Re: [A-List] Mark Jones on energy and imperialism

[WRC92@xxxxxxx]

I do not claim to have the insights of Mark Jones, but as a personal aside, I too am in the process of writing a book on petrodollars, energy, and Imperialism.  Many of you may have read my original essay entitled "The Real Reasons for the Upcoming War with Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth."  Surprisingly, I received 3 book offers based on that essay.  Thus, I am in the process of researching and writing a book on this subject.  This weekend I wrote a 3,500 word essay on this matter for possible publication in Global Outlook (CA).  I am certainyl not an economist by training, so please feel free to review and critique, thanks.

May 12, 2003

The Unspoken Oil Currency War:
Macroeconomics behind the Iraq War 

By William Clark 

"If a nation expects to be ignorant and free, it expects what never was and never will be . . . The People cannot be safe without information. When the press is free, and every man is able to read, all is safe."

Those words by Thomas Jefferson embody the unfortunate state of affairs that have beset our nation.  It is a disturbing prospect that the U.S.-led war against Iraq appears to have been waged under fraudulent premises.  This weekend it was reported in the Washington Post that the US military unit in charge of searching for Iraqâs elusive Weapons of Mass Destruction (WMD) will be heading home next month. According to the article, this âfrustratedâ elite unit could not find any evidence of viable WMD. [1] It is increasingly obvious that Saddam did not possess an imminent or viable threat to the U.S., but like his illusionary ties to Al Qaeda and 9/11, the Bush administration will not let such facts get in their way.

For those who may still be wondering, âWhy did the U.S. invade Iraq?â  - I recommend that you follow the money, or more specifically â follow Iraqâs oil currency.  Although hidden behind the massive media propaganda campaign, the answer to the Iraq enigma is the US dollar.  The real reason for the war was this administration's goal of preventing further Organization of the Petroleum Exporting Countries (OPEC) momentum towards the euro as an oil transaction currency standard. However, in order to pre-empt OPEC, the U.S. needed to gain geo-strategic control of Iraq along with its 2nd largest proven oil reserves.   The Iraq war had less to do with any threat from Saddamâs old weapons of mass destruction program and certainly less to do to do with fighting terrorism than it has to do with the almighty dollar.  Iraq was an oil currency war â a war designed to keep the euro from becoming an alternative oil transaction currency.

Origins of the oil currency war 

Saddam sealed his fate with the neo conservatives in Presidentâs Bush administration when he decided in September 2000 that Iraq was no longer going to accept dollars for its oil sales, but accept euros instead.  Given that in the fall of 2000 the euro was at itâs lowest point to the dollar (about 82 cents to the dollar), some analysts were rather surprised that Saddam was willing to give up approximately  $270 million in annual oil revenue for what was essentially a political statement. [2] Nonetheless, pricing oil in euros was his symbolic way of protesting continued U.S. support of the U.N. sanctions against Iraq.  

On November 6th, 2000 the U.N. switched the required currency accepted for Iraqi oil sales from dollars to euros.  Saddam subsequently converted Iraqâs $10 billion dollar oil for food reserve into euros as well. [2]  Well before 9/11 it appears that the Bush administration concluded that regime change and a puppet government in Iraq were necessary to change oil sales back to U.S. dollars.  Saddamâs switch to the euro currency appears to be a âquasi-state secretâ within the U.S. government and media, as it exposes one of the core reasons for the war.  Currently Iraqâs oil purchases are routed into the U.N.âs âoil for food program,â and then into a euro-denominated account with a French bank.  On May 8th, 2003 the U.S. proposed a U.N. resolution to end the U.N. sanctions, phase-out the oil for food program, and gain full control of Iraqâs oil revenue. [3] The proposed resolution would create an âIraqi Assistance Fundâ that is solely administered by the U.S.   Such a proposal should allow this administration to quietly convert Iraqâs oil currency back to the dollar.

As for those who asked âWhy invade Iraq now?â â perhaps the urgency for the Iraq war was heightened by Iran, which in 2002 moved the majority of its reserve funds to euros.  It is well documented that Iran has discussed switching from the dollar to the euro for oil pricing.  Due to the lack of coverage of this crucial âdetail,â perhaps this is another âtaboo subjectâ within our government and our seven corporate-controlled media conglomerates.  Nonetheless, given its strong trade relationship with the European Union, it is logical for Iran to make the switch in currencies, if only from a purely monetary and economic perspective.  It remains to be seen what Iran will do with its oil currency given its new U.S. neighbors.

Overview of structural imbalances within the U.S. economy

The U.S. economy has acquired significant structural imbalances, including our record-high $503 billion trade account deficit (now 5 % of GDP), a $6.4 trillion dollar deficit (60% of GDP), and the recent return to annual budget deficits in the hundreds of billions over the last two years.  These imbalances are being exacerbated by the Bush administrationâs ideologically driven tax cut and massive spending policies, which are creating enormous deficits for the rest of this decade.   Why is the dollar still predominant despite these significant structural imbalances?   While many Americans assume the strength of the U.S. dollar merely rests on our economic output (i.e. GDP), the ruling elites understand that the dollarâs strength is founded on its two fundamentally unique advantages relative to all other hard currencies.

Unfortunately the majority of Americans are not cognizant to the fact that the âstrengthâ of our current economy is founded on the dollarâs two pivotal advantages following the Bretton Woods Conference of 1944-1945.  First is the dollars role as the single international reserve currency, which affords the US market with its âsafe harborâ international status.  The second crucial factor is the dollarâs role as the fiat and sole currency for global oil transactions.  While the dollarâs role as the only international reserve currency is well understood, the effects of the dollar as the monopoly currency for international oil transactions is rarely discussed.  Nonetheless, one of the Federal Reserveâs worst nightmares would consist of an OPEC switch from dollars to euros as the international currency standard for oil purchases.  

Origins of the Petrodollar

The valuation of the U.S. dollar was rather shaky after August 1971 when the Nixon had to âde-linkâ the dollar from the $35 per oz. âgold standard.â  According to Dr. David Spiroâs research on this issue, in 1973-74 the Nixon administration sought to alleviate this situation by negotiating assurances from King Saud of Saudi Arabia to price oil in dollars only, and to invest their surplus oil proceeds in U.S. Treasury Bills. [4] In return the U.S. would protect the Saudi regime. These agreements created the phenomenon known as âpetrodollar recycling.â The U.S. prints hundreds of billions of fiat dollars, which U.S. consumers provide to other nations via trade when we purchase their imported goods.  Hundreds of billions of these dollars then become petrodollars when used by nations to purchase oil/energy from OPEC producers. Depending upon the price of oil, approximately $600 to $800 billion petrodollars are annually âre-cycledâ from OPEC sales and invested back into the U.S. via Treasury Bills or other dollar-denominated assets.

The fact that all buyers of oil must first buy dollars to pay for the oil supports the U.S. dollar as the worldâs reserve currency, and eliminates our currency risk for oil.  Oil priced in âpetrodollarsâ and the dollar as the worldâs reserve currency has supported the value of our currency which by normal economic logic, given Americaâs trillions of dollars in trade deficits over the past decade, should have much less purchasing power than it currently possesses.  An enlarged E.U. and a strong euro is challenging this arragement.

However, as long as the dollar remains the monopoly oil transaction currency, its âstorage of wealthâ is theoretically derived from the simple fact that it purchases between 1.5 and 1.9 gallons of crude oil.  (Using OPEC price range of $22-$28 per barrel, and 42 gallons in a production barrel).   No other hard currency in the world can be used to directly purchase the most valuable commodity in the world â oil.   This unique geo-political agreement with Saudi Arabia has worked to our favor for the past 30 years by eliminating any fluctuation (currency risk) in our oil purchases in relation to the dollarâs valuation, raising the entire asset value of all dollar denominated assets/properties, and facilitating the Federal Reserve in creating a truly massive debt and credit expansion (or `credit bubble' in the view of some economists). In effect, global oil consumption via OPEC âpetrodollar recyclingâ provides a subsidy to the U.S. economy. 
OPEC, the Euro, and E.U. enlargement

It is no secret that the Europeans created the E.U. in an effort to create a huge trading bloc and common currency that could directly compete with the large U.S. economy.  Hence, the goals of the E.U. include the euro becoming an alternative international reserve currency.  To facilitate that goal, the euro would have to become an alternative âstorage of wealthâ for oil transactions.  Obviously the E.U. would like their oil purchases to be priced in the euro, as that would eliminate their currency risk, and stabilize their oil bill.  Moreover, in December 2002 ten additional countries were approved for membership into the EU, which in 2004 will result in an aggregate GDP of $9.6 trillion - directly comparable to the U.S. sâ $10 trillion GDP.

Indeed, in a visit to Spain in April 2002, Mr Javad Yarjani, the Head of OPEC's Market Analysis Department, illustrated the new dynamics of the E.U. and the euro currency in an important speech.  He stated, âIn the short-term, OPEC Member Countries (MCs), with possibly a few exceptions, are expected to continue to accept payment in dollars. Nevertheless, I believe that OPEC will not discount entirely the possibility of adopting euro pricing and payments in the future.â [5] Based on the details of this candid speech, momentum for OPEC to consider switching to the euro will grow once the E.U. expands in May 2004 to 450 million people with the inclusion of 10 additional member states.  Undoubtedly, the euro currency is a significant new competitor, and appears to be the primary threat to U.S. dollar hegemony.

What would a collective switch by OPEC to euros instead of U.S. dollars for their oil mean to the US economy?  Although a sudden switch by OPEC would be very unlikely barring major financial maneuvers or a dollar panic, it would cause oil-consuming nations to flush dollars out of their central bank reserve funds and replace these with euros. That event could cause an additional dollar devaluation anywhere from 20 to 40% (the dollar has already fallen 27% against the euro since late 2001).  The consequences of such devaluation would be those one could expect from any currency collapse.  Americans would pay dramatically more for the billions of dollars of our imported goods.  Americans would pay dramatically more for energy â the cost to fly our planes, run our factories, heat our homes, and drive our cars. Our economy would grind into a deep recession, or possible much worse.  Perhaps fear of decreased investor and consumer confidence is the reason this crucial issue is not discussed in the U.S. media, but European governments and some astute citizens understand the underlying dollar versus euro oil issues.
Post-war Iraq

We are in the very early stages of the occupation of Iraq, but the initial reactions of the Iraqis, particularity the Shiâites, does not inspire confidence. Undeterred by the unstable situation on the ground and in Baghdad, the neo-conservatives are pursuing through the U.N. their bold yet simple agenda - to use our new position and Iraq and the perpetual `war on terror' to prevent the OPEC cartelâs inevitable switch to pricing oil in euros. I hypothesize that President Bush toppled Saddam in a pre-emptive attempt to quickly rebuild Iraqâs oil production capability, initiate massive Iraqi oil production in far excess of OPEC quotas, to reduce global oil prices, and dissolve the OPEC cartelâs price controls. Removing Saddam was more of a victory for dollar hegemony and Bushâs re-election campaign than a victory in the fight against terrorism.  

How does the Bush administration intend to break-up the OPEC cartel's price controls in a post-Saddam Iraq?   Assuming the U.N. Resolution proposed last week by the U.S./U.K. passes, that will clear the way for the U.S. to gain full control over Iraqâs oil resources.  The newly installed U.S. General will dismantle the U.N.âs oil for food program, create an âIraqi Assistance Fundâ denominated in U.S. dollars, and thus convert Iraqâs oil pricing back to the dollar. The next step of the U.S. ruling junta involves massive repairs and upgrades to Iraqâs oil production capability (via Halliburton), ultimately allowing a rapid increase in oil production from approximately 2.5 million barrels per day to eventually 6 or 7 million. Such massive Iraqi oil production could lead to a reduction in the price of oil to the $15 per barrel range. This would result in the collapse of the OPEC cartel, and possibly negate their ability to switch oil transaction currencies. 

An interesting piece of news regarding the dollar/euro issues and the potential political fallout from the Iraq war relates to Indonesia, a small OPEC producer with a Muslim majority.  In April 2003 Indonesiaâs state oil company, Pertamina, indicated that it was considering dropping the dollar for the euro regarding its oil and gas trades. [6] Additionally, some articles have suggested that other countries such as Malaysia and Nigeria may be considering dropping the dollar in favor of the euro.  These countries perceive that switching to the euro will eventually diminish the ability of the neoconservatives to pursue militant global Imperialism.  A troubling âanti-dollarâ movement may be spreading. To illustrate, a Wall Street Journal reporter witnessed an anti-war street protest in Nigeria where the crowd shouted âEuro Yes! Dollar No! [7] 

The Paradox

The Bush administration probably believes that the occupation of Iraq and the installation of a large and permanent U.S. military presence in the Persian Gulf region will stop other OPEC producers from even considering switching the denomination of their oil sales from dollars to euros. However, using the military to enforce dollar hegemony for oil transactions strikes me as a rather unwieldy and inappropriate strategy. Despite the media reporting otherwise, the current wave of âglobal anti-Americanismâ is not against the American people or against American values - but against the hypocrisy of militant American Imperialism. I respectfully submit the current polices of the neoconservative movement as expressed through their PNAC document, their manipulation of the citizenry through fear, and the application of unilateral military force is treasonous to both American Public and to the fundamental principles that founded our nation.  Regrettably, President Bush and his neo-conservative advisors have chosen to apply a military option to what was is in essence an economic problem.  History may not look kindly upon their actions.   

Paradoxically, for a variety of economic and political reasons, it appears that a growing number of OPEC producers in the Middle East, South America, and Africa may wish to transition their oil pricing from dollars to euros.  Furthermore, we may be witnessing the regrettable emergence of a European-Russian-Chinese alliance in an effort to counter American Imperialism.  Hence, it is plausible that Russia may at some point re-denominate its oil exports in euros.  In conclusion, the structural imbalances in the U.S. economy, along with the Bush administration's flawed tax, economic and most principally their overtly Imperialist foreign polices could result in the dollar's reserve currency status and oil transaction currency status being placed in jeopardy or at the very least significantly diminished over the next 1-2 years.  In the event that my hypothesis materializes, the U.S. economy will require restructuring in some manner to account for the reduction of either of these two pivotal advantages.  This will be an exceedingly painful process if it occurs in a disorderly manner, perhaps reminiscent of the Great Depression in the 1930s.   

What is needed is a multilateral meeting of the G-7 nations to reform the international monetary system. Given that future wars will become more likely over oil and the currency of oil, the author advocates that the global monetary system be reformed without delay. This would include the dollar and euro designated as equal international reserve currencies, and placed within an exchange band along with a dual-OPEC oil transaction currency standard.  Additionally, the G-7 nations should also explore a future third reserve currency option regarding a yen/yuan bloc for East Asia.  A compromise on the euro/oil issues via a multilateral treaty with a gradual phase-in of a dual-OPEC transaction currency standard could minimize economic dislocations within the U.S.   While these multilateral reforms may lower our standard of living slightly and reduce our ability to project a massive global military presence, the benefits would include improving the quality of our lives and that of our children by reducing animosity towards the U.S. while we rebuild our alliances with the E.U. and world community.  Creating balanced domestic fiscal polices along with global monetary reform is in the long-term national security interest of the United States.  Hopefully these proposed monetary reforms could mitigate future armed or economic warfare over oil, ultimately fostering a more stable, safer, and prosperous global economy in the 21st century.

Saving the American Experiment

Only time will tell what will happen in the aftermath of the Iraq war and U.S. occupation, but I am hopeful my research will contribute to the historical record and help others understand one of the important but hidden reasons for why we conquered Iraq.   Until the U.S. agrees to negotiate a more balanced Global Monetary system and embarks on a viable National Energy Strategy, our nation will continue to pursue a hypocritical foreign policy that is incompatible with the ideas of the founding fathers regarding freedom and liberty.  The current neoconservative foreign policies are creating âblowbackâ and âanti-Americanâ sentiments around the world, as well as dangerous new geo-political alliances with nations that should be U.S. allies.

Compounding these foreign policy issues is the ongoing domestic political strategy of this administration to discourage dissent.  While this administration talks of âspreading freedom abroad,â they are cynically utilizing fear tactics to erode our Constitutional protections while eviscerating our Bill of Rights.  The U.S. media has been silent regarding the many components of the so-called USA Patriot Act and Patriot Act II which are profoundly dangerous tools that could be used to suppress the U.S. citizenry. [7] The temptation to abuse such broad powers would be tremendous for political purposes and/or in the event our economy experiences a severe downturn.  

Quite frankly, in order to save the American Experiment and stop our slide towards an isolated, oppressive Authoritarian State, we must elect an enlightened administration in 2004.  The three main challenges of the next U.S. administration will be 1) negotiating global monetary reform, 2) broadly re-organizing U.S. fiscal policies, and 3) attempting to repair our damaged foreign relationships with the E.U., Russia, the Middle East, as well as our frayed alliances with the U.N. and NATO. Sadly, the next U.S. President will have to undertake these challenges from a weakened position both economically and diplomatically.  I do not envy the arduous journey that awaits the 44th President of the United States. 

****************************************

References:

1.  Frustrated, U.S. Arms Team to Leave Iraq: Task Force Unable To Find Any Weapons, Washington Post (May 11, 2003)
http://www.washingtonpost.com/wp-dyn/articles/A40212-2003May10.html

2   Recknagel, Charles, "Iraq: Baghdad Moves to Euro," Radio Free Europe (November 1, 2000) 
http://www.rferl.org/nca/features/2000/11/01112000160846.asp

3.  âDetails of resolution to lift Iraq sanctions,â CNN (May 8, 2003) http://www.cnn.com/2003/WORLD/meast/05/08/iraq.sanctions/

4.  Spiro, David E., âThe Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets,â Cornell University Press, (1999)

5.  The Choice of Currency for the Denomination of the Oil Bill," Speech given by Javad Yarjani, Head of OPEC's Petroleum Market Analysis Dept, on The International Role of the Euro (Invited by the Spanish Minister of Economic Affairs during Spain's Presidency of the EU) (April 14, 2002, Oviedo, Spain) 
http://www.opec.org/NewsInfo/Speeches/sp2002/spAraqueSpainApr14.htm 

6.  Pesek Jr., William, 'Indonesia May Dump Dollar; Rest of Asia Too?" Bloomberg, (April 17, 2003)
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_pesek&sid=anZbHuX9q8gI

7.  Geewax, Marilyn, âMuslims eye euro as new oil currencyâ (April 22, 2003)
http://www.smh.com.au/cgi-bin/common/popupPrintArticle.pl?path=/articles/2003/04/21/1050777210439.html

8.  Patriot Act II analysis, Electronic Privacy Information Center (EPIC), (February 7, 2003)
http://www.epic.org/privacy/terrorism/patriot2.html

Copyright  2003 William Clark 
Reprinted for Fair Use Only


About the Author: William Clark is a graduate student in the MBA & MS/ITS programs at Johns Hopkins University.  He has been offered to write a book based on his research regarding Iraq, and hopes to complete this project by yearâs end.  For questions or interviews please contact: wrc92@xxxxxxx