Petrodollar vs. Petroeuro

Yesterday, we started exploring into the geopolitical and economic world where oil is the world currency. Since 1975 until recently, all global oil transactions were done in US dollars (USD). This afforded the US to use these free petrodollars to build a hegemony (dominance) over other world economies.

The dollar is the de facto world reserve currency. The USD currency accounts for approximately two thirds of all official exchange reserves. More that 80% of all foreign exchange transactions and half of all world exports are denominated in dollars. Additionally, all IMF (International Monetary Fund) loans are denominated in dollars.

So it should not surprised anyone that the US dominates the world economically and militarily. But the exact mechanisms by which the American hegemony has been established and maintained are less well understood. The more dollars there are circulating outside the US, or invested by foreign owners in US based assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. The US dollars cost the US next to nothing to produce, and the rest of the world has to use this currency so the net effect is 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 huge trade deficits year after year without apparently any major economic consequences. This is like getting a massive interest-free loan from the rest of the world.

This is how the American hegemony was born and reigned throughout the last 30 years. However, we should remember that the more you have, the more you have to lose. So, in 1999, when the euro was born as the currency for the European Union, this began to pose a threat to the American hegemony. Not only did they start losing a large part of their annual subsidy of effectively free imported goods and services, but countries switching to euro reserve from dollar reserves would bring down the value of the US currency. (Hasn't this been happening where the dollar has lost 40% of its value in the last couple years?) Imports now cost Americans a lot more and the American standard of living is definitely going down. As countries and business converted their dollar assets into euro assets, the US property and stock markets would start to plummet. (Again, hasn't this been happening?)

The Federal Reserve has been doing all it can to print more money to reflate the economic bubble, but for how long? The government continues to borrow and spend at record levels. Do you think its a coincidence that they have the nebulous and elusive "war on terror" they can blame for these spending levels? Another coincidence is that on March 23, 2006, the US government stopped publishing the M3 money supply report. This report effectively states what the big boys are doing with large blocks of money (amounts greater than $100,000). They wanted to begin covering their tracks where all the money is going. And without lots of eager foreigners salivating to buy US government securities, a serious inflation would result making foreigners even more reluctant to hold US currency and heighten the crisis.

Now, you add to the crisis the sub-prime mortgage crisis where historical investment banks such as Bear Stearns are getting offered for fire-sale prices, the American hegemony is severely wounded.

Now back to the most precious commodity - oil. Oil is not just the most important commodity traded internationally, it is the lifeblood of all modern industrialized economies. If you don't have oil, you have to buy it using US dollars, and the only country able to print US dollars is the US.

Say for example, that OPEC (Organization of Petroleum Exporting Countries) would start accepting euros for its oil sales. The 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. The US, on the other hand, being the world's largest oil importer, would have to run a trade surplus to acquire euros. This cascading series of events would ultimately force the US to significantly change its current tax, debt, trade, and energy policies, all of which are severely unbalanced.

Now, the first country to change the currency used in oil transactions from dollars to euros was Saddam Hussein's Iraq. Back on November 23, 2000, more than 9 months before the attacks of Sept. 11, 2001, Saddam Hussein said that Iraq will no longer accept dollars for oil because it does not want to deal in the "currency of the enemy". At that time, the euro was worth 82 cents. Today, the euro is worth $1.54. This makes Saddam look like a financial genius. Since then, Iran, Venezuela, Afghanistan, Russia, Turkmenistan, and others also converted their oil sales away from the dollar.

Saddam Hussein's decision was ultimately met with a devastation display of military might from the US government via their "shock and awe" campaign that everyone got to see on television. Upon toppling Iraq, the Bush administration immediately dismantled the "Oil-For-Food" program and quietly re-converted Iraq's oil transaction currency back to the US dollar. This had the adverse effect of wiping out 13% of Iraq's oil export profits due to the euro's higher valuation to the dollar in mid-2003. So much for getting Iraq back on its feet financially after disposing Hussein.

Tomorrow, we will look at more geopolitical effects of oil. Stay tuned ...

We know that we are children of God, and that the whole world is under the control of the evil one. I John 5:19 (NIV)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com