Centre for Research on Globalisation
Centre de recherche sur la mondialisation


The system of the dollar acting as world (reserve) currency in oil trade:

Iraq, oil and U.S. world hegemony (II)

by the International Workers Association (IWA)

Oslo the 16th of March 2003 IWA-Secretariat
www.globalresearch.ca   22 March 2003

The URL of this article is: http://globalresearch.ca/articles/IWA303A.html

The U.S. world hegemony is based on military and economical power. By attacking Iraq, the U.S. can fulfil their goal of controlling the entire Middle East, but the outcomes are dependent on what will happen with the war. The U.S. goal is clearly to obtain a “quick victory” scenario lasting only one or two months, and this explains why the U.S. is threatening Turkey. They need to attack Iraq on at least two fronts, from Kuwait in the South and the Kurdish areas in the North.

On the other hand, the U.S. fears a “prolonged conflict” lasting three to six months with combinations of burning Iraqi oil-fields, urban fighting, heavy casualties, pictures of a humanitarian disaster on the news, massive foreign denouncements of the U.S. policy. These fears are not humanitarian, but economical. Given the fact that the trend of the slow U.S. economical growth in the fall of 2002 continues or even increases, a war against Iraq can be triggering a serious economical recession or crisis.

The dictator Saddam Hussein stated as a propaganda effort during the Gulf War I that he would be longer in power than President Bush Sr. He was right as burning oil -fields in Iraq and Kuwait, a rise and drop of oil prices and a sharp U.S. and world economic decline followed the war, and President Bush wasn’t re-elected. Today Saddam Hussein says he will win the war. This seems unlikely, as the U.S. killing machine is ready for attack in order to implement a regime change. But does Saddam Hussein have a “secret weapon”?

This question makes it necessary to look upon a mechanism in which the U.S. economical hegemony is established, and in this mechanism oil is central. The oil industry was born in the United States, and both the prices and payments of oil are dominated in dollars. Nations buy and hold dollars like they buy and hold gold because they can`t purchase oil without dollars. It is estimated that as much as two-thirds of central banks official foreign exchange reserves are denominated in dollars.

Similarly the oil- exporters keep their huge profits in the currency in which they receive the payments. Investing these dollars (called petrodollars) back in the U.S. economy is possible at zero currency risk. Norway, the third largest oil exporter, has invested tens of thousands of millions of dollars in stocks and U.S. government bonds. Russia, the second largest exporter does the same. Saudi Arabia, the largest oil exporter and producer might have as much as 700 000 000 000 dollars invested in the United States.

This system of the dollar acting as world (reserve) currency in oil trade and most of the world trade, keeps the demand for the dollar “artificial” high. As no other nation it enables the United States to carry out printing dollars at the price of nothing, to fund tax cuts, increased military spending and consumer spending on imports. This is shown by the figures of the United States net debt accumulated over years to the rest of the world: In 2002 it was as enormous as 2800 000 000 000 dollars, a level more than double that recorded in 1999. Any other nation would have seen its currency and stock market crash hard. (Compare Argentine in 2001!)

The U.S. foreign dept increases as the expansion goes on. As long as the U.S. has no serious challengers and the other nations have confidence in the dollar and U.S. policy, the system functions. But, as we know, capitalism can`t exist without competition and imperialist struggle about control of territory, resources and other nations` economies. We see this clearly in the Middle East today. Iraq and the Middle East is an imperialist battleground about access to present and future oil supplies, of implementing free trade zones and of controlling and undermining competitors. And additionally it brings us to a very important and untold root of the war: It`s a currency war between the dollar and the euro that in fact can undermine the economical foundation of the U.S. hegemony!

This brings us back to the so-called “secret weapon” of Iraq. In the end of the 2000, Iraq switched its oil denomination from “the enemy currency” dollar to euro. When Iraq switched to euro, the value was low compared to the dollar, and it was considered as a political move with no economical sense. But the alarm bells were ringing in Washington, and the crucial question was: Who will follow next?

After the September 11th 2001, we know more of what has happened. The Afghanistan war became “a war against terrorism”. President Bush declared Iraq, Iran and North Korea as «Axis of Evil States». We have seen a further U.S. militarization of Colombia, and the important U.S. oil supplier Venezuela suffered a coup attempt in April 2002 etc. We must also remember that a report to the U.S. Congress January the 8th 2002 outlined that the Pentagon should be prepared to use nuclear weapons against China, Russia, Iraq, North Korea, Iran, Libya and Syria. No wonder, that the alarm bells were ringing in these countries!

Today we know that the dollar dropped 15% last year towards the euro, and 5% so far in 2003. The Iraqi switch to euro, the expected move by Iran and the strengthening of the euro, have put a pressure on OPEC and other main oil-exporters to drop the dollar as transaction currency. And as the future prospects show a looming oil marked, consuming nations must switch currencies when oil producing states do so. The Iraqi trade partner Jordan did this in 2000.

If we take the largest oil exporters, the third largest Norway is traditionally tied to the United States as a strategically important country with borders to Russia. Norway is not a political member of the EU, but now the public opinions polls show that a majority is in favour of the European Union. If Sweden and Denmark decide to accept euro as their currency, Norway might join the EU and it is unlikely to think that oil transactions can be kept in dollars. If Norway switches to euro, Great Britain has to follow as both produces the oil from the North Sea. Contrary, if Britain implements the euro currency, Norway will have to follow. Both countries are today in fact squeezed between the United States and the EU.

Russia, the second largest oil exporter, has according to an article of “The Observer” on the February 23rd, recently discussed to adopt the euro for oil sales. Russia acts in an alliance with France and Germany and (partly) China against the U.S. It is important for the U.S. to try to split Russia from Old Europe (Germany and France) since Russia has oil.

And when it comes to Saudi Arabia, beyond doubt he largest producer and exporter, we will mention an event that shows how vulnerable the U.S. is. In the aftermath of September 11th more and more tracks went towards Saudi Arabia. 15 of the 19 terrorist hijackers were from Saudi Arabia and an extensive research was (and is) made by the U.S. and Israel to reveal Saudi terrorist connections.

On August the 6th 2002 the Washington Post described a report prepared by the Consultation Council of the U.S. Defence Department (the Pentagon). The report, which was extended by a researcher at the Rand Corporation, reflected views of the growing trend inside the U.S. Administration, which classifies Saudi Arabia as an enemy. It also called for targeting the Saudi oil - fields and investments in the United States, unless the Saudis stopped their support to terrorism.

The Financial Times reported the August 20th that the Saudis had withdrawn tens of thousands of millions of dollars from the United States in protest against the accusations, and the article indicated that the Saudi money shifts may have contributed to the downward pressure on the dollar. Later, it became silent about this “intermezzo”. The U.S. denied that the report reflected official views and the Saudis denied the withdrawing of investments from the U.S.A.

We wrote in part I that it seems to be a matter of U.S. National Security of not talking about oil in the Iraq conflict. This is partly because a regime change would benefit U.S. and U.K. oil companies, and not the Russian, Chinese, French etc. companies that have made contracts with the Iraqi dictatorship. The reason is further highly that the U.S. is dependent on Saudi Arabia until the job is done in Iraq. They need military bases in Saudi Arabia, their oil and continued Saudi petrodollar investments in the U.S.

A “quick victory” scenario against Iraq can fulfil the U.S. goal of controlling the entire Middle East. After the war, one of the first priorities of the planned U.S. military junta will be to switch Iraqi oil transactions back to dollars showing the neighbouring countries Saudi Arabia, Syria and Iran the price of challenging the Empire. They will also implement a free trade zone for the Middle East and an increase the Iraqi oil production in order to decrease oil prices, and by this undermine oil exporters as Saudi Arabia. (See part I)

A “prolonged conflict” scenario, and even an intermediate one, can create major economical problems for the U.S. and the world economy. The U.S. will be dependent on Saudi Arabia spare oil production capacity and they can’t, as the time goes on, rely on releasing their own Strategic Petroleum Reserves to adjust prices. The oil prices are in this scenario expected to rise from today’s already high price of 35$ to 40$ per barrel. This price rise can, as shown in the past, be followed by an economical recession.

It must be noticed that Japan is very vulnerable as they get as much as 70% of their oil imports from the Middle East. If a crises starts in Asia, it can be triggering a major economical world recession and crisis. Investments can be withdrawn from the U.S. and switched to euro as the dollar value drops.

These are desperate scenarios, but we are living in desperate times of the global capitalism.

(To be continued)

 Copyright IWA  2003.  For fair use only/ pour usage équitable seulement .