Tuesday, February 24, 2004
Rise of the Petroeuros: No Blood for Greenbacks?
The world of international currency has been in a state of suspended animation ever since President Nixon chose to de-couple the dollar from the gold standard back in the early 1970s. Until that time, paper currency had been valued with a corresponding amount of gold or other precious metal held by the nation that issued the bills. Nixon’s removal of a gold standard meant that dollars were now worth what was an agreed upon value, rather than any commodities balance in Fort Knox.
One way that the dollar continued to play a dominant role was by multilateral agreements to use dollars for certain transactions, the most important of those being an agreement between the United States and Saudi Arabia to transact oil products through OPEC in dollars, which became known as Petrodollars.
The importance of the dollar as a worldwide currency is maintained is by assuring that petroleum transactions between Japan and Saudi Arabia are conducted in dollars rather than directly in yen and dinars. This keeps demand for dollars high around the world, since it is the universal currency exchanged for the world’s most important energy source.
But there are signs that this agreement may be just another artifact of the Cold War era whose time is drawing to a close. The emergence of the euro as a currency to challenge dollar hegemony is one development, as is the recent decline in the dollar’s value. The final straw, however, may be more political than economic.
OPEC countries surprisingly announced a move to curtail production this month. The result would be to keep world prices at their high levels. The Minister from Oman expressed this reason for the decision, “We are a nation that earns our salary in dollars and pays our expenses in euros.” The same could be said for most Middle East nations that purchase the bulk of their goods and services from Europe.
As the dollar continues to decline in value relative to the euro it would make increasing sense for nations in Eastern Europe, Central Asia and the Middle East to convert their petroleum revenues to the common currency of Europe. There is a recent precedent for this conversion, as well as a strongly cautionary tale—Saddam Hussein’s Iraq.
As a thumb to the nose of the US and Britain, when the Food for Oil program was instituted in Iraq the payments were made in euros at Saddam’s request. The institutional threat to this shift was not unnoticed in the United States. Several writers and even a former Pentagon military analyst gave this as one of the primary, and hidden, reasons for the current War in Iraq. These articles by Marc Cooper and P.D. Scott go into great detail about this aspect of the war as well as the politicization of the intelligence process. It’s disturbing reading, no doubt—one with more than a hint of conspiracy theory. However, the fact that one of these commentaries comes from a lifelong Republican conservative military analyst, one who retired from the Pentagon so she could publicly go on the offensive against the corruption of her former colleagues, makes for sobering commentary not easily dismissed.
It is possible, however, that in the final analysis the US may not have any say over a possible rise of the Petroeuro. OPEC nations disgusted with US policies toward Israel and Palestine and the ongoing stalemate in Iraq could be induced to making this change unilaterally. The US may well increasingly find itself at the mercy of its creditor nations as our dollar loses value and our balance of trade continues to decline.
This,too, is not without precedent. Scott notes:
"The US is strong enough to dominate the world militarily. Economically it is in decline, less and less competitive, and increasingly in debt. The Bush peoples' intention appears to be to override economic realities with military ones, as if there were no risk of economic retribution. They should be mindful of Britain's humiliating retreat from Suez in 1956, a retreat forced on it by the United States as a condition for propping up the failing British pound."
With friends like these. . .
The world of international currency has been in a state of suspended animation ever since President Nixon chose to de-couple the dollar from the gold standard back in the early 1970s. Until that time, paper currency had been valued with a corresponding amount of gold or other precious metal held by the nation that issued the bills. Nixon’s removal of a gold standard meant that dollars were now worth what was an agreed upon value, rather than any commodities balance in Fort Knox.
One way that the dollar continued to play a dominant role was by multilateral agreements to use dollars for certain transactions, the most important of those being an agreement between the United States and Saudi Arabia to transact oil products through OPEC in dollars, which became known as Petrodollars.
The importance of the dollar as a worldwide currency is maintained is by assuring that petroleum transactions between Japan and Saudi Arabia are conducted in dollars rather than directly in yen and dinars. This keeps demand for dollars high around the world, since it is the universal currency exchanged for the world’s most important energy source.
But there are signs that this agreement may be just another artifact of the Cold War era whose time is drawing to a close. The emergence of the euro as a currency to challenge dollar hegemony is one development, as is the recent decline in the dollar’s value. The final straw, however, may be more political than economic.
OPEC countries surprisingly announced a move to curtail production this month. The result would be to keep world prices at their high levels. The Minister from Oman expressed this reason for the decision, “We are a nation that earns our salary in dollars and pays our expenses in euros.” The same could be said for most Middle East nations that purchase the bulk of their goods and services from Europe.
As the dollar continues to decline in value relative to the euro it would make increasing sense for nations in Eastern Europe, Central Asia and the Middle East to convert their petroleum revenues to the common currency of Europe. There is a recent precedent for this conversion, as well as a strongly cautionary tale—Saddam Hussein’s Iraq.
As a thumb to the nose of the US and Britain, when the Food for Oil program was instituted in Iraq the payments were made in euros at Saddam’s request. The institutional threat to this shift was not unnoticed in the United States. Several writers and even a former Pentagon military analyst gave this as one of the primary, and hidden, reasons for the current War in Iraq. These articles by Marc Cooper and P.D. Scott go into great detail about this aspect of the war as well as the politicization of the intelligence process. It’s disturbing reading, no doubt—one with more than a hint of conspiracy theory. However, the fact that one of these commentaries comes from a lifelong Republican conservative military analyst, one who retired from the Pentagon so she could publicly go on the offensive against the corruption of her former colleagues, makes for sobering commentary not easily dismissed.
It is possible, however, that in the final analysis the US may not have any say over a possible rise of the Petroeuro. OPEC nations disgusted with US policies toward Israel and Palestine and the ongoing stalemate in Iraq could be induced to making this change unilaterally. The US may well increasingly find itself at the mercy of its creditor nations as our dollar loses value and our balance of trade continues to decline.
This,too, is not without precedent. Scott notes:
"The US is strong enough to dominate the world militarily. Economically it is in decline, less and less competitive, and increasingly in debt. The Bush peoples' intention appears to be to override economic realities with military ones, as if there were no risk of economic retribution. They should be mindful of Britain's humiliating retreat from Suez in 1956, a retreat forced on it by the United States as a condition for propping up the failing British pound."
With friends like these. . .
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