Why do I feel this way? Well, it's complicated, but I'll try to keep the explanation simple:
The US Dollar has been the World's reserve currency since the end of WWII. This reserve status was seriously threatened in 1971, when Nixon removed the Dollar/Gold peg and changed the dollar from a "commodity" to a "Fiat" currency.
The US-Saudi Arabian Joint Commission on Economic Cooperation of 1974 restored waning confidence in the dollar by mandating that OPEC sell its oil for US Dollars ONLY. Any country who needed oil now needed to earn or borrow dollars to pay for their oil -- creating a huge worldwide demand for the US dollar and any excess dollars eventually got recycled back to the US.
For many years, this excess dollar recycling created a boon for America and these Petrodollars were used by our banking system to create new credit/debt -- helping our economy to grow.
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 will significantly raise the prices of imported goods and our cost of living.
For three decades, America has reaped the benefits of trading our printed dollars (created from nothing) for oil, but as our trade deficits continued to grow beyond comprehension and foreign policy blunders created new enemies, things started to change.
IRAN's Oil Bourse and refusal to take US Dollars for Oil
For decades, most worldwide oil trading took place on the New York Mercantile Exchange (NYMEX) and the London-based International Petroleum Exchange (IPE). This monopoly has recently come under threat.
In Feb 2008, IRAN opened its own oil Bourse (oil trading platform -- similar to NYMEX & IPE) and then refused to accept dollars for their Oil. (Note: Russia has taken similar steps recently and their new Bourse now trades oil for the ruble).
Theses new monetary threats are seriously jeopardizing the artificial "dollar-for-oil" prop and if the threat is not eliminated soon, the status of the US dollar as the world's reserve currency could be called to question.
Recap: Oil replaced gold in the mid 70's as the underlying peg for the USD and until Iran's recent actions all oil transactions around the globe had to be made in USD's. For three decades, oil provided the foundation for the World's reserve currency, but that foundation is starting to crack...
Shifting gears a bit
Though I disagree with Time author Robert Baer's assertion (that Bush can't attack IRAN) made in the article below, Mr. Baer has several very good points that I think everyone needs to think about.
How Iran Has Bush Over a Barrel
If wasn't clear before it should be now: the Bush Administration can't afford to attack Iran. With gas already at $4 a gallon and rising almost every day, Iran figuratively and literally has the United States over a barrel. As much as the Administration is tempted, it is not about to test Iran's promise to "explode" the Middle East if it is attacked.
The Iranians haven't been shy about making clear what's at stake. If the U.S. or Israel so much as drops a bomb on one of its reactors or its military training camps, Iran will shut down Gulf oil exports by launching a barrage of Chinese Silkworm missiles on tankers in the Strait of Hormuz and Arab oil facilities. In the worst case scenario, seventeen million barrels of oil would come off world markets.
One oil speculator told me that oil would hit $200 a barrel within minutes. But Iran's official news agency, Fars, puts it at $300 a barrel. I asked him if Iran is right, what does that mean?
"Four-dollar-a-gallon of gasoline only reflects $100 oil because the refiners' margins are squeezed," he said. "At $300, you have $12 a gallon of gasoline and riots in Newark, Los Angeles, Harlem, Oakland, Cleveland, Detroit, Dallas."
In either case, whether at $200 or $300, Bush does not want to be the President who leaves the White House on a mule-drawn cart. But Iran's blackmail is not just about oil. The Iranians truly believe they have us hostage in Iraq — our supply lines, the acquiescence of the Shi'a in the occupation. It would all change in an instant, though, especially if we were to borrow Iraq to attack Iran. The way Fars put it: "In Iraq, fighters would rise up in solidarity with each other and begin ... making the Tet Offensive in 1968 Vietnam."
If this all sounds very alarming, Iran meant it to, and it seems to be working. On Tuesday Bush was talking about the prospect of new sanctions rather than attacking.
Which leaves Israel. Are the Israelis, who have a lot more on their minds than the price of gas in the United States, going to launch a pre-emptive attack? One hard and fast rule in the Middle East is never rule out Israel's readiness to turn the table over. But an Israeli hawk on Iran, with close ties to Israel's Ministry of Defense, told me to forget about it. "There's not a chance Israel will do anything. Maybe there's a window after the American elections and the new President but even that's doubtful. Washington does not have the stomach for another war."
Israel cannot attack or contain Iran on its own; it needs the full military might of the United States behind it. So in the meantime Israel can only huff and puff, hoping new sanctions on Iran will do the trick.
I certainly hope Bush/Cheney aren't stupid enough to wage war with IRAN, but the recent resignation of CENTCOM Commander Admiral William Fallon -- over Iran policy -- really makes one wonder what the heck they are up to.
Once again, take a good look at the Strait of Hormuz below and realize that nearly 40% of the worlds oil passes through it and right by IRAN. What would happen to the price and supply of oil IF war were to happen?