Post by Papa C. on Jan 11, 2006 14:04:00 GMT
War in Iraq, 'petro-dollar' and the challenge by euro
There were many factors related to the Iraqi oil, driving Bush administration to intervene in Iraq militarily. But the biggest one seems to be about the currency used to trade oil: the role of preserving the dollar as the world’s reserve currency. This appears to be the major driving factor contributing US policy over Iraq. In other words, the need to dominate oil from Iraq is deeply intertwined with the defence of the dollar.
Oil has been a major US concern about Iraq since the start of the Bush administration, and indeed earlier. Iraq’s proven oil reserves are 113 billion barrels, the second largest in the world after Saudi Arabia, and eleven percent of the world’s total. The total reserves could be 200 billion barrels or even more, all of it quite easy and relatively cheap to extract. Because the US is the world's largest user of petroleum, and its appetite is growing because of its standards of consumption, it needs control over the oilfields of the Middle East.
The US policy, however, does not only want to control oil for its own consumption, but also to deny this control to other important industrial powers - European Union, China, Japan. For geopolitical reasons and reasons related to energy security it wants to determine that Europe's access to oil will be routed through it. Indeed, for this reason and another, the war in Iraq was directed as much against major powers in Europe as Iraq, a fact to which the "old Europe" of Chirac and Schroeder were quite alert. As in the case of the Caspian oil, the US wants to deny Iraq’s oil to China as well, which has a quickly increasing requirement of imported crude. Since America perceives China as its potential rival in establishing a secure and dynamic global system under its own control, this is quite a significant reason for the Bush administration’s persistence to keep China out of the oil regions of Eurasia.
There were many factors related to the Iraqi oil, driving Bush administration to intervene in Iraq militarily. But the biggest one seems to be about the currency used to trade oil: the role of preserving the dollar as the world’s reserve currency. This appears to be the major driving factor contributing US policy over Iraq. In other words, the need to dominate oil from Iraq is deeply intertwined with the defence of the dollar.
Since the emergence of the United States as the dominant global superpower after 1945, the hegemony of the US has rested on two unchallengeable pillars. First, the overwhelming US military superiority over all other rivals; and second, the control of global economic markets with the dominant role of the US dollar as reserve currency. Reserve currencies are held by governments and institutions outside the country of issue and are used to finance international economic transactions, including trade and the payment of debts. Reserve currency status is not just an international status symbol. It brings international seigniorage, benefits for ‘home’ financial institutions, relaxation of the ‘external constraint’ on macroeconomic policy, a greater role for the issuer in international institutions, and the wider geopolitical consequences of exercising currency hegemony.
In the aftermath of the Second World War this was understandable because the US dollar was backed up by gold. In 1971, US president Richard Nixon took the dollar off the gold standard that has been agreed to at the Bretton Woods Conference in 1944. Since 1971 the dollar has been an irredeemable currency, no longer defined or measured in terms of gold. This removed the restraints on printing new dollars. The dollar has become the world’s dominant currency and the core reserve asset of central banks all over the world. It has replaced gold as an international currency. Central banks around the world have built up large reserves of dollar. Those dollars flow back into the US banking system in the form of investments in US dollar-denominated assets.
The dollar hegemony is key to the future of American global dominance, in many respects as significant if not more so, than the overwhelming military strength. And the Petrodollar has been at the heart of the dollar hegemony since the early 1970s. Almost two-thirds of the world's currency reserves are kept in dollars, because oil importers pay in dollars and oil exporters keep their reserves in the currency they are paid in. The entire global oil trade is conducted in dollars. This means that everyone needs to keep dollars. This effectively provides the American economy with an interest-free loan, as these dollars can be invested back into the U.S.A. with zero currency risk. This money is not inactive; it is invested in dollar securities like US Treasury notes, stocks, mutual funds, and bonds. The US dollar's current strength is supported by OPEC’s requirement that all OPEC oil sales be denominated in dollars. This was secured by an agreement between the US administration and Saudi Arabia, the largest OPEC oil producer. This had been determined in June 1974 by Secretary of State Henry Kissinger, establishing the US-Saudi Arabian Joint Commission on Economic Cooperation. In 1975 OPEC officially agreed to sell its oil only for dollars.
America practically borrows today from the entire world without keeping reserves of any other currency. Because the dollar is de facto the global reserve currency, the US currency accounts for approximately two-thirds of all official exchange reserves. America does not have to compete with other currencies in interest rates; even at low interest rates, capital flies to the dollar. The more dollars there are circulating outside the US, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. 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. The US has a luxury of having its debts denominated in its own currency. This is the position the US has enjoyed for 30 years. It means that the US has been receiving a huge subsidy from everyone else in the world. The United States economy is therefore intimately tied to the dollar's role as reserve currency. The dominant position of the US dollar in world markets is not only a matter of pure economics, but also “deeply rooted in the geopolitical role of the United States.”
Until the advent of the Euro in late 1999 there was no potential challenge to this dollar hegemony in world trade. The coming of the Euro has threatened the dominant role of the US dollar as reserve currency. Some European leaders have even said that the euro's main aim is to put Europe on an equal monetary footing with the United States - ending the dollar's hegemony, in the word of President Jacques Chirac of France.
In just a few years the Euro has emerged as a real alternative to challenge the dollar hegemony in world trade. It has established itself as the second most important currency on the world’s financial markets. Just before the introduction of the euro, the outstanding amount of bonds and notes denominated in the legacy currencies of the euro accounted for barely 28 % of world issues, compared to 45 % for dollar-denominated bonds and notes. By mid-2003, the gap became much smaller: the share of issues in dollars had fallen to 43 %, while the euro’s share had increased to 41 %. And even more spectacular development took place on the money market. At the end of 1998, money market instruments denominated in the euro’s predecessor currencies accounted for just over 17 % of world issues, compared to 58 % for dollar denominated instruments. By mid-2003, the share of issues in dollars had fallen to 30 %, while the share of euro issues had climbed to almost 46 %. The Euro today accounts for one quarter of the global market.
Iraq was the first OPEC country, in November 2000, to convert its reserves from dollars to euros. This was the first time an OPEC country dared violate the dollar price rule. Iraq also converted $10 billion of its currency reserves to euros. Since then the value of the Euro has increased, and the dollar has begun to decline. Libya has been urging for some time that oil be priced in euros rather than dollars. Iran, Venezuela and other countries have indicated that they would denominate their petroleum trade in euros. During 2002 the majority of reserve funds in Iran's central bank have been shifted to euros. Some in Saudi Arabia have called for switching to the euro as “a more effective punishment than an oil embargo for the United States, Israel’s principal source of financial and political support”. In October 2003, Russian President Vladimir Putin announced that Russia might price its oil in euros as well. Since the oil trade is a central factor underpinning the dollar's hegemony, all these are potentially very significant threats to the strength of US economy in particular, and the US global hegemony in general.
With a significant part of the petroleum trade uses euro, instead of dollars, many countries would have to keep a part of their reserves in euros. The dollar would then have to compete with the Euro for global capital. Not only would Europe not need dollars anymore, but Japan which imports more than 80 % of its oil from the Middle East have to convert most of its dollar assets to euro. The US, too, being the world’s largest oil importer would have to get hold of euro reserves. This would be disastrous for the American attempts at monetary management. Not only they would lose a large part of their annual subsidy of effectively free goods and services, but that switch to euro reserves from dollar reserves would bring down the value of the US currency. Even a modest shift out of dollars, or a change in the flow, would create significant changes. If the euro becomes a bigger reserve currency i.e. if the US were to share its reserve currency status with the euro it is also likely to mean either the US buys more euro or the Europeans reduce their dollar holdings and buy euros.
That is why there is a clear and definite oil (and Petrodollar) connection in the recent military conflict in Iraq. This financial dimension is a power game of the highest geopolitical significance. The future of the dollar/ euro competition to be the global reserve currency is far from a minor issue of interest only to banks or currency traders. A hidden war between the dollar and the new Euro currency for global hegemony correspond to two different perceptions of the global order: Pax Americana, or the American Century model of global dominance on one hand; and to balance the overwhelming dominance of the U.S. in world affairs on the other. In this connection, the war in Iraq is a war whose purpose is bigger than Halliburton or Exxon: it's a war being fought to maintain America's position in the world.
It is really surprising how little the topic of reserve currencies has been discussed. As of 30 December, 2003, the euro was worth 25% more than the dollar. With an additional ten member states (from May 2004) the EU represents an oil consumer 33% larger than the US. The fact that following this enlargement 60% of OPEC oil will be imported by the EU, from a purely economic perspective it would make sense for Iraq (and all other OPEC countries) to require payment for oil in euros, not dollars. If OPEC were to decide to accept euros for its oil, then American economic dominance would be practically over.
The US, in alliance with the British, has intervened in Iraq militarily in March 2003, installed its own authority to run the country. Soon after the invasion it was announced that payment for Iraqi oil would be in dollars only. But the story does not end there. Paradoxically, despite all these recent military and political advances and the fast increasing grip of the US military power in Eurasia, for a variety of economic and political reasons, it appears that a growing number of oil producers in the Middle East, South America, and Russia are talking openly trading their commodity for euros instead of dollars, or perhaps denominate oil in a "basket of currencies”.
Dr. Bulent Gokay
Senior Lecturer in International Relations and
Director of European Studies Programme
SPIRE, Keele University, Staffs ST5 5BG, England, UK
There were many factors related to the Iraqi oil, driving Bush administration to intervene in Iraq militarily. But the biggest one seems to be about the currency used to trade oil: the role of preserving the dollar as the world’s reserve currency. This appears to be the major driving factor contributing US policy over Iraq. In other words, the need to dominate oil from Iraq is deeply intertwined with the defence of the dollar.
Oil has been a major US concern about Iraq since the start of the Bush administration, and indeed earlier. Iraq’s proven oil reserves are 113 billion barrels, the second largest in the world after Saudi Arabia, and eleven percent of the world’s total. The total reserves could be 200 billion barrels or even more, all of it quite easy and relatively cheap to extract. Because the US is the world's largest user of petroleum, and its appetite is growing because of its standards of consumption, it needs control over the oilfields of the Middle East.
The US policy, however, does not only want to control oil for its own consumption, but also to deny this control to other important industrial powers - European Union, China, Japan. For geopolitical reasons and reasons related to energy security it wants to determine that Europe's access to oil will be routed through it. Indeed, for this reason and another, the war in Iraq was directed as much against major powers in Europe as Iraq, a fact to which the "old Europe" of Chirac and Schroeder were quite alert. As in the case of the Caspian oil, the US wants to deny Iraq’s oil to China as well, which has a quickly increasing requirement of imported crude. Since America perceives China as its potential rival in establishing a secure and dynamic global system under its own control, this is quite a significant reason for the Bush administration’s persistence to keep China out of the oil regions of Eurasia.
There were many factors related to the Iraqi oil, driving Bush administration to intervene in Iraq militarily. But the biggest one seems to be about the currency used to trade oil: the role of preserving the dollar as the world’s reserve currency. This appears to be the major driving factor contributing US policy over Iraq. In other words, the need to dominate oil from Iraq is deeply intertwined with the defence of the dollar.
Since the emergence of the United States as the dominant global superpower after 1945, the hegemony of the US has rested on two unchallengeable pillars. First, the overwhelming US military superiority over all other rivals; and second, the control of global economic markets with the dominant role of the US dollar as reserve currency. Reserve currencies are held by governments and institutions outside the country of issue and are used to finance international economic transactions, including trade and the payment of debts. Reserve currency status is not just an international status symbol. It brings international seigniorage, benefits for ‘home’ financial institutions, relaxation of the ‘external constraint’ on macroeconomic policy, a greater role for the issuer in international institutions, and the wider geopolitical consequences of exercising currency hegemony.
In the aftermath of the Second World War this was understandable because the US dollar was backed up by gold. In 1971, US president Richard Nixon took the dollar off the gold standard that has been agreed to at the Bretton Woods Conference in 1944. Since 1971 the dollar has been an irredeemable currency, no longer defined or measured in terms of gold. This removed the restraints on printing new dollars. The dollar has become the world’s dominant currency and the core reserve asset of central banks all over the world. It has replaced gold as an international currency. Central banks around the world have built up large reserves of dollar. Those dollars flow back into the US banking system in the form of investments in US dollar-denominated assets.
The dollar hegemony is key to the future of American global dominance, in many respects as significant if not more so, than the overwhelming military strength. And the Petrodollar has been at the heart of the dollar hegemony since the early 1970s. Almost two-thirds of the world's currency reserves are kept in dollars, because oil importers pay in dollars and oil exporters keep their reserves in the currency they are paid in. The entire global oil trade is conducted in dollars. This means that everyone needs to keep dollars. This effectively provides the American economy with an interest-free loan, as these dollars can be invested back into the U.S.A. with zero currency risk. This money is not inactive; it is invested in dollar securities like US Treasury notes, stocks, mutual funds, and bonds. The US dollar's current strength is supported by OPEC’s requirement that all OPEC oil sales be denominated in dollars. This was secured by an agreement between the US administration and Saudi Arabia, the largest OPEC oil producer. This had been determined in June 1974 by Secretary of State Henry Kissinger, establishing the US-Saudi Arabian Joint Commission on Economic Cooperation. In 1975 OPEC officially agreed to sell its oil only for dollars.
America practically borrows today from the entire world without keeping reserves of any other currency. Because the dollar is de facto the global reserve currency, the US currency accounts for approximately two-thirds of all official exchange reserves. America does not have to compete with other currencies in interest rates; even at low interest rates, capital flies to the dollar. The more dollars there are circulating outside the US, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. 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. The US has a luxury of having its debts denominated in its own currency. This is the position the US has enjoyed for 30 years. It means that the US has been receiving a huge subsidy from everyone else in the world. The United States economy is therefore intimately tied to the dollar's role as reserve currency. The dominant position of the US dollar in world markets is not only a matter of pure economics, but also “deeply rooted in the geopolitical role of the United States.”
Until the advent of the Euro in late 1999 there was no potential challenge to this dollar hegemony in world trade. The coming of the Euro has threatened the dominant role of the US dollar as reserve currency. Some European leaders have even said that the euro's main aim is to put Europe on an equal monetary footing with the United States - ending the dollar's hegemony, in the word of President Jacques Chirac of France.
In just a few years the Euro has emerged as a real alternative to challenge the dollar hegemony in world trade. It has established itself as the second most important currency on the world’s financial markets. Just before the introduction of the euro, the outstanding amount of bonds and notes denominated in the legacy currencies of the euro accounted for barely 28 % of world issues, compared to 45 % for dollar-denominated bonds and notes. By mid-2003, the gap became much smaller: the share of issues in dollars had fallen to 43 %, while the euro’s share had increased to 41 %. And even more spectacular development took place on the money market. At the end of 1998, money market instruments denominated in the euro’s predecessor currencies accounted for just over 17 % of world issues, compared to 58 % for dollar denominated instruments. By mid-2003, the share of issues in dollars had fallen to 30 %, while the share of euro issues had climbed to almost 46 %. The Euro today accounts for one quarter of the global market.
Iraq was the first OPEC country, in November 2000, to convert its reserves from dollars to euros. This was the first time an OPEC country dared violate the dollar price rule. Iraq also converted $10 billion of its currency reserves to euros. Since then the value of the Euro has increased, and the dollar has begun to decline. Libya has been urging for some time that oil be priced in euros rather than dollars. Iran, Venezuela and other countries have indicated that they would denominate their petroleum trade in euros. During 2002 the majority of reserve funds in Iran's central bank have been shifted to euros. Some in Saudi Arabia have called for switching to the euro as “a more effective punishment than an oil embargo for the United States, Israel’s principal source of financial and political support”. In October 2003, Russian President Vladimir Putin announced that Russia might price its oil in euros as well. Since the oil trade is a central factor underpinning the dollar's hegemony, all these are potentially very significant threats to the strength of US economy in particular, and the US global hegemony in general.
With a significant part of the petroleum trade uses euro, instead of dollars, many countries would have to keep a part of their reserves in euros. The dollar would then have to compete with the Euro for global capital. Not only would Europe not need dollars anymore, but Japan which imports more than 80 % of its oil from the Middle East have to convert most of its dollar assets to euro. The US, too, being the world’s largest oil importer would have to get hold of euro reserves. This would be disastrous for the American attempts at monetary management. Not only they would lose a large part of their annual subsidy of effectively free goods and services, but that switch to euro reserves from dollar reserves would bring down the value of the US currency. Even a modest shift out of dollars, or a change in the flow, would create significant changes. If the euro becomes a bigger reserve currency i.e. if the US were to share its reserve currency status with the euro it is also likely to mean either the US buys more euro or the Europeans reduce their dollar holdings and buy euros.
That is why there is a clear and definite oil (and Petrodollar) connection in the recent military conflict in Iraq. This financial dimension is a power game of the highest geopolitical significance. The future of the dollar/ euro competition to be the global reserve currency is far from a minor issue of interest only to banks or currency traders. A hidden war between the dollar and the new Euro currency for global hegemony correspond to two different perceptions of the global order: Pax Americana, or the American Century model of global dominance on one hand; and to balance the overwhelming dominance of the U.S. in world affairs on the other. In this connection, the war in Iraq is a war whose purpose is bigger than Halliburton or Exxon: it's a war being fought to maintain America's position in the world.
It is really surprising how little the topic of reserve currencies has been discussed. As of 30 December, 2003, the euro was worth 25% more than the dollar. With an additional ten member states (from May 2004) the EU represents an oil consumer 33% larger than the US. The fact that following this enlargement 60% of OPEC oil will be imported by the EU, from a purely economic perspective it would make sense for Iraq (and all other OPEC countries) to require payment for oil in euros, not dollars. If OPEC were to decide to accept euros for its oil, then American economic dominance would be practically over.
The US, in alliance with the British, has intervened in Iraq militarily in March 2003, installed its own authority to run the country. Soon after the invasion it was announced that payment for Iraqi oil would be in dollars only. But the story does not end there. Paradoxically, despite all these recent military and political advances and the fast increasing grip of the US military power in Eurasia, for a variety of economic and political reasons, it appears that a growing number of oil producers in the Middle East, South America, and Russia are talking openly trading their commodity for euros instead of dollars, or perhaps denominate oil in a "basket of currencies”.
Dr. Bulent Gokay
Senior Lecturer in International Relations and
Director of European Studies Programme
SPIRE, Keele University, Staffs ST5 5BG, England, UK
