We do not endorse the theory, but we think there is a lot of financial background in the story that most of us may not know, and particularly the consequences that flow from the decline of the dollar as it impacts the oil industry.
The author describes himself as an independent observer, not an economist, and his English is not yet perfect, but we think you'll find his take on the future of U.S.-Iranian relations at least as interesting as the cacophony on Raging Bull.
Here it is:
Iraq and now Iran, what is it about?
Iraq had would-be weapons of mass destruction. Now it is the turn of Iran. There are many leaks about an imminent attack. The US would attack still this year. The press shows images of nuclear plants.[1] Here, there would be a possibility to produce nuclear arms…
Before the invasion of Iraq, many people thought it was about oil. Iraq has the second biggest world oil reserves (10.5 %). The oil reserves in the US are, in comparaison, nearly exhausted (2 %). The US’ consumes more than any other country: 25 % of world oil consumption.[2] So it was rather logical to think, the attack on Iraq had something to do with oil. But how exactly?
OPEC oil is paid in dollars
Since 1971 the dollar has been detached of a fixed amount of gold. In fact it was an emerency solution of President Nixon. The Vietnam war had emptied the national bank. The US did not have enough gold anymore for all the dollars it had issued. Since then the value of the dollar is determined by offer and demand. Still the same year the OPEC-countries decided they would only accept US-dollars. At that time too the dollar was the most used currency in international trade. So nothing special?
All countries need dollars
Since 1971 everyone who wants to import oil from OPEC countries, has to buy dollars first. And that is where the fun starts for the US. Everybody needs oil, so everybody wants dollars.
Oil buyers from all over the world hand over their yens, crowns, francs and other currencies. They receive greenbacks in return. With those dollars they go and buy oil in the OPEC countries. The OPEC countries will spend the money again. Of course, they can do that in the US, but also in all other countries in the world. Everybody wants dollars, for everybody will need oil again.
The first benefit for the U.S.
In this oil trade a huge amount of dollars is needed. Many dollars will stay in the permanent money cycle outside the US, that is to say between the OPEC countries and other countries. At the start there were not enough dollars for this. They had to be printed. It cost the US paper and ink. But then the enormous benefit arrives: there is only one way to get those nice new greenbacks out of the country: the US goes shopping abroad for free!
All the time more dollars for abroad
This free shopping did not only occur at the start. As soon as more money is needed in the oil trade, by increase in price or volume, that means shopping for the U.S.
The same thing happens when the number of dollars in the rest of world trade increases. Globalization and free world trade mean that still more dollars will disappear in every little corner of the globe. And in the first place, each time this means free shopping for the US!
Debt
Of couse those free shoppings create a debt for he US. For, some day, the foreign countries could use those dollars to purchase things in the US. Then, finally, the US has to give something in return.
Trade balance
So, to avoid problems, the US should take care their purchases and sales stay balanced. After 1971, when more dollars were put into circulation, only in 1973 the US sold more then it bought. Afterwards the situation declined, and each year the US bought more foreign goods they never paid for. In the year 2004 alone, the shortage on the trade balance was 650 billion dollars! On a population of 220 million people this means, that in average each US citizen purchased for $ 3,000 dollars of foreign goods they did not pay for!
US imports 2004 $ 1,469,704,400,000,00
US exports 2004 $ 818,774,900.000.00
Purchases less sales: $ 650,929.500,000.00
The exchange rate of the dollar
Each country which purchases more than it sells, will see the value of its money diminish. If you can not do a lot with a currency, demand decreases and its exchange value goes down. But what is true for all other currencies, is not true for the US dollar. As long as the whole world needs dollars to purchase oil, there will always be demand. And this is the key for understanding the need for the US to keep the sale of OPEC oil in dollars.
Moreover, in times the use of the dollar expands, the US can let it’s exchange value increase, by not responding at the demand immediately. At first central banks in foreign countries will sell their dollar reserves to avoid the dollar to climb. But if the use of the dollar continues to expand, the exchange value will finally go up.
US consumes one quarter of world oil production. When the dollar rate climbs, only the price for the other three-quarters of oil consumers will get higher. For the US the price stays the same.
When the OPEC price climbs, more dollars are needed in the cycle. If oil consumption remains the same, those extra dollars can be printed and added to the cycle without decline of the exchange rate. Since the US imports 1/8 of world oil consumption, seven-eighths of the extra dollars are needed outside the US. This means that at each increase of the OPEC-price, the US can sell seven times more new dollars abroad than the increase it pays itself. Which means free shopping and making debts!
The US disposes of a wide range of tricks to influence the exchange rate. Put more dollars in circulation when the rate goes higher than wanted. Buy back dollars themselves when demand decreases. For instance by issueing bonds. However, this solution costs money: the interest. All those interests together have reached such high levels, that new loans have to be contracted each time to pay for them. US debts increases faster each time!
7,800,000,000,000 dollar debt(July 2005)
Today US debt is so high (http://brillig.com/debt_clock/) that is not imaginable it will ever be paid back. On www.babylontoday/national_debt_clock.htm you can see the current height and you can see how much it grows each second… 45 % of it is to be paid back to foreign borrowers.
If you don’t need dollars for oil anymore...
If US dollars are no longer necessary to purchase oil, there is no advantage for the rest of the world trade to use the dollar. Only disadvantages. The dollar does not represent any weight in gold anymore and the enormous debt will lead to the logical desastrous consequences. The dollar would drop. Foreign countries could buy cheaply in the US. On the contrary the US would have to pay lots of dollars to purchase things abroad. US would not have enough money left for an expensive army. It would loose its influence.
Saddam Hussein and the euro
In 1990 Saddam invaded Quwait. In 1991 he was expulsed from Quwait during Operation Desert Storm by 134 countries led by the US. Then the trade embargo was installed. Iraq was isolated internationally and broken economically. The United Nations created the Oil For Food program. Iraq was allowed to sell restricted volumes of oil in order to be able to buy food and medical supply for its population. As the US was opposed to ending the embargo this lasted many years. Then, in February 2000 Saddam asked the United Nations to switch the currency of the Oil For Food program from dollars to euros. On October 30, 2000, the United Nations accepted the switch. [4]. That seemed to be the ending of the dollar hegemony! The rate of the euro, which had been going down snce 1998, started a triumphatical climb. The rate went higher and higher.
The US had a problem. A pretext had to be found to rule out Saddam. After September 11th 2001 the wold press was to be made believe Iraq would have weapons of mass destruction. On March 20th, 2003, Iraq was attacked by the US and a few remaining allies. On June 5th 2003 the oil trade was switched back from euros to dollars.
Iran and the euro
More and more OPEC-countries want to get rid of the exclusive tie with the dollar. In 1999 Iran stated publicly it wanted to accept euros as well. Just logical if you realize Iran sells 30 percent of its oil production to Europe and the rest mainly to India an China. In spite of President Bush's threatening tale, mentioning the country as a part of some "axis of evil," Iran started to sell its oil in euros from spring 2003. The euro continued its march. The iranian oil price was still labeled in US-dollars, but customers did not have to exchange their money in dollars first anymore. And now, while the US is still occupied to impose its will in neighbouring country Iraq, Iran has already announced its next step: it wants to establish an oil bourse with its own oil prices in euros. Exit dollar.
Like a cat in a tight corner
The US is in a scrape. The permanent demand for dollars allowed it to buy on tick and rule the world. By political plotting and superior military power OPEC-countries were kept in harness. If one dared to sell oil otherwise than in dollars, he could count on a beating. For Iran Bush probably has already his plans. It seems likely to me, they consist of the same ingredients as for Afghanistan and Iraq.
The march of the euro
Since January 1993 the euro has a quotation at the exchange market. In June 2005 its rate is the same as at its introduction, $1.22. In its short life the currency has already experienced many fluctuations. From the end of 1998 it sank away. Until Sadam Hussein switched to the euro at the beginning of November 2000. Although the Iraqi oil trade was switched back to dollars in June 2003, the march of the euro continued, as Iran had started to sell oil in euros then.
The euro has become a small world currency now. Between July 2004 and July 2005 the part of the dollar in world trade went down from 70 percent to 64 percent. A little bit less than half of those 64 percent presents the US’ part in world trade.[5] If the euro wants to develop into a currency as mighty as the dollar, it still has a lot of work to do.
In essence the euro has the same disadvantages and dangers as the dollar. In times the use of the euro outside Europe grows, there is only one way to get new euros outside: go shopping around the world and make debts. As long as there is a motor which keeps the demand for euros going (for instance an oil bourse in Iran), you can endlessly let debts increase and push it in front of you. This is one of the things the example with the dollar learned. Then Europe can live on the tick of other countries, who have to buy euros before they can purchase oil.
We also have to realize, that an Iranian oil bourse would have a lot of influence on the exchange rates between dollar and euro. If the oil price in euros goes down (compared to the oil price in dollars), there will be a rush on the euros. And, inversively, when the oil price in euros increases, there will be a rush for dollars.
Freedom of expression
In the Western world we have freedom of expression. It means anyone can shout what he wants. Next, the press selects what it wants to relay via its newspaper, radio or tv to its public. Politicians often know to use this sytem adroitly. Like President Bush, who succeeds to mislead the world each time. In fact it works very simply. When a politician tells us, that certain persons are dangerous and that he will do something about it, he will get our support. The terrorists of 9/11 came from Saudi Arabia, but when Bush goes and search for them in Afghanistan, we believe him right away. Of course Bush does not tell that he wants to occupy Afghanistan in order to build profitable and strategic pipelines there. An employee of Unocal Corporation that helped developing the plan becomes interim president of Afghanistan.
The lies about arms of mass destruction came out. No problem. The White House simply tells us it was a good case anyway. Saddam murdered Kurds massively. The public likes such arguments. It doesn’t mean the White House really cares mass murders. Has there ever been a US military standing trial for his participation in mass murders in Vietnam, Cambodia or Afghanistan? When President Bush will tell the world Iran is a villain country, it does not seem likely to me that he will explain how painful it is to the US that Iran sells its oil in euros.
Conclusion
The political and diplomatical joust about nuclear plants (and other emotional subjects still to come) leads the attention away from what is hurting the US most: the decreasing demand for dollars caused by the sale of Iranian oil in euros. The crumbling of the demand for dollars will definitely lead to the end of US’ hegemony.
Rudo de Ruijter,
independent observer,
rudoderuijter@wanadoo.nl
Sources:
US Broadcasts of TV5 Europe
Department of Energy
US Census Bureau
www.un.org/News/briefings/docs (Fred Eckhard, October 31st 2000)
BIS (Bank for International Settlements)
No comments:
Post a Comment