NEW! IPRD » Petrodollar Warfare
Papers

Books

Blogs

Events

Media

Home » Briefings

Petrodollar Warfare

January 20, 2006 No Comment

By William R. Clark

I recall someone looking to see a little bit more about Iran here recently. I’ll attempt a “who (or what, in this case) is behind the curtain” act with this post.

We have a member/author at peakoil.com by the name of William R. Clark I’d like to introduce to everyone. He has written a book by the name ‘Petrodollar Warfare’ that lays out the framework for how currency hegemonies are played. This many-layered complex of a trade arrangement such that crude oil is cannot be understood simply by pounds and gallons ledger comparisons. The intrigues are much deeper and by far more tangled.

I highly recommend the Economically and Poli-Sci oriented read his responses to the questions about his thesis.

William takes on some Oil Bourse questions near the end of the thread, so I’ll link that first and take you to the beginning second:http://www.peakoil.com/post229224.html#229224

http://www.peakoil.com/fortopic10101.html

Says William, “For those familiar with my research, and are interested in the arcane subject matter of the global economy, Peak Oil, and the unspoken oil currency war between the dollar the euro, I am pleased to announce that my book is finally being released this week. It only took 3 years of research, 1.5 years of writing, and 640+ footnotes, to produce my little magnum opus, but I think most objective readers will find it interesting, even if somewhat disconcerting.”

________________________

Origins of Petrodollar Recycling

(exerpt from the book- Chapter 1)….By the summer of 1971 the drain on the Federal Reserve’s gold stocks had become critical, and even the Bank of England joined the French in demanding US gold bullion for their dollars. In August 1971 the British ambassador showed up at the Treasury Department to redeem $3 billion for its fixed exchange value in gold of $35 per ounce (approximately 5.3 million ounces, or 2600 tons of gold).  At this time the Nixon administration opted to abandon the dollar-gold link entirely, thereby going to a system of floating currencies on August 11, 1971. Otherwise Nixon would have risked the collapse of the gold reserves of the US. Rather than risk damaging US credit, he changed the rules, or more accurately, he abandoned the rules.

The break with gold effectively ended the Bretton Woods Agreement and opened the door to an entirely new phase of the American Century. In this phase, large international banks, such as Citibank, Chase Manhattan, or Barclays Bank, in effect privatized control over monetary policy. These institutions assumed the role that central banks held under the Bretton Woods gold system, but of course without any ability to redeem dollars for gold. In this phase, market forces determined the dollar’s value, which resulted in substantial inflation during the early 1970s. In an effort to stem this inflation, the Nixon administration adopted wage-price freezes in late 1971, but inflation continued to increase significantly during the 1970s.

The combined forces of a free-floating dollar, a growing US trade deficit, and massive debt associated with the ongoing Vietnam War contributed to both the volatility and devaluation of the dollar in the 1970s. According to research outlined in David Spiro’s book, The Hidden Hand of American Hegemony, it was during this time that OPEC began discussing the viability of pricing oil trades in several currencies. This unpublished proposal involved a basket of currencies from the Group of Ten nations, or G-10. These members of the Bank of International Settlements (BIS), plus Austria and Switzerland, included the major European countries and their currencies, such as Germany (mark), France (franc), and the UK (pound sterling), as well other industrialized nations, such as Japan (yen), Canada (Canadian dollar), and of course the US (US dollar). It should be noted the powerful G-10/BIS also has one unofficial member, the governor of the Saudi Arabian Monetary Authority (SAMA).

In order to prevent this monetary transition to a basket of currencies, the Nixon administration began high-level talks with Saudi Arabia to unilaterally price international oil sales in dollars only — despite US assurances to its European and Japanese allies that such a unique monetary/geopolitical arrangement would not transpire. In 1974 an agreement was reached with New York and London banking interests that established what became known as “petrodollar recycling.” That year the Saudi government secretly purchased $2.5 billion in US Treasury bills with their oil surplus funds, and a few years later Treasury Secretary Blumenthal cut a secret deal with the Saudis to ensure that OPEC would continue to price oil in dollars only.

In typical understatement Spiro noted that, “clearly something more than the laws of supply and demand … resulted in 70 percent of all Saudi assets in the United States being held in a New York Fed account.” Naturally, this arrangement with the Saudi government prevented a market-based adjustment and was the basis for the second phase of the American Century, the petrodollar phase. What follows is the extraordinary history in which petrodollar recycling was vigorously implemented during the 1970s…

(here’s an interesting warning from the CIA circa 1975 re petrodollar recycling…)

Though it was less concerned with the secrecy of Arab investments, the CIA concurred that OPEC money continued to have a great potential for disrupting markets if an Arab government became displeased with US policy. [The CIA report stated] ‘Temporary dislocation of international financial markets would ensue, if the Saudi Arabian government ever chose to use its accumulated wealth as a political weapon.’ [emphasis added]

-CIA memo “Saudi Arabian Foreign Investment”, marked “Secret, Not Releasable to Foreign Nationals,” reviewed for declassification in May 1985, as noted in David Spiro’s book, The Hidden Hand of American Hegemony

Fast Forward to 2000 – Prewar momentum towards a “petroeuro”

“The [Iraqi] cabinet has decided to assign a committee of economists with the task of seriously studying the possibility of using the euro or any other currency instead of the dollar in the commercial transactions of our foreign contracts. The dollar is one of the levers of our enemy’s influence and power on both regional and international levels.”

- The Iraqi News Agency, quoting a statement by the cabinet after a meeting chaired by President Saddam Hussein, September 14, 2000

“On Sept. 24, 2000, the regime of Saddam Hussein stunned the world after a routine cabinet meeting by announcing that it would no longer accept dollars for oil being sold under the UN Oil for Food program. All oil sales were to be paid for in euros. A government statement said the move was to confront the “daily American-Zionist aggression,” an apparent reference to support for UN sanctions. The Iraqi move did little to hurt the US economy. It paid off for Iraq when the euro appreciated by 30%.

- Robert Block, the Wall Street Journal,April 15, 2003

“In the long-term, perhaps one question that comes to mind is could a dual system operate simultaneously? Could one pricing system apply to the Western Hemisphere in dollars and for the rest of the world in euros …. Should the euro challenge the dollar in strength, which essentially could include it in the denomination of the oil bill, it could be that a system may emerge which benefits more countries in the long-term.

- Javad Yarjani, Head of OPEC’s Petroleum Market Analysis Department, in a speech to Spanish officials, April 2002

Saudi Arabia’s Prince Muhammad Bin-Turki Bin-Abdallah Bin-Abd-al-Rahman said … rather than resorting to an [oil] embargo … he argues that a more effective punishment for the United States, Israel’s principal source of financial and political support, would be to change the currency in which oil is traded from the dollar to the euro, something that Iraq has already done. This option, he said, is a strategic and rational one, compared with cutting off production, and it is purely commercial. The Arab countries have the right to choose the currency, just as it is the right of consumer countries to choose to deal with oil-exporting countries. [emphasis added]

“Protest by Switching Oil Trade from Dollar to Euro,” Oil and Gas International, (US), April 15, 2002

Postwar momentum

‘In the future the euro is (going to be) taking a place in the international markets in general as the money of exchange.’ Asked if a switch to pricing oil in euros was possible, ‘Of course, in the oil market and in any market. It’s a stable and a strong currency, the role of the euro is going to be increased step by step. It’s normal.’

- Loyola de Palacio, European Energy Commissioner, June 16, 2003

‘I don’t see any particular merit in that for the average oil producing country. It really is a question of which currency (oil producers) feel most comfortable with over the long run — and the dollar’s always won out.’

- Guy Caruso, director of the U.S. Energy Information Admintration, June 17, 2003 (note this is the following day after the above EU comments)

OPEC Secretary General Alvaro Silva said the oil producers’ cartel is considering trading oil in euros or a basket of currencies other than the dollar to compensate for the decline in the value of the greenback. ‘There is talk of trading crude in euros — it is one of the alternatives,’ Silva told.

- OPEC Secretary Gerneral Alvaro Silva, December 9, 2003

OPEC is considering a move away from using the US dollar — and to the euro — to set its price targets for crude oil, the highest-profile manifestation of the debilitating effect of depreciation on the greenback’s standing as the currency of international commerce.

Several members of the Organization of Petroleum Exporting Countries are seeking formal talks on using the euro, as well as the US dollar, when determining price targets for crude, a senior oil minister within the cartel said Monday. ‘There are countries that are proposing this,’ Venezuela’s Oil Minister Rafael Ramirez said in Caracas. ‘It’s out there, under discussion.’

Mr. Ramirez did not specify which OPEC members are pushing the proposal, but much of the impetus is believed to come from Persian Russian Gulf producers.

- Globe and Mail, January 2004

Postwar commentary

(exerpt from Chapter 4 of Petrodollar Warfare)

On June 5, 2003, an article in Financial Times briefly mentioned that the first “postwar” Iraqi oil sales returning to the international markets were once again denominated in US dollars — not euros, thus confirming my original hypothesis that the US would immediately seek to reconvert Iraqi oil exports to the dollar.

“The tender, for which bids are due by June 10, switches the transaction back to dollars — the international currency of oil sales — despite the greenback’s recent fall in value. Saddam Hussein in 2000 insisted Iraq’s oil be sold for euros, a political move, but one that improved Iraq’s recent earnings thanks to the rise in the value of the euro against the dollar.”

Not surprisingly, the US corporate media has not run a single news story on the reconversion of Iraq’s oil exports from petroeuros to petrodollars. The swiftness with which the Bush administration achieved this tactical goal was impressive. This hidden fact helped illuminate one of the crucial, yet overlooked, macroeconomic rationales for the 2003 Iraq War.

(more exerpts from Petrodollar Warfare)

Although this little-noted Iraqi move to defy the dollar in favor of the euro, in itself, did not have a huge impact, the ramifications regarding further OPEC momentum toward a petroeuro were quite profound. If invoicing oil in euros were to spread, especially against an already weak dollar, it could create a panic sell-off of dollars by foreign central banks and OPEC oil producers. In the months before the latest Iraq War, hints in this direction were heard from Russia, Iran, Indonesia, and even Venezuela. There are indicators that the Iraq War was a forceful way to deliver a message to OPEC and other oil producers: Do not transition from the petrodollar to a petroeuro system. Engdahl’s conversation with a forthright London-based banker is rather enlightening:

Informed banking circles in the City of London and elsewhere in Europe privately confirm the significance of that little-noted Iraq move from petrodollar to petroeuro. ‘The Iraq move was a declaration of war against the dollar,’ one senior London banker told me recently. ‘As  soon as it was clear that Britain and the US had taken Iraq, a great sigh of relief was heard in London City banks. They said privately, “now we don’t have to worry about that damn euro threat.”’

Petrodollar recycling works quite simply because oil is an essential commodity for every nation, and the petrodollar system demands the buildup of huge trade surpluses in order to accumulate dollar surpluses.

This is the case for every country but the US, which controls the dollar and prints it at will or fiat. Because the majority of all international trade today is conducted in dollars, other countries must engage in active trade relations with the US to get the means of payment they cannot themselves issue. The entire global trade structure today has formed around this dynamic, from Russia to China, from Brazil to South Korea and Japan. Every nation aims to maximize dollar surpluses from their export trade because almost every nation needs to import oil.

This insures the dollar’s liquidity value and helps explain why almost 70 percent of world trade is conducted in dollars, even though US exports are about one third of that total. The dollar is the currency that central banks accumulate as reserves, but whether it is China, Japan, Brazil, or Russia, they simply do not stack all these dollars in their vaults. Currencies have one advantage over gold. A central bank can use it to buy the state bonds of the issuer, the United States. Most countries around the world are forced to control trade deficits or face currency collapse.

Such is not the case in the United States, whose number one export product is the dollar itself. This unique arrangement is largely due to the dollar’s World Reserve Currency role, which is underpinned by its petrodollar role. Every nation needs to get dollars to purchase oil, some more than others. This means their trade targets are countries that use the dollar, with the US consumer as the main target for export products of the nation seeking to build dollar reserves.

Synopsis

The “safe harbor” status of the US dollar since 1945 rests on it being the World Reserve Currency. In conjunction with the oil industry’s historical roots in Texas in the early 20th century, it has traditionally assumed the role of the main currency for international oil transactions. The dollar’s monopoly began to breakdown in the early 1970s due in part to the debts of the Vietnam War, with its associated drain of the US’ gold reserves, and the emergence of reinvigorated European and Japanese economies. Secret, unilateral US agreements with Saudi Arabia in 1974 thwarted movement toward a basket of multiple currencies for international oil trades. This has produced a fundamentally unbalanced global economy.

For the past 30 years the US Federal Reserve has printed hundreds of billions of oil-backed petrodollars, which US consumers provide to other nations by purchasing imported goods. Then those nations use these dollars to purchase oil/energy from OPEC producers. These billions of surplus petrodollars are recycled from OPEC and invested back into the US via Treasury bills or other dollar-denominated assets, such as US stocks, bonds, and real estate. The structural imbalances in the US economy are sustainable as long as

• nations continue to demand and purchase oil for theirenergy/survival needs,

• the world’s monopoly currency for global oil transactions remainthe US dollar, and

• the three internationally traded “crude oil markers” remaindenominated in US dollars.

However, the introduction of the euro is a significant new factor, and it appears to be the primary challenge to US economic domination.  Saddam’s switch to a petroeuro in November 2000 was the ‘first shot across the bow’ regarding the unsustainable supremacy of the US dollar, and Iran’s up-coming euro-denominated oil Bourse is the second – and potentially far more important – international development in the battle for oil-currency supremacy. (note: the Iranian bourse if scheduled to “go live” on March 21, 2006).

Well, I hope this information was useful in helping others understand that it is not only the impending arrival of global Peak Oil that is driving – but also the associated unspoken oil-currency war. Iraq was the first proxy war in this high-stakes game of geopolitical influence.

Leave a comment!

Add your comment below, or trackback from your own site. You can also subscribe to these comments via RSS.

Be nice. Keep it clean. Stay on topic. No spam.

You can use these tags:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

This is a Gravatar-enabled weblog. To get your own globally-recognized-avatar, please register at Gravatar.