When it comes to Uncle Sam and oil you simply don’t mess around. I don’t mean that in a frivolous way either, playing about with Oil supply will get you invaded, it has happened before (both Gulf Wars) and can/will happen again.
Iran’s leader Mahmoud Ahmadinejad might not be your favourite leader, and he does some of the disgraceful things that are a hallmark of some Middle Eastern politicians, such as claiming there was no holocaust. Perhaps for them ‘holocaust’ is subjective given that there is one happening in Iraq today and nobody is talking about it any more than the SS did back in the 1940’s, the only saving grace at the moment is that it is not a state sponsored exercise. Anyways, Ahmadinejad might not be to your liking but he is the legally elected President and the leader of Persia, thus far his wild comments and defiant stance when it comes to things like nuclear power have brought about international pressure but the thing that might make his country the final resting place of many bombs is the new oil bourse which threatens the very basis of the US economy.
Now, what is an oil bourse? Simply put its a place where oil commodities are traded, there are three main markets in the world at the moment, the ‘West Texas Intermediate’, ‘North Sea Brent Crude’, ‘UAE Dubai Crude. The actual Bourses – which is where the trading of this oil takes place – are currently in New York (NYMEX) and London (IPE: international Petroleum Exchange). And now there is new Bourse in Iran.
The Iranian Oil Bourse will not trade in US Dollars, it will trade in Euro’s and Iranian Rials (ideally), but in fact they will accept almost anything other than FRN’s (Federal Reserve Notes – the US Dollar), Rubles, Yen, and Euro are all welcome.
Currencies are no longer asset backed but demand backed, so when you heard about ‘gold standard’ that meant that for every note there was a corresponding amount of gold held to ‘back’ it. In the 70’s though the US Dollar and many others ‘floated’ in other words, their worth was set by world-wide demand. The one advantage the dollar had over its rivals was that markets such as Oil were traded in USD so that currency would always have to be held, in fact USD’s were one of the main currencies held by any country as part of the Bretton Woods Regime.
Bretton Woods Regime, now there’s a few words that truly shaped economic history and yet they don’t get even a tenth of the attention (outside of Economics schools) that they deserve. The gold backing to the US dollar was the very reason that it became the standard in many commodity markets, this was in a world where many countries had no constant and certainly not the wealth/security to hold all of the required gold. In 1971 however Nixon abandoned the scheme because deficits from overseas spending was crucifying the dollars. The new floating currency was not across the finish line yet though, in 1973 during the Oil Crisis the Dollar was the only accepted payment, that’s because it was a reliable currency. Oil was traded in dollars from then on. After the cold war the deregulation and flow of currency internationally meant that your countries currency could come under attack (the Thai Baht had this happen in 1997 during the Asian Currency Crisis) and this risk meant that countries were basically forced to hold more US dollars than necessary in order to protect themselves and have some kind of economic basis for the valuation of their own money and there you have the foundations for Dollar Hegemony.
That meant that for exporting countries the money they make in USD can’t really be spent domestically because they constantly have to hedge their own currencies with the USD holdings and thus all it really does is help prop up the US economy who can then print off all the money they like because somebody somewhere is going to have to hold it for them worldwide dollar deposits represent almost 65% of the currency held, that is an insane sum of money, however, if the EURO starts to take hold (and it has risen as a reserve currency every year that it has been in existence), the all of these dormant US dollars might start to find their way home, if oil is in any way popularly traded in Euro then this could happen much quicker than anticipated.
Iran acting alone can’t really do too much, but then throw in some of the other nations which have become fundamentally anti-US (primarily on the back of the performance and decisions of George Bush, the US backlash was never noticeable under Clinton) you get a picture of how big the issue can become. Venezuela’s Hugh Chavez would be more than happy to go in on the new oil bourse, Venezuela is the fourth biggest oil production nation right now, not something many people really think about. Then take a look at some of the other countries making up the OPEC basket: Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Algeria, UAE, Saudi Arabia, and Qatar. In that list there are only two US friendly nations, the rest are either Staunchly opposed to the United States (Venezuela, Iran, Iraq, Libya, Nigeria, Indonesia), indifferent (UAE, Qatar) or only in existence because of the US – and therefore a paid for ally – (Saudi Arabia, Kuwait) – and of the latter Kuwait was actually talking about going to a non-dollar linked bourse as well.
I don’t want to go down the route of conspiracy theories but the fact that George Bush went on a middle east tour so close to the end of his term could have been to say in person, unequivocally and face to face that any country crossing the line is open to attack, after all, the nail in Iraq’s coffin was the move to go non-dollar. The USA needed a puppet government in Iraq or at the minimum a US reliant leadership the way they have in Saudi Arabia, because the Saudi’s (it is well known) only keep power over their nation thanks to the USA, their human rights record almost makes Saddam Hussein look like an alter boy, they are – the House of Saud – some of the worst dictators going. Saddam Hussein didn’t get hung for killing 183 people, if that was the way law worked then Saudi Arabia would be without leadership tomorrow, he was killed because he tried to make his country operate on petroeuros and not petrodollars. The main effect of this decision is seen in the Petrodollar Warfare of 2003 until now, where the death toll is fast closing in on 1,000,000 human lives.
One million lives… It seems crazy when you put it down in act numbers, that is one million human beings, like me or you, sentient beings who did not want to die, people who are likely praying for a return of Saddam rather than to go on paying the price of a ‘Western Freedom’ which they likely won’t understand or appreciate. It creates a worrisome picture for all of the west as the most likely result is that Iraq will become a hotbed for terrorist recruitment, if you lose a few family members to a stray bomb you can be instantly incensed to become a terrorist, or ‘freedom fighter’ as they would call themselves.
The economic impact will also be felt, by and large by the general public in the USA, at this point it’s probably safe to say that the war doesn’t hold popular support but that won’t stop the economic repercussions from hitting the US economy in a variety of ways, in effect what war in the middle east has done is create a dollar backlash which will hurt America more than an oil shortage would because hungry buyers from China and elsewhere will now snap up the oil supply, the FRN’s will go back to America and hurt the currency even more when it is already at 30 year lows (this was indeed timed to kick the buck while it was down). The Russians have been looking for a dollar-alternative platform for quite some time as well, and they will likely get in on the act soon. With a buyer like China in the wings there is guaranteed demand and if everybody then stops holding USD as a reserve currency then it will be a scary situation for the world economy.
Nobody can foresee the outcome accurately, the new Iranian Oil Bourse is not regulated, many pundits question whether they can therefore be trusted? Only time will tell, however, the best gauge is probably to watch the movements in USD rates.