Ming the Mechanic:
Dollars, Euros and Oil

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 Dollars, Euros and Oil2003-02-06 19:36
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Excellent article by Cóilín Nunan: "Oil, Currency and the War on Iraq". Fascinating explanation of some major economic mechanisms involving dollars and euros and oil. A very big reason that the United States is such an economically and militarily dominating country is apparently that U.S. dollar is the de facto world reserve currency. Lots of things are counted in dollars and some goods are only sold for dolars. That means that foreign governments and corporations and banks are keeping large dollar reserves. That essentially amounts to a huge loan the rest of the world is giving to the United States, which will subsidize the U.S. economy. In order to acquire those dollars, the rest of the world has to provide goods and services for those dollars. That allows the U.S. to have a huge import/export imbalance. Last November, 48% more imports than exports. It would be untennable for any other country to run such a deficit.

Next major point is that one of the reasons everybody has to have dollars is that the OPEC oil producting countries only accept dollars for oil. Well, not all of them. The only one that does something different is Iraq, which only accepts Euros for their oil, since 2000. And Iran is considering it as well. And the thing is that it might just as well be Euros that everybody used as a reserve currency. It would apparently be a better choice in many ways, because the European economies are more balanced, and the OPEC countries would end up getting more value for their oil. So, now, what would happen if Euros became the only choice for buying oil? Most likely the U.S. economy would plunge, because it would no longer be subsidized in that manner. And EU would probably be quite happy being subsidized in its place. Anybody thinks all this might have something to do with the great urgency to take over Iraq? And why would Britain support it?



Cóilín Nunan: Oil, Currency and the War on Iraq

It will not come as news to anyone that the US dominates the world economically and militarily. But the exact mechanisms by which American hegemony has been established and maintained are perhaps less well understood than they might be. One tool used to great effect has been the dollar, but its efficacy has recently been under threat since Europe introduced the euro.

The dollar is the de facto world reserve currency: the US currency accounts for approximately two thirds of all official exchange reserves. More than four-fifths of all foreign exchange transactions and half of all world exports are denominated in dollars. In addition, all IMF loans are denominated in dollars.

But the more dollars there are circulating outside the US, or invested by foreign owners in American assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. The dollars cost the US next to nothing to produce, so the fact that the world uses the currency in this way means that the US is importing vast quantities of goods and services virtually for free.

Since so many foreign-owned dollars are not spent on American goods and services, the US is able to run a huge trade deficit year after year without apparently any major economic consequences. The most recently published figures, for example, show that in November of last year US imports were worth 48% more than US exports. No other country can run such a large trade deficit with impunity. The financial media tell us the US is acting as the ‘consumer of last resort’ and the implication is that we should be thankful, but a more enlightening description of this state of affairs would be to say that it is getting a massive interest-free loan from the rest of the world.

While the US’ position may seem inviolable, one should remember that the more you have, the more you have to lose. And recently there have been signs of how, for the first time in a long time, the US may be beginning to lose.

One of the stated economic objectives, and perhaps the primary objective, when setting up the euro was to turn it into a reserve currency to challenge the dollar so that Europe too could get something for nothing.

This however would be a disaster for the US. Not only would they lose a large part of their annual subsidy of effectively free goods and services, but countries switching to euro reserves from dollar reserves would bring down the value of the US currency. Imports would start to cost Americans a lot more and as increasing numbers of those holding dollars began to spend them, the US would have to start paying its debts by supplying in goods and services to foreign countries, thus reducing American living standards. As countries and businesses converted their dollar assets into euro assets, the US property and stock market bubbles would, without doubt, burst. The Federal Reserve would no longer be able to print more money to reflate the bubble, as it is currently openly considering doing, because, without lots of eager foreigners prepared to mop them up, a serious inflation would result which, in turn, would make foreigners even more reluctant to hold the US currency and thus heighten the crisis.

There is though one major obstacle to this happening: oil. Oil is not just by far the most important commodity traded internationally, it is the lifeblood of all modern industrialised economies. If you don’t have oil, you have to buy it. And if you want to buy oil on the international markets, you usually have to have dollars. Until recently all OPEC countries agreed to sell their oil for dollars only. So long as this remained the case, the euro was unlikely to become the major reserve currency: there is not a lot of point in stockpiling euros if every time you need to buy oil you have to change them into dollars. This arrangement also meant that the US effectively part-controlled the entire world oil market: you could only buy oil if you had dollars, and only one country had the right to print dollars - the US.

If on the other hand OPEC were to decide to accept euros only for its oil (assuming for a moment it were allowed to make this decision), then American economic dominance would be over. Not only would Europe not need as many dollars anymore, but Japan which imports over 80% of its oil from the Middle East would think it wise to convert a large portion of its dollar assets to euro assets (Japan is the major subsidiser of the US because it holds so many dollar investments). The US on the other hand, being the world's largest oil importer would have, to run a trade surplus to acquire euros. The conversion from trade deficit to trade surplus would have to be achieved at a time when its property and stock market prices were collapsing and its domestic supplies of oil and gas were contracting. It would be a very painful conversion.

The purely economic arguments for OPEC converting to the euro, at least for a while, seem very strong. The Euro-zone does not run a huge trade deficit nor is it heavily endebted to the rest of the world like the US and interest rates in the Euro-zone are also significantly higher. The Euro-zone has a larger share of world trade than the US and is the Middle East’s main trading partner. And nearly everything you can buy for dollars you can also buy for euros - apart, of course, from oil. Furthermore, if OPEC were to convert their dollar assets to euro assets and then require payment for oil in Euros, their assets would immediately increase in value, since oil importing countries would be forced to also convert part of their assets, driving the prices up. For OPEC, backing the euro would be a self-fulfilling prophesy. They could then at some later date move to some other currency, perhaps back to the dollar, and again make huge profits.

But of course it is not a purely economic decision.

So far only one OPEC country has dared switch to the euro: Iraq, in November 2000. There is little doubt that this was a deliberate attempt by Saddam to strike back at the US, but in economic terms it has also turned out to have been a huge success: at the time of Iraq's conversion the euro was worth around 83 US cents but it is now worth over $1.05. There may however be other consequences to this decision.

One other OPEC country has been talking publicly about possible conversion to the euro since 1999: Iran, a country which has since been included in the George W. Bush’s ‘axis of evil’.

A third OPEC country which has recently fallen out with the US government is Venezuela and it too has been showing disloyalty to the dollar. Under Hugo Chavez’s rule, Venezuela has established barter deals for trading its oil with 12 Latin American countries as well as Cuba. This means that the US is missing out on its usual subsidy and might help explain the American wish to see the back of Chavez. At the OPEC summit in September 2000, Chavez delivered to the OPEC heads of state the report of the 'Interrnational Seminar on the Future of Energy’, a conference called by Chavez earlier that year to examine the future supplies of both fossil and renewable energies. One of the two key recommendations of the report was that ‘OPEC take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers’, i.e. OPEC should avoid using both the dollar and the euro for many transactions.

And last April, a senior OPEC representative gave a public speech in Spain during Spain’s presidency of the EU during which he made clear that though OPEC had as yet no plans to make oil available for euros, it was an option that was being considered and which could well be of economic benefit to many OPEC countries, particularly those of the Middle East.

As oil production is now in decline in most oil producing countries, the importance of the remaining large oil producers, particularly those of the Middle East, is going to grow and grow in years to come.

Iraq, whose oil production has been severely curtailed by sanctions, is one of a very small number of countries which can help ease this looming oil shortage. Europe, like most of the rest of the world, wishes to see a peaceful resolution of the current US-Iraqi tensions and a gradual lifting of the sanctions - this would certainly serve its interests best. But as Iraqi oil is denominated in euros, allowing it to become more widely available at present could loosen the dollar stranglehold and possibly do more damage than good to US economic health.

All of this is bad news for the US economy and the dollar. The fear for Washington will be that not only will the future price of oil not be right, but the currency might not be right either. Which perhaps helps explain why the US is increasingly turning to its second major tool for dominating world affairs: military force.

Copyright © Feasta. All rights reserved.


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20 comments

7 Feb 2003 @ 08:24 by fleer : War to kickstart the US economy?
Interesting point of view.

I think another reason for Bush to enter into a war against is the economic recession in the US.

As I recall it after operation Desert Storm in 1991, the US actually received more money in gratitude funds from various countries (Saudi Arabia was one country) than it cost to fight the war!

Bush would not stand a chance to be elected the next time in the midst of a recession. And a war seems to be the only solution the Bush administration can come up with to kickstarting the US economy.

The Bush doctrine also puts the resistance against prosecution of US soldiers in the international war crimes tribunal in a very very different light.

If this war is a "success", we´ll see more US aggression wars.

no thx I say.

Saddam is a monster, but Bush´s need to be in power is IMHO an even greater threat.  



8 Feb 2003 @ 14:27 by sharie : cause and effect
Yes, I've posted this before, that the Bush take-over of Iraq's oil will diffuse OPEC, and create a domino effect on the economies of Europe and elsewhere.

But the Iraq invasion isn't prompted by the american recession. Bush and his gang are the *cause* of the recession. They don't give a damn about the american economy or the american people. They're in it for themselves. And there will be no end to their greed, their invasions, or their wars because they have found a way to get rich while simultaneously reducing world population - 70% reduction in world population is their goal, leaving them the rulers of the world.  



15 May 2003 @ 16:08 by anonymous @209.197.2.35 : I love U.S.A.
Don't be so against America. Be more open-minded.  


5 Jul 2003 @ 14:10 by James Richardson @68.107.94.94 : Iraq War
I voted for Bush and now regret it immensely. His war in Iraq has turned me
from a life long Republican into ???...maybe even a Democrat. He will not
get my vote next year, nor the vote of anyone else whose mind I can change.
As for WMD I say hogwash....this war was for OIL and only OIL. Cheap oil for
Israel and control of the World oil supply by the US. It's a tragedy that innocent women and children of Iraq and our own troops have died to bring this about. Bush and his NeoCons must be removed from power.  



18 Nov 2003 @ 14:44 by ees death @199.183.160.223 : euro switch
What will happen? New York will will be hit with a WMD in 2004. This will cause the Euro switch and a Global Middle East Peace Treaty. A seven year treaty will be sighned. Security will encompass a global personal ID system that will be imposed on all populations. You will be subject to arrest if you do not comply. How much does a micro implant cost? Just enoculate and don't abate or els. Why would you refuse? If you enquire this scinereo, you may see the logic of, men behaving badly.  


4 Dec 2003 @ 16:26 by Fenster der Wahrheit @64.173.241.138 : Oil...Oil...All the time
All I hear from the anti-war crowd is "Bush is in it for the oil", "Oil caused this war", "Inncoents shouldn't die for oil", blah...blah...blah...go put on your polyester fiber blend shirt and get in your 4 mile per gallon SUV paid for with daddy's credit card and go find something better to waste your time on you ignorant whelps still sucking on your momma's teet...Of course he's in it for the oil! Take the blinders off your eyes and come off your high horse...The real world sucks...Deal With It!  


11 Jan 2006 @ 16:37 by Harry @68.167.224.148 : Euro's verses Dollars for Oil
Hm this is all very well for theorists and economists sitting on the fence.

Originally after WW2 the US was the only country in the world with a stable economy and infrastructure. So it was naturally the place to invest for commodities and the US Dollar was the only currency to be used because of the reserves the US had.

However in the Vietnam era US reserves dropped to $B10 and at that time was suffering with economic decline. President Nixon at the time stopped the US Dollar being linked to Gold Reserves and floated the US Dollar on the world markets.

Regardless of any article or link anyone produces on this subject there is one under lying fact that is ignored.

The Oil for Food program run buy the UN was a Euro account! But Oil was being traded in Dollars world wide. Taking into account the exchange rates between the Euro and the Dollar (at that time 1EU = $1.07) it was a very wise and an intelligent decision by Saddam to sell Oil in Euros. That move aided him by acquiring more food and goods saving himself a lot of money in the process.

As oil reserves diminish globally and new technology replaces it, the need for OPEC and the Dollar as a world currency will naturally decline. So to say a move to the Euro and the collapse of the US dominated markets will occure.... is pie in the sky!! It may happen but not in our life times!!!

I think you will see a fully fledged World Currency first with every nations using the same monetary system....... Science Fiction... The Credit?  



11 Jul 2006 @ 12:08 by John @68.199.19.153 : New Technology vs. Oil
As far as new technology REPLACING oil in our lifetimes, is fantasy. The only thing it will do is slow our need for oil. Our entire infrastructure (not just motor vehicles) runs on oil, and since it will take around 30-50 years to replace, not to mention about 45 Trillion Dollars, I think you get the picture.
Even with the current new technologies(Solar, Wind, Alternative Fules...) the fact remains that oil is the most concentrated energy source known to man. Read lifeaftertheoilcrash.net  



30 Jul 2006 @ 06:10 by Mark @66.189.204.142 : Iraq War for Euros I think not.
John Stossels Book - Myths Lies and Downright Stupidity stated the Petrol Sands of Canada contain close to a 400 year supply of oil. Granted at current production rates it cannot sustain global consumption. The fact remains the age of cheap oil is coming to a close.

But to believe the US would go to war only on the grounds of artificially bolstering the dollar is ludicrous. Many economists will state benefits to the devaluing of the dollar as a way to fend off the US trade deficit. A devalued dollar will prompt American and the rest of the world to consider buying American products. But the authors seem to believe America is getting something for nothing because these countries sell there goods to America. The question I have is who else these countries would be selling their good to if not Americans? Americans up to the recent rise in energy cost have had more disposable income than the average European or for that matter any other citizen of the world, the reason being the taxation in these countries makes it imposable. People invest in American companies because it is profitable. Americans have out sourced most of the American jobs but buying cheap imports. Many people during the last presidential cycle beleaguered big business for out sourcing jobs that are performed by
Americans when in reality if the clothes you wear the car you drive even the gasoline you buy does not state that is made in the US of A you have out sourced an American job.

The only good thing I can think of that has come from this Urban Legend of the Petro Dollar Wars is they scared the hell out Hugo Chaves, he really believes the US will invade because he want Euros for Oil. If he wants his check made out in Euros it will be.

America is capable of energy independence but as of yet cheap oil has not made it essential. Anyone who tells you other wise has something to sell, usually a book.  



27 Jul 2007 @ 08:11 by AMERICAN @24.12.230.205 : ENJOYING THE SPOILS OF WWII
YES, THE CONVERSION FROM THE DOLLAR WOULD BE GREAT! IT WOULD ATTEMPT TO CREATE A NEW EUROPEAN EMPIRE. THE EUROPEANS HAVE A GREAT HISTORY OF BEING A PEACE LOVING PEOPLE, UNLIKE THOSE WAR MONGERING AMERICANS! THAT WOULD ALMOST WORK IF ONLY THE DOLLARS COLLAPSE DIDN'T TAKE THE EURO AND ALL OTHER CURRENCIES ALONG WITH IT. AMERICA ONLY HAPPENS TO BE THE WORLD LARGEST MARKET (AGORA). MOST FORIEGN COMPANIES WOULD GO BELLY UP IF THEY WEREN'T TAKING IN PROFITS FROM AMERICAN CONSUMERS!  


24 Sep 2010 @ 12:28 by hermes bags @59.60.76.19 : dsadsadaw
Don't be so against America. Be more open-minded.  


19 Dec 2014 @ 14:01 by Marchelle @142.58.110.22 : LXwWIRPYFD
You misread the arilcte.The Chinese own a large amount of American dollars. With the lowering of the value of the dollar, their holdings are not worth as much. And since they have such a large amount, if they sold most or all of what they have, it would make the dollar become worth even less. And if they sold American dollars, they could buy Euros, instead, since it is currently a strong currency.If this happened, it would be catastrophic. Europeans do not want their currency worth so much, either, because while it can make traveling cheaper, it makes the cost of living at home increase greatly. The hope is that the Chinese would not do something so rash. Was this answer helpful?  


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