rial will be used for all transactions on the Tehran Oil Bourse, Gholamhossein Nozari said today, according to IRNA.
Iran, the second-largest producer in the Organization of Petroleum Exporting Countries, was originally expected to start its own oil-trading market in 2005.
Iran’s Oil Bourse Set to Open Sunday
Iranian Oil minister Gholamhossein Nozari has confirmed to Iranian news outlets that the long awaited oil bourse will begin trading in oil related products on Sunday February 17th. Just what “oil related products” means is not yet clear because few details have been released to the public.
What we do know is that the bourse (oil exchange) will be dealing in strictly Rial, the Iranian currency. The guess is right now that the bourse, which is to be located on the gulf island of Kish, will open by trading in “oil products” and within a short amount of time begin dealing in crude. This comes at a time when Iran’s oil output is reaching levels not seen in Iran since 1979.
The fear in the United States in some economic circles is that the opening of this bourse could lead to a further decline of the U.S. dollar. The U.S. dollar is currently the international currency in the trading of crude oil, with all oil exchanges being located in the Western world, but the Iranian oil bourse would seek to change this fact. As long as the U.S. dollar is the only international currency that can be used in purchasing oil the dollar will remain relatively stable because it will be in demand to purchase oil, if for no other reason. Therefore, countries such as Saudi Arabia are forced to accept the dollar for the sale of their crude and countries such as China and India are forced to keep the dollar on hand to purchase oil. Since the dollar has now fallen below the value of the Euro the opening of the Iranian Oil Bourse would remove one of the last remaining incentives for nations to hold onto the United States dollar. Some even go as far as to speculate this looming opening of the oil bourse being a reason for the harsh rhetoric Washington has used in the recent past towards Iran.
So, what can we expect as the final end-game?
As I’ve stated before in Dollar: Faltering Foundation of US Economic Strength, troubles for the dollar are bubbling up everywhere. Aside from the fact that our own fed has sacrificed our currency (in an attempt to save the banking/financial system), numerous nations have already de-pegged their currencies from the dollar (w/more planning to follow suit). Additionally, OPEC (as of late) has been talking about pricing oil in Euros.
This new action by IRAN, though lacking enough support to change things overnight, is a huge, long-term threat to the dollar, and is a deliberate slap in the face of US global economic power.
Personally, I don’t think the current administration will allow this problem to be passed on to the next. Rhetoric w/regard to Iran’s nuclear ambition will probably soon ratchet up again; a catalyst to action will likely be found, and bombs may be falling from the sky before November 08. However, don’t ever expect to hear (from the mainstream) that this bourse and its threat to the dollar were the real reason as to why.