< HOME  Friday, March 10, 2006

A Different take on Iran's Oil Bourse

I ran into this very important article that challenges the argument that a war against Iran is being triggered by their plans to open an oil bourse.

The author argues that the war is simply part of the master plan to reshape the Middle East and that the dollar is not backed by oil, but by the sheer might of the US military:
Why Iran's oil bourse can't break the buck
By F William Engdahl

A number of writings have recently appeared with the thesis that the announced plans of the Iranian government to institute a Tehran oil bourse, perhaps as early as this month, is the real hidden reason behind the evident march to war on Iran by the Anglo-American powers. The thesis is simply wrong for many reasons, not least that war on Iran has been in planning since the 1990s as an integral part of the United States' Greater Middle East strategy.

More significant, the oil-bourse argument is a red herring that diverts attention from the real geopolitical grounds behind the march toward war that have been detailed on this website, including in my piece, A high-risk game of nuclear chicken, which appeared in Asia Times Online on January 31.

In 1996, Richard Perle and Douglas Feith, two neo-conservatives later to play an important role in formulation of Bush administration's Pentagon policy in the Middle East, authored a paper for then newly elected Israeli prime minister Benjamin Netanyahu. That advisory paper, "A Clean Break: A New Strategy for Securing the Realm", called on Netanyahu to make a "clean break from the peace process". Perle and Feith also called on Netanyahu to strengthen Israel's defenses against Syria and Iraq, and to go after Iran as the prop of Syria.

More than a year before President George W Bush declared his "shock and awe" operation against Iraq, he made his now-infamous January 2002 State of the Union address to Congress in which he labeled Iran, along with Iraq and North Korea, as a member of the "axis of evil" trio. This was well before anyone in Tehran was even considering establishing an oil bourse to trade oil in various currencies.

The argument by those who believe the Tehran oil bourse would be the casus belli, the trigger pushing Washington down the road to potential thermonuclear annihilation of Iran, seems to rest on the claim that by openly trading oil to other nations or buyers in euros, Tehran would set into motion a chain of events in which nation after nation, buyer after buyer, would line up to buy oil no longer in US dollars but in euros. That, in turn, goes the argument, would lead to a panic selling of dollars on world foreign-exchange markets and a collapse of the role of the dollar as reserve currency, one of the "pillars of Empire". Basta! There goes the American Century down the tubes with the onset of the Tehran oil bourse.

Some background considerations
That argument fails to convince for a number of reasons. First, in the case of at least one of the oil-bourse theorists, the argument is based on a misunderstanding of the process I described in my book, A Century of War, regarding the creation in 1974 of "petrodollar recycling", a process with which then-US secretary of state Henry Kissinger was deeply involved, in the wake of the 400% oil-price hike orchestrated by the Organization of Petroleum Exporting Countries (OPEC).

The US dollar then did not become a "petrodollar", although Kissinger spoke about the process of "recycling petrodollars". What he was referring to was the initiation of a new phase of US global hegemony in which the petrodollar export earnings of OPEC oil lands would be recycled into the hands of the major New York and London banks and re-lent in the form of US dollar loans to oil-deficit countries such as Brazil and Argentina, creating what soon came to be known as the Latin American debt crisis.

The dollar at that time had been a fiat currency since August 1971 when president Richard Nixon first abrogated the Bretton Woods Treaty and refused to redeem US dollars held by foreign central banks for gold bullion. The dollar floated against other major currencies, falling more or less until it was revived by the 1973-74 oil-price shock.

What the oil shock achieved for the sagging dollar was a sudden injection of global demand from nations confronted with 400% higher oil-import bills. At that time, by postwar convention and convenience, as the dollar was the only reserve currency held around the world other than gold, oil was priced by all OPEC members in dollars as a practical exigency.

With the 400% price rise, nations such as France, Germany and Japan suddenly found reason to try to buy their oil directly in their own currencies - French francs, Deutschmarks or Japanese yen - to lessen the pressure on their rapidly declining reserves of trade dollars. The US Treasury and the Pentagon made certain that did not happen, partly with some secret diplomacy by Kissinger, bullying threats, and a whopping-big US military agreement with the key OPEC producer, Saudi Arabia. At that time it helped that the shah of Iran was seen in Washington to be a vassal of Kissinger.

The point was not that the US dollar became a "petro" currency. The point was that the reserve status of the dollar, now a paper currency, was bolstered by the 400% increase in world demand for dollars to buy oil. But that was only a part of the dollar story. In 1979, after the accession to power of the ayatollah Ruhollah Khomeini in Iran, oil prices shot through the roof for the second time in six years. Yet, paradoxically, later that year the dollar began a precipitous free-fall, not a rise. It was no "petrodollar".

Foreign dollar-holders began dumping their dollars as a protest against the foreign policies of the administration of US president Jimmy Carter. It was to deal with that dollar crisis that Carter was forced to bring in Paul Volcker to head the Federal Reserve in 1979. In October 1979 Volcker gave the dollar another turbocharge by allowing interest rates in the US to rise some 300% in weeks, to well over 20%. That in turn forced global interest rates through the roof, triggered a global recession, mass unemployment and misery. It also "saved" the dollar as sole reserve currency. The dollar was not a "petrodollar". It was the currency of issue of the greatest superpower, a superpower determined to do what it needed to keep it that way.

The F-16 dollar backing
Since 1979 the US power establishment, from Wall Street to Washington, has maintained the status of the dollar as unchallenged global reserve currency. That role, however, is not a purely economic one. Reserve-currency status is an adjunct of global power, of the US determination to dominate other nations and the global economic process. The United States didn't get reserve-currency status by a democratic vote of world central banks, nor did the British Empire in the 19th century. They fought wars for it.

For that reason, the status of the dollar as reserve currency depends on the status of the United States as the world's unchallenged military superpower. In a sense, since August 1971 the dollar is no longer backed by gold. Instead, it is backed by F-16s and Abrams battle tanks, operating in some 130 US bases around the world, defending liberty and the dollar.

A euro challenge?
For the euro to begin to challenge the reserve role of the US dollar, a virtual revolution in policy would have to take place in Euroland. First the European Central Bank (ECB), the institutionalized, undemocratic institution created by the Maastricht Treaty to maintain the power of creditor banks in collecting their debts, would have to surrender power to elected legislators. It would then have to turn on the printing presses and print euros like there was no tomorrow. That is because the size of the publicly traded Euroland government-bond market is still tiny in comparison with the huge US Treasury market.

As Michael Hudson explains in his brilliant and too-little-studied work Super Imperialism, the perverse genius of the US global dollar hegemony was the realization, in the months after August 1971, that US power under a fiat dollar system was directly tied to the creation of dollar debt. The US debt and the trade deficit were not the "problem", they realized. They were the "solution".

The US could print endless quantities of dollars to pay for foreign imports of Toyotas, Hondas, BMWs or other goods in a system in which the trading partners of the United States, holding paper dollars for their exports, feared a dollar collapse enough to continue to support the dollar by buying US Treasury bonds and bills. In fact in the 30 years since abandoning gold exchange for paper dollars, the US dollars in reserve have risen by a whopping 2,500%, and the amount grows at double-digit rates today.

This system continued into the 1980s and 1990s unchallenged. US policy was one of crisis management coupled with skillful and coordinated projection of US military power. Japan in the 1980s, fearful of antagonizing its US nuclear-umbrella provider, bought endless volumes of US Treasury debt even though it lost a king's ransom in the process. It was a political, not an investment, decision.

The only potential challenge to the reserve role of the dollar came in the late 1990s with the European Union decision to create a single currency, the euro, to be administered by single central bank, the ECB. Europe appeared to be emerging as a unified, independent policy voice of what French President Jacques Chirac then called a multipolar world. Those multipolar illusions vanished with the unpublicized decision of the ECB and national central banks not to pool their gold reserves as backing for the new euro. That decision not to use gold as backing came amid a heated controversy over Nazi gold and alleged wartime abuses by Germany, Switzerland, France and other European countries.

Since the shocks of September 11, 2001, and the ensuing declaration of a US "global war on terror", including a unilateral decision to ignore the United Nations and the community of nations and go to war against a defenseless Iraq, few countries have even dared to challenge dollar hegemony. The combined defense spending of all nations of the EU today pales by comparison with the total of current US budgeted and unbudgeted military spending. US defense outlays will reach an official, staggering level of US$663 billion in the 2007 fiscal year. The combined annual EU spending amounts to a mere $75 billion, and is tending to decline, in part because of ECB Maastricht deficit pressures on its governments.

So today, at least for the present, there are no signs of Japanese, EU or other dollar holders engaging in dollar-asset liquidation. Even China, unhappy as it is with Washington's bully politics, seems reluctant to rouse the American dragon to fury.

The origins of the oil bourse
The idea of creating a new trading platform in Iran to trade oil and to create a new crude-oil benchmark apparently originated with the former director of the London International Petroleum Exchange, Chris Cook. In a January 21 article in Asia Times Online (What the Iran 'nuclear issue' is really about), Cook explained the background. Describing a letter he had written in 2001 to the governor of the Iranian Central Bank, Dr Mohsen Nourbakhsh, Cook explained what he advised then:

In this letter I pointed out that the structure of global oil markets massively favors intermediary traders and particularly investment banks, and that both consumers and producers such as Iran are adversely affected by this. I recommended that Iran consider as a matter of urgency the creation of a Middle Eastern energy exchange, and particularly a new Persian Gulf benchmark oil price.

It is therefore with wry amusement that I have seen a myth being widely propagated on the Internet that the genesis of this "Iran bourse" project is a wish to subvert the US dollar by denominating oil pricing in euros.

As anyone familiar with the Organization of Petroleum Exporting Countries will know, the denomination of oil sales in currencies other than the dollar is not a new subject, and as anyone familiar with economics will tell you, the denomination of oil sales is merely a transactional issue: what matters is in what assets (or, in the case of the United States, liabilities ) these proceeds are then invested.

A full challenge to the domination of the US dollar as the world central-bank reserve currency entails a de facto declaration of war on the "full-spectrum dominance" of the United States today. The mighty members of the European Central Bank Council well know this. The heads of state of every EU country know this. The Chinese leadership as well as the Japanese and Indians know this. So does Russian President Vladimir Putin.

Until some combination of those Eurasian powers congeal in a cohesive challenge to the unbridled domination of the United States as sole superpower, there will be no euro or yen or even Chinese yuan challenging the role of the dollar. The issue is of enormous importance, as it is vital to understand the true dynamics bringing the world to the brink of possible nuclear catastrophe today.

As a small ending note, a good friend in Oslo recently forwarded me an article from the Norwegian press. At the end of December, Sven Arild Andersen, director of the Oslo bourse, announced he was fed up with depending on the London oil bourse trading oil in dollars. Norway, a major oil producer, selling most of its oil into euro countries in the EU, he said, should set up its own oil bourse and trade its oil in euros. Will Norway - a member of the North Atlantic Treaty Organization - become the next target for the wrath of the Pentagon?

F William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press). He can be reached through his website, www.engdahl.oilgeopolitics.net.


At Friday, March 10, 2006, Blogger Red Tulips said...

Interesting article.

I happen to think Richard Perle is a horrible man who happens to be "Jewish." I have noted Richard Perle's evil for quite some time. he is also ugly as sin. Though, that is a tough one to debate. Is he as ugly...or uglier than sin? Tough indeed.


Seriously, the man's ugliness is a blight on the world.

Here is an article about Richard Perle, who I consider to be one of the most evil men currently on earth. He is why people are anti-Jewish and anti-Israel, however, I do not see him as representing Judaism or Israel.


The man is called "The Prince of Darkness" by friends and foes alike!


Interesting article you cited today. Not sure how I feel about it, but it's a good read. Makes you think.

At Friday, March 10, 2006, Blogger Confessions of a Malamute said...

What the article avoids is the price the u.s. will pay for nuking Iran. I would have to say that the u.s. will deservedly become a pariah nation. Attacking Iran is a war the u.s. can’t possible hope to win. All they will achieve is their own demise. The u.s. army is broken and the leadership of the u.s. is incompetent. The Iranian people will fight like hell to preserve their independence from the american jackboot. They saw what happened to Iraq and they know what life was like under the Shah. They wont submit to the u.s.

The only way the u.s. will get away with nuking Iran is to nuke itself first (since Iran doesn't actually have ANY nuclear capabilities despite the lies of the u.s. government). It’s a lose lose situation for the u.s.

As for printing trillions of Euro’s to offset the u.s. dollar, Europe doesn't have to. Dump enough u.s. dollars and its economy, already on the edge, will go over. Nuke Iran for no reason and the world wont care what becomes of america.

I don't personally think there is just one simple reason to go after Iran. There are many. In order to be world dictator the u.s. needs its hands on the oil pumps. China and Russia are not 3rd world nations. This non sense of the u.s. being the only world super power is exactly that. Non sense. Russia and China both have nuclear capabilities and the ability to deliver it. Unlike the u.s. Chinese economy is growing. Russia is recovering from its problems as well. I highly doubt that China or Russia will allow the u.s. to play god and establish itself as world dictator. This is an over reach based on the arrogance of america assuming it can do whatever it likes with no consequences to itself. It simply doesn't have the military capability to rule everything. The u.s. will find out what Germany did in WW2. It may have a powerful military but it cant fight the whole world. All that is needed to watch america go down in flames is a spark. That spark is Iran. Without oil the u.s. cant run anything at all let along its military. If Russia, Iran, Venezuela, get together and stop exporting oil to the u.s. its end game. Normally that would not happen. The u.s. however isn't playing by the rules and its not in the interests of the other superpowers of the world to let the u.s. succeed. At best the u.s. invades Iran and it receives the same treatment that the Soviet Union did in Afghanistan. This will complete the task of breaking the u.s. military and ending american hopes of being world dictator. At worst bush and criminals will use nukes and that could well spell the end for us all. The Iranian military is not helpless. The american people are not able or willing to sustain the large numbers of casualties necessary to take Iran out properly. A bombing campaign will not work. Which is why the war criminal government of the u.s. wants to use nukes. I knows it cant win without them and is hoping to get away with mass genocide. My personal view is the u.s. is finished as a nation. It’s a house of cards that will blow over without too much effort. bush and the criminal congress have no credibility left. The u.s. is in so much debt that it will never pay its way out and it cant possibly be able to borrow forever. Sooner or later the system will crash and when it does there will be some very unhappy faces in america. And smiles on the faces of the rest of the world. This is what american arrogance and war crimes has bought it. No matter how many paid off bottom feeders CNN interviews, the average person wont care if the u.s. goes down in flames. After pissing off the entire planet do you really think we out side america will care ? We don't.

At Friday, March 10, 2006, Blogger qrswave said...


Many thanks for your thorough analysis. You basically read my mind. I agree that there are a number of reasons behind the effort to attack Iran and I agree that the US does not have the military power to rule the world. If Americans don't do something to stop this madness, we're finished.

At Friday, March 10, 2006, Blogger Confessions of a Malamute said...

The worst part is the innocent will pay for the crimes of government. Innocent americans and innocent everyone. I’m personally sick to death of it. It doesn’t have to be this way. All it takes is a modicum of respect and tolerance. Something that bush and cronies are lacking to say the least.

At Saturday, March 11, 2006, Blogger Akber said...

Bush and cronies reflect US public opinion.

Lynndie England's hometown welcomed her as a hero. And the Abu Ghraib whistle-blower's parents had to board up their home and leave town.

A people deserve the government they have.

At Saturday, March 11, 2006, Blogger Akber said...

IMHO, the Eurasians are just biding their time for the right moment.

As you say in the other post, there are incredible things going on in the world. Trump was on Larry King Live the other day, saying, "There are wonderful things going on in Dubai right now." Dubai is leading the world in architecture novelty and construction - almosta a modern-day Xanadu.

China is leading in environmental laws and sustainable development, even while going through growing pains.

Ask an average American about China - "f*ng communists with no human rights" and about Dubai - "camel f*ing Arab ragheads".

What more do we need to know?

The US is a done deal. The only question is: how much damage can it do before it exits stage left?

At Sunday, March 12, 2006, Anonymous Byrne said...

Engdahl does not mention in late September 2000 & the consequential strengthening of the Euro. I am not sure of the change of the Euro:Dollar position, but the Euro certainly strengthened 10-15% against the British Pound.

This article provides an explanation for the oil currency arguement behind the IRAQ war

At Sunday, March 12, 2006, Blogger qrswave said...

Wow. Byre, those are OUTSTANDING links!

Many thanks!

At Monday, March 13, 2006, Anonymous Byrne said...

The William Clark article on the REAL REASON behind the IRAQ War is excellent. Clark has written a number of articles on the Iran situation too.

Perhaps you could do a front page article on the Iraq reason. One of the first things that Bremner did in Iraq was revert oil sales back to dollars.

Best Wishes & Keep up the good Work


At Sunday, March 26, 2006, Blogger JasonSpalding said...

Iraq --- Cold War II --- Back with a vengeance!

The war in Iraq is a critical blunder by State Department of the United States. The U.S.S.R. was before its break up was allied with Iran in its war against Iraq. Iraq at the time had the support of the State Department of the United States. You remember the Axiom the enemy of my enemy is my friend. So when the U.S.S.R. dissolved some in the state department that we no longer had to keep supporting Iraq. So Saddam stopped getting the due he was felt so he tried to conquer Kuwait. This pissed off to many in the world so the U.S.A. and the rest of the world stepped in and sent his soldiers packing back to Iraq. Now when Iraq became has become further destabilized the U.S. had to go in and insure the safety of our worlds needed oil supply. Flash forward till now and what is happening Iran wants to control its nuclear destiny and who is supporting them Russia a former member of the U.S.S.R. club. So the real question is Russia attempting a come back?

At Sunday, May 07, 2006, Blogger Tom said...

In economic terms, an Iranian Oil Bourse represents a much greater threat to the U.S. than an Iranian nuclear first strike!


Post a Comment

<< Home