Petrodollar warfare
Encyclopedia
The phrase petrodollar
warfare refers to a hypothesis that one of the unknown, driving forces of United States
foreign policy over recent decades has been the status of the United States dollar
as the world's dominant reserve currency
and as the currency in which oil
is priced. The term was coined by William R. Clark, who has written a book with the same title. The phrase oil currency wars is sometimes used with the same meaning.
The reality is that the value of the U.S. dollar
is determined by the fact that oil is sold in dollars. If the denomination changes to another currency, such as the euro
, many countries would sell dollars and cause the banks to shift their reserves, as they would no longer need dollars to buy oil and gas (see World Bank and IMF). This would thus weaken the dollar relative to the euro (see supply and demand
). The U.S. administrations' thinking is greatly affected by fear of the consequences of a weaker dollar, particularly higher oil prices. This motivation is seen as underlying and explaining many aspects of U.S. foreign policy, including the Iraq War.
at lower interest rates than they otherwise would be able to. As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries. A stronger USD also means that goods imported into the United States are relatively cheap.
Another component of the hypothesis is that the price of oil is more stable in the U.S. than anywhere else, since importers do not need to worry about exchange rate fluctuations. Since the U.S. imports a great deal of oil, its markets are heavily reliant on oil and its derivative products (jet fuel, diesel fuel, gasoline, etc.) for their energy needs. The price of oil can be an important political factor; U.S. administrations are quite sensitive to the price of oil.
Political enemies of the United States therefore have some interest in seeing oil denominated in euros or other currencies. The EU could also theoretically accrue the same benefits if the euro replaced the dollar. However, the European economy could also be seriously damaged if the euro were to appreciate significantly against the dollar or other world currencies, particularly its exports which would become relatively more expensive for the rest of the world. The same dynamic can apply to the dollar and the U.S. economy, as well.
In mid-2006 Venezuela indicated support of Iran's decision to offer global oil trade in the euro currency.
A controversial change like that in Iran would have limited ability to influence the denomination of sales one way or the other. A large number of traders would have to agree to a change in denomination before a significant change would occur.
In October of 2011 top U.S. officials announced that they had apprehended 2 Iranians that were suspected of trying to commit terrorist activities on U.S. soil.
U.S. Attorney General Eric Holder announced that the DEA and FBI had disrupted a plot "conceived, sponsored and... directed from Iran" to murder the Saudi Arabian ambassador to the U.S. in or outside a crowded Washington, D.C. restaurant which potentially would have been followed up by bombings of the Saudi Arabian and Israeli embassies. The U.S. said an Iranian-American, 56-year-old Manssor Arbabsiar of Corpus Christi, Texas, was working for elements of the Iranian government -- specifically Iran's elite military unit the Quds force -- when he attempted to hire hitmen from the feared Zetas Mexican drug cartel to carry out the hit, but Arbabsiar was unwittingly speaking to a DEA informant from the start.
It is believed by some that the terrorist activity was absolutely falsified by the U.S. Government in order to facilitate further sanctions on Iran, therefore securing the strength of the Dollar.
At least one U.S. Representative, Republican Ron Paul
of Texas, has made very strong statements advancing similar views, using the phrase “dollar hegemony
” to describe U.S. policy and proposing related reforms.
Petrodollar
A petrodollar is a United States dollar earned by a country through the sale of petroleum. The term was coined by Ibrahim Oweiss, a professor of economics at Georgetown University, in 1973...
warfare refers to a hypothesis that one of the unknown, driving forces of United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
foreign policy over recent decades has been the status of the United States dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
as the world's dominant reserve currency
Reserve currency
A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves...
and as the currency in which oil
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
is priced. The term was coined by William R. Clark, who has written a book with the same title. The phrase oil currency wars is sometimes used with the same meaning.
The reality is that the value of the U.S. dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
is determined by the fact that oil is sold in dollars. If the denomination changes to another currency, such as the euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
, many countries would sell dollars and cause the banks to shift their reserves, as they would no longer need dollars to buy oil and gas (see World Bank and IMF). This would thus weaken the dollar relative to the euro (see supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
). The U.S. administrations' thinking is greatly affected by fear of the consequences of a weaker dollar, particularly higher oil prices. This motivation is seen as underlying and explaining many aspects of U.S. foreign policy, including the Iraq War.
The hypothesis
Most oil sales throughout the world are denominated in United States dollars (USD). According to proponents of the petrodollar warfare hypothesis, because most countries rely on oil imports, they are forced to maintain large stockpiles of dollars in order to continue imports. This creates a consistent demand for USDs and upwards pressure on the USD's value, regardless of economic conditions in the United States. This in turn allegedly allows the US government to gain revenues through seignorage and by issuing bondsBond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
at lower interest rates than they otherwise would be able to. As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries. A stronger USD also means that goods imported into the United States are relatively cheap.
Another component of the hypothesis is that the price of oil is more stable in the U.S. than anywhere else, since importers do not need to worry about exchange rate fluctuations. Since the U.S. imports a great deal of oil, its markets are heavily reliant on oil and its derivative products (jet fuel, diesel fuel, gasoline, etc.) for their energy needs. The price of oil can be an important political factor; U.S. administrations are quite sensitive to the price of oil.
Political enemies of the United States therefore have some interest in seeing oil denominated in euros or other currencies. The EU could also theoretically accrue the same benefits if the euro replaced the dollar. However, the European economy could also be seriously damaged if the euro were to appreciate significantly against the dollar or other world currencies, particularly its exports which would become relatively more expensive for the rest of the world. The same dynamic can apply to the dollar and the U.S. economy, as well.
Political events
In 2000, Iraq converted all its oil transactions under the Oil for Food program to euros. When U.S. invaded Iraq in 2003, it returned oil sales from the euro to the USD.In mid-2006 Venezuela indicated support of Iran's decision to offer global oil trade in the euro currency.
A controversial change like that in Iran would have limited ability to influence the denomination of sales one way or the other. A large number of traders would have to agree to a change in denomination before a significant change would occur.
In October of 2011 top U.S. officials announced that they had apprehended 2 Iranians that were suspected of trying to commit terrorist activities on U.S. soil.
U.S. Attorney General Eric Holder announced that the DEA and FBI had disrupted a plot "conceived, sponsored and... directed from Iran" to murder the Saudi Arabian ambassador to the U.S. in or outside a crowded Washington, D.C. restaurant which potentially would have been followed up by bombings of the Saudi Arabian and Israeli embassies. The U.S. said an Iranian-American, 56-year-old Manssor Arbabsiar of Corpus Christi, Texas, was working for elements of the Iranian government -- specifically Iran's elite military unit the Quds force -- when he attempted to hire hitmen from the feared Zetas Mexican drug cartel to carry out the hit, but Arbabsiar was unwittingly speaking to a DEA informant from the start.
It is believed by some that the terrorist activity was absolutely falsified by the U.S. Government in order to facilitate further sanctions on Iran, therefore securing the strength of the Dollar.
American vulnerability
Of particular concern among many American politicians, academics, and pundits is America's dependence on foreign oil. Many economists feel that the recent rise in oil prices is at least partially tied to the fall of the US dollar relative to most currencies. Since oil is priced in dollars, sellers have increased prices to compensate for the purchase of their product with a less valuable currency. Economists generally agree that higher oil prices pose a risk of inflation, recession, or both. Inflation would almost certainly rise if the dollar were to depreciate heavily.At least one U.S. Representative, Republican Ron Paul
Ron Paul
Ronald Ernest "Ron" Paul is an American physician, author and United States Congressman who is seeking to be the Republican Party candidate in the 2012 presidential election. Paul represents Texas's 14th congressional district, which covers an area south and southwest of Houston that includes...
of Texas, has made very strong statements advancing similar views, using the phrase “dollar hegemony
Dollar hegemony
Dollar hegemony is the hypothesized monetary hegemony of the US dollar in the global economy. Henry C.K. Liu popularized the term in the article "Dollar Hegemony has to go" in Asia Times, April 11, 2002...
” to describe U.S. policy and proposing related reforms.
See also
- PetrocurrencyPetrocurrencyPetrocurrency is a portmanteau neologism used with three distinct meanings, though often confused:#Trading surpluses of oil producing nations, originally called petrodollars...
- Iranian oil bourseIranian oil bourseThe Iranian Oil Bourse International Oil Bourse, Iran Petroleum Exchange Kish Exchange or Oil Bourse in Kish is a commodity exchange which opened on February 17, 2008. It was created by cooperation between Iranian ministries, the Iran Mercantile Exchange and other state and private institutions...
- Petrodollar recyclingPetrodollar recyclingPetrodollar recycling refers to the phenomenon of major oil-producing states mainly from OPEC earning more money from the export of oil than they could usefully invest in their own economies...
- Peak oilPeak oilPeak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. This concept is based on the observed production rates of individual oil wells, projected reserves and the combined production rate of a field...
- Oil reservesOil reservesThe total estimated amount of oil in an oil reservoir, including both producible and non-producible oil, is called oil in place. However, because of reservoir characteristics and limitations in petroleum extraction technologies, only a fraction of this oil can be brought to the surface, and it is...
- Dollar hegemonyDollar hegemonyDollar hegemony is the hypothesized monetary hegemony of the US dollar in the global economy. Henry C.K. Liu popularized the term in the article "Dollar Hegemony has to go" in Asia Times, April 11, 2002...
Further reading
- Clark, William R.: Petrodollar Warfare : Oil, Iraq and the Future of the Dollar, New Society Publishers, 2005, ISBN 0-86571-514-9
- Engdahl, F. William, A New American Century? Iraq and the hidden euro-dollar wars, Current Concerns, No 4, June 2003
- Engdahl, F. William: A Century of War: Anglo-American oil politics and the New World Order, Pluto Press, 2004, ISBN 0-7453-2309 X
Books
- Clark, William R.: Petrodollar Warfare: Oil, Iraq and the Future of the Dollar, ISBN 978-0865715141
Background
- How much longer can the dollar reign supreme? by Linda Heard. The Guardian (Australia), July 6, 2006. This article discusses exchange rates and the dollar's slowly declining role as the dominant reserve currency.
- Don't worry about the euro by Paul KrugmanPaul KrugmanPaul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
. April 27, 1998. Krugman claims concerns about the dollar's reserve currency status are overblown. This column pre-dates the current debate by several years. - Norwegian Bourse Director wants oil bourse - priced in euros by Laila Bakken and Petter Halvorsen, NRK.no, December 27, 2005
- Brinkmanship of Energy Geopolitics by Mathew Maavak, Panoptic World, March 3, 2006
Pro views
- Hysteria Over Iran and a New Cold War with Russia: Peak Oil, Petrocurrencies, and the Emerging Multi-Polar World, by William Clark, December 30, 2006
- The Attack on the U.S. Dollar and Energy Needs by Alan Caruba. March 19, 2006. An editorial.
- The Rise of the Petroeuro by Dan Adleman. The Republic of East Vancouver, July 20, 2006.
- Petrodollar Warfare by Ryan McGreal, "Raise the Hammer", January 27, 2006. A review of William Clark's book.
- Talk in congress: The End of Dollar Hegemony by Congressman Ron PaulRon PaulRonald Ernest "Ron" Paul is an American physician, author and United States Congressman who is seeking to be the Republican Party candidate in the 2012 presidential election. Paul represents Texas's 14th congressional district, which covers an area south and southwest of Houston that includes...
, February 15, 2006 - Petrodollar Warfare Interview (audio) with William R. Clark and Jim PuplavaJim PuplavaJames Joseph "Jim" Puplava, born , is an investment analyst and Internet radio show host born in Gary, Indiana. He is the founder, president & CEO of the Puplava Financial Services Inc. group, and Puplava Securities Inc.. He is also chief author and host for the Financial Sense Newshour. His...
of the Financial Sense Newshour. - Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse by William R. Clark. Media Monitors Network, August 5, 2005.
- Petrodollar or Petroeuro? A new source of global conflict by Cóilín Nunan, Feasta Review no. 2
- Battle Plans for Iran by Mike WhitneyMike WhitneyMichael Roy Whitney is an Australian television personality and former cricketer, who played in 12 Tests and 38 ODIs from 1981 to 1993....
, OpEdNews, January 31, 2006. - US Paper Money and Iran's Oil Bourse an abstract of a speech by Congressman Ron PaulRon PaulRonald Ernest "Ron" Paul is an American physician, author and United States Congressman who is seeking to be the Republican Party candidate in the 2012 presidential election. Paul represents Texas's 14th congressional district, which covers an area south and southwest of Houston that includes...
, February 17, 2006. - Where will oil trade: New York? London? Tehran? by NeonTetra. Sandcastle in the tide Blog, February 27, 2006.
- The Real Reasons for the Upcoming War With Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth, Essay by William R. Clark, January 2004.
- U.S. Dollar vs. the Euro: Another Reason for the Invasion of Iraq by Project CensoredProject CensoredProject Censored is a non-profit, media criticism and investigative journalism project within the Sonoma State University Foundation. It is managed through the School of Social Sciences at the university....
. - Iran’s Oil Exchange threatens the Greenback by Mike Whitney, OpEdNews, January 23, 2006.
- The Proposed Iranian Oil Bourse by Krassimir Petrov. Informationclearinghouse.info, January 19, 2006.
- Oil, Geopolitics, and the Coming War with Iran by Michael T. Klare. Tom Dispatch, April 11, 2005.
- History of Oil video by Robert Newman.
- The Beginning of the End of the Petrodollar: What Connects Iraq to Iran by Dr. Bulent Gokay, 15 March 2006.
- Cost, abuse and danger of the dollar by Rudo de Ruijter, Mathaba News, March 7, 2007.
Critical views
- Petroeuros: A Threat to U.S. Interests in the Gulf? by R. Looney, Middle East Policy, 11, (2004), 1, pp. 26–37
- Strange ideas about the Iranian oil bourse by James D. Hamilton, Econbrowser, January 20, 2006
- What the Iran 'nuclear issue' is really about by Chris Cook, Asia Times Online, January 21, 2006
- Why Iran's oil bourse can't break the buck by F. William Engdahl, Asia Times Online, March 10, 2006