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April 4, 2007
by Gary North, Ph.D.
The fact that Iran is now pricing its oil in currencies other than the dollar is reminiscent of Saddam Hussein's similar decision in September, 2000. This was one month after Hugo Chavez met with Hussein in Iraq. He was the first head of state to visit Hussein since the 1991 Gulf War. Oil was then around $30.
On April 10, 2001, the Council on Foreign Relations and the James A. Baker III Institute issued a joint, bipartisan publication, "Strategic Energy Policy: Challenges for the 21st Century." Baker is a former Secretary of State under Bush, Sr., and was regarded as the number-one advisor to Bush. He also ran the Reagan White House whenever Reagan did not lay down the law on a specific issue. When the CFR and Baker issue a joint report, we had better take it seriously as a statement of what the Powers That Be are thinking -- or want the public to think -- about government policy. The CFR's press release summarized the report's findings.
The invasion of Iraq by Bush and the resistance to the occupation have created just the kind of disruption that the CFR warned about. It is no accident that when the Establishment's independent Iraq Study Group presented a supposedly practical alternative to the Administration's Iraq policy, Baker was co-chairman. The problem is, the report was yada, yada, yada -- the standard Establishment bloviation, which offered no meaningful, clear-cut solution to the problem because there is no agreement within the foreign policy Establishment regarding America's Middle East policy, and hasn't been since May 1, 1948. Concern about a looming war with Iran is continuing to force oil prices upward. An actual war will drive prices much higher, just as the Iraq war has. THE EURO WORRY The euro was introduced in 1999 at an exchange rate of $1.17. It started falling almost immediately. It bottomed in October, 2000, a few days after Hussein's announcement, at 83 cents. It stayed low until October 2001, after the 9-11 attack, when it started rising. So, initially, Hussein's announcement did not have any visible economic effect on the dollar/euro exchange rate. A month before the Iraq war began, the euro was around $1.10. It continued to rise after the war began in March, 2003. It was at $1.16 in May. The U.S. dollar is the world's reserve currency. About 65% of all central bank foreign exchange reserves are held in the dollar. A March 30 report on Bloomberg provides the figures.
What the report does not mention is that these figures are essentially unchanged since the end of 2004. The dollar was then 66% and the euro 25%. The big change has come since 2002. In early 2002, the euro figure was 10%. THE SAUDI CONNECTION The dollar has been supported by Saudi Arabia ever since 1971. When Nixon unilaterally broke the United States government's agreement to sell gold at $35/oz, the dollar has floated against other currencies. Foreign central banks have held T-bills as foreign exchange reserves because of the dollar's universal acceptability for international trade. The Saudis could have undermined the dollar's role in trade if they had accepted yen or pounds sterling in addition to dollars. But the Nixon Administration negotiated a not-so-secret secret agreement. The Saudis would accept the dollar, and only the dollar, in oil sales, no matter who was buying the oil. At any time, the Saudis could have bailed out, but they didn't -- not even during the OPEC oil embargo. Look at the chronology.
I don't want to belabor this. You can see what happened. The nationalizations continued for another year. On October 6, 1973, the fourth Israeli-Arab war broke out. On October 17, OPEC's six Middle Eastern nations raised the price of oil to $3.65 from $3.12. On October 19, they declared an oil embargo against the United States. On October 19, they embargoed the Netherlands. The Netherlands is where the world's oil exchange operates. Oil rose. On December 22, the six Gulf states raised the price from $5.12 to $11.65, effective January 1, 1974. You can see the chronology here. The initial domino in the sequence is clear: the closing of the gold window on August 15, 1971. But at no time did the Saudis or OPEC officially abandon the dollar as the sole unit of account. This was when the flow of petrodollars began to accelerate. The Saudis sold their oil for dollars, but they deposited the money mainly in multinational banks headquartered in New York City. The banks then lent the money around the world. The Saudis could have pulled the plug at any time. All they had to do was allow other currencies in exchange for oil. Then they could have ceased doing business with U.S. banks. They could have switched to London, Germany, and Switzerland. They didn't. There had to be a reason. But what reason makes sense? PROTECTION MONEY The Saud family runs the country. It is a fiefdom. The family cannot protect itself militarily without weapons. It also needs a buffer against enemies. It gets both from the United States. After the fall of the Shah in 1979 and the capture of the American embassy by Iran's revolutionary guards, the Shi'ite threat to Saudi Arabia grew. The Saudis support the Wahhabi Sunni sect, which has always been officially supportive of the Saud family. This goes back over two centuries. Iran under the mullahs became an immediate threat to the Saud family. The oil fields of Saudi Arabia are in the east, which is where Shi'ites are dominant. The military equipment and other support given to Hussein by the U.S. in the Iraq-Iran war (September 1980 to August 1988) was a shield for Saudi Arabia. It kept a pro-Sunni leader in power in an otherwise Shi'ite-dominated country on Saudi Arabia's border. When Hussein moved into Kuwait in 1991, the Saudis agreed to help fund the Gulf war. When Bush encouraged the Shi'ites to revolt after the war ended, and they did, the United States let Hussein's troops slaughter them. This was a benefit for the Saudis. They did not want Shi'ite forces on their border. They still don't. The Shi'ites and Kurds will be the big winners if and when the U.S. departs. The Saudis will then have a Shi'ite state on its border. Across the water is Iran, which is facing a crisis within a decade, as its oil exports decline, possibly to zero. Iran will have to make its move soon. The prospects of a Shi'ite kingdom are fading. The quid pro quo for the dollar's sole acceptability in Saudi Arabia and the other Sunni members of OPEC is protection. As long as the United States keeps the State of Israel on a tight leash beyond its own borders, the Saudis need fear only the Shi'ites. This is why there has been no hue and cry from the Saudis regarding the second American invasion of Iraq. This is why there is silence regarding the two carrier task forces in the Gulf, with the third leaving San Diego today to join the other two. IRAN BREAKS THE STRANGLEHOLD With Iran now selling oil only for other currencies, it has offered a challenge to the other OPEC exporters. They can get out of the petrodollar trap by switching to the euro. Iran is about to set the precedent. Iraq did, but it was invaded. Then the old arrangement was reimposed by the Americans: oil for dollars only. By telling other oil exporters that it's a good idea to do business in other currencies, Iran threatens to cause a shift in central bank holdings. If the euro continues to rise, central banks are better off by buying euros. At the margin, they will make money. But the dollar will fall: reduced demand for dollars. The downside of this is two-fold: (1) a falling dollar means fewer exports to America; (2) a falling market price of their existing holdings of T-bills. This will hurt Japan and China the most. This threat to U.S. foreign policy is great. The threat to the domestic economy is worse. The dollar has been subsidized by OPEC nations for 35 years. The dollar's looming fall in value in relation to other currencies is a minimal threat to the American economy compared to rising oil prices. We are importers of oil. If gasoline prices rise, voters will seek vengeance. Republicans know this. So, Iran is now a threat to Bush and the Republicans in 2008. The British Broadcasting Corporation reported on the same interview with Iran's central bank governor.
Then what about Japan? The Japanese are not looking to rock the boat &endash; at least not until they are officially asked to rock it. The Arab Times reported:
All it will take is an official request. Clearly, Iran can gain Japan's cooperation at any time. CONCLUSION The Israelis would like Iran removed as a regional center of power. On this point, they are in full agreement with the Saudis. The Administration does not want to see a dramatic fall of the dollar in relation to the euro. An attack on Iran will produce a spike in the oil price, no matter what currency is used to settle accounts. Oil importers don't want that. Oil exporters will cry crocodile tears, and then hike their prices. It's called "meeting the market." The potential for disrupting the flow of oil has never been greater. If I were James Baker and his associates at the Council on Foreign Relations, I would be ordering several cases of Depends. They are running out of time to reign in Junior.
Dr. Gary North earned a Ph.D. in history and is one of America's keenest economic analysts and commentators. He supports the Austrian school of economics and is a previous assistant to libertarian congressman Dr. Ron Paul. Visit his website at http://garynorth.com. To subscribe to Gary North's Reality Check go to http://www.dailyreckoning.com/sub/GetReality.cfm If you enjoyed this essay and would like to read more of Gary's writing please visit his website at http://www.garynorth.com or http://www.freebooks.com
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No,
I don't mean its arrest of fifteen British low-rank
military people who were taking a boat ride in
long-disputed waters dividing Iraq and Iran. That
was just a bit of old- fashioned tail-twisting of
the British lion, which has been close to toothless
ever since 1945. I mean this:
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