The Weekly Reader

Link: http://www.peakoil.ie/newsletters/647

The financial subtext of Conflict

It seems that the principal benefit of Empire was control of world trading currency. The British Empire at its prime was a magnificent construction spanning the World. It was built, not so much on military prowess, but on the back of traders who wanted political and administrative support. A huge hidden tribute flowed to the City of London from the use of the pound sterling for world trade. Germany was overtaking Britain as an industrial power in the 19th Century but lacked the advantage of controlling the world currency. Some see the two World Wars as a consequence.

ED NOTE: From the Oct ASPO newsletter

Follow up:

The European Union started as a co-operative effort to better manage the iron and steel industries but has evolved in a classic imperial mode, seeking economic and financial hegemony through eastward expansion. This reflects the mindset and politico-economic environment of the First Half of the Age of Oil when banks lent more than they had on deposit, confident that Tomorrow’s Expansion, driven by cheap, largely oil-based, energy, was collateral for To-day’s Debt. The Second Half of the Age of Oil now dawns and will be marked by the decline of oil and all that depends upon it, calling for a radically new politico-economic system.

Meanwhile, the United States naturally fights to preserve its financial hegemony facing increasing opposition from the oil-rich Middle East. Iran seeks to develop a financial base for marketing Middle East oil, escaping from the domination of the dollar, but finds itself under increasing pressure under various pretexts.

The following article explains the implications:
From www.financialsense.com:

IRANIAN OIL BOURSE COULD KILL THE US DOLLAR
by Toni Straka ,August 23, 2005

Can the Iranian Oil Bourse become the catalyst for a significant blow to the position of worldwide power that the US Dollar enjoys? Manifold supply fears have driven the price of crude oil towards its historical records in real dollar terms. With the world facing a daily bill of roughly $5.5 billion for crude oil at current price levels, it becomes apparent that sellers and purchasers of the black gold are looking into all ways that could lead to a financial improvement on their respective side.

While the worldwide bottleneck of inadequate refining facilities and partly dramatic declines in production - for example in the North Sea - are two factors that cannot be eliminated in the short term, there is one area left which could result in smiling faces of oil producers and (most) buyers likewise. Non US dollar thinkers are the victim of a transaction cost in the oil trade. The necessary conversion of local banks can be considered a hidden tax, charged and enjoyed by the banking sector.

Until now oil is solely priced, traded and paid for in the greenback on both markets in London and New York. The Treasury Inflow Capital data from mid-2005 show that OPEC members have parked only a skimpy $120 billion in direct dollar holdings, which are almost equally split between equities and debt paper. This is a clear indication that oil producers are investing their windfalls elsewhere. The yield spread between US and EU debt papers in favor of the EU is clearly another hint where the petrodollars might flow after conversion.

The Iranian Oil Bourse (IOB) will become a factor that could further unsettle the dollar's dominant position.
Especially in the case of Iran, it does not make sense to accept dollars only for its much desired commodity. Being seen as a hostile country by the USA for its intention to build its own nuclear reactors one wonders whether the new IOB will not try to attract other buyers than Americans who are particularly unwelcome in that corner of the globe. Iran has recently announced that the new oil exchange will start up its computers in early 2006.
The IOB can count on two sharp arrows in their holster. It can - and probably will - lure European buyers with oil prices quoted in Euros, saving them transaction costs. And it can strike barter deals with oil-hungry giants like China and India who have a lot of products and commodities to offer. I doubt that hamburgers and legal services will be considered adequate collateral for the world's most after-sought resource.

A Renunciation of the Dollar Is Worse Than An Iranian Nuclear Attack

Steering away from the almighty commodity, currency and commodity currency - the US dollar - can have a deeper impact on the US economy than a direct nuclear attack by Iran. The permanent demand for dollar denominated paper stems to a good part from the fact that until now almost all resources of the world are quoted in it.

While this has led to the Eurodollar market in the 1970's, new terms of trade could ring the demise of the dollar as the premier reserve currency. With the world economy depending so much on oil, the black gold itself can be seen as a reserve currency that will be handed out only against the best collateral in the future. The Fed’s recent San Francisco paper about the progress of the diversification of international Central Bank' reserves shows that the dollar is in decline in many countries. NOTE: China has officially decided to diversify a part of its foreign exchange holdings into oil.

Iran holds a strong hand as the No.2 producer of crude behind Saudi Arabia. Politicians there will also keep in mind that dollar deposits might become a burden in the future when the US steps up its current war of words to the level of economic sanctions in the crusade against nuclear power plants. Money in the bank does not help when you have no access to it.

An abdication from the current status quo has only one real enemy: the USA, where less than five percent of the global population consume roughly one third of global production. Oil in Euros would benefit several million people more in the EU and its trading partners. And it would loosen the grip the USA has on OPEC members. Thinking of the rapid growth of hostilities between the USA and Arab nations in recent years a renunciation of the dollar appears to be more than just a wish in Arabic dreams.

As this development poses a very real and big danger to the superior status of the greenback and the interests of the USA the "president of war" can be expected to steer a close tack against the winds blowing from the Middle East. One may be reminded that the Iraqi despot Saddam Hussein had entered into discreet talks with the EU, proposing to sell his oil for Euros. That was in the year before the first oil war of this century.

In short, the IOB this way could help the Euro to become the interim primary reserve currency before China and India rise to the first two slots in the global economic ranking in the next few decades, an issue discussed in the post "What will be the next big reserve currency ."

A decline of the dollar's position in oil trading might also open the floodgates in other commodity markets where the dollar is the medium of exchange but where the USA has only a minority market share. A global economy driven by tough efficiency demands, in the light of thin profit margins almost everywhere, is a good primer for accounting changes in other commodity markets. This process could begin in resources like steel and energy and spread to all other resources that are marketed globally. The world outside the USA has a lot to gain and nothing to lose from it.
(Reference furnished by Prof. Rosa)