The Invasion of Iraq: Dollar vs
Re-denominating Iraqi oil in U.
S. dollars, instead of the euro
by Sohan Sharma, Sue Tracy, &
Z magazine, February 2004
What prompted the U.S. attack on Iraq,
a country under sanctions for 12 years (1991-2003), struggling
to obtain clean water and basic medicines? A little discussed
factor responsible for the invasion was the desire to preserve
"dollar imperialism" as this hegemony began to be challenged
by the euro.
After World War II, most of Europe and
Japan lay economically prostrate, their industries in shambles
and production, in general, at a minimum level. The U.S. was the
only major power to escape the destruction of war, its industries
thriving with a high level of productivity. In addition, prior
to and during WWII, due to extreme political and economic upheaval,
a considerable amount of gold from European countries was transferred
to the U.S. Thus, after WWII the U.S. had accumulated 80 percent
of the world's gold and 40 percent of the world's production.
At the founding of the World Bank (WB) and the International Monetary
Fund (IMF) in 1944-45, U.S. predominance was absolute. A fixed
exchange currency was established based on gold, the gold-dollar
standard, wherein the value of the dollar was pegged to the price
of gold-U.S. $35 per ounce of gold. Because gold was combined
with U.S. bank notes, the dollar note and gold became equivalent,
which then became the international reserve currency.
Initially, the U.S. had $30 billion in
gold reserves. But the United States spent more than $500 billion
on the Vietnam War alone, from 1967-1972. During these years,
the U.S. had over 110 military bases across the globe, each costing
hundreds of millions of dollars a year. These expenses were paid
in paper dollars and the total number given out far exceeded the
gold reserve of the U.S treasury. By then (1971-72), the U.S.
Treasury was running out of gold and had only $10 billion in gold
left. On August 17, 1971, Nixon suspended the U.S. dollar conversion
into gold. Thus, the dollar was "floated" in the international
Also in the early 1970s, U.S. oil production
peaked and its energy resources began to deplete. Its own oil
production could not keep pace with growing home consumption.
Since then, U.S. demand for oil continually increased, and by
2002-2003 the U.S. imported approximately 60 percent of its oil-OPEC
(primarily Saudi Arabia) being the main exporter. The U.S. sought
to protect its dollar strength and hegemony by ensuring that Saudi
Arabia price its oil only in dollars. To achieve this, the U.S.
made a deal, some say a secret one, that it would protect the
Saudi regime in exchange for their selling oil only in dollars.
Throughout the late 1950s and 1960s the
Arab world was in ferment over an emerging Nasser brand of Arab
nationalism and the Saudi monarchy began to fear for its own stability.
In Iraq, the revolutionary officers corps had taken power with
a socialist program. In Libya, military officers with an Islamic
socialist ideology took power in 1969 and closed the U.S. Wheelus
Air base; in 1971, Libya nationalized the holdings of British
Petroleum. There were proposals for uniting several Arab states-Syria,
Egypt, and Libya. During 1963-1967, a civil war developed in Yemen
between Republicans (anti-monarchy) and Royalist
forces along almost the entire southern border of Saudi Arabia.
Egyptian forces entered Yemen in support of republican forces,
while the Saudis supported the royalist forces to shield its own
monarchy. Eventually, the Saudi government-a medieval, Islamic
fundamentalist, dynastic monarchy with absolute power-survived
the nationalistic upheavals.
Saudi Arabia, the largest oil producer
with the largest known oil reserves, is the leader of OPEC. It
is the only member of the OPEC cartel that does not have an allotted
production quota. It is the "swing producer," i.e.,
it can increase or decrease oil production to bring oil draught
or glut in the world market. This enables it more or less to determine
Oil can be bought from OPEC only if you
have dollars. Non-oil producing countries, such as most underdeveloped
countries and Japan, first have to sell their goods to earn dollars
with which they can purchase oil. If they cannot earn enough dollars,
then they have to borrow dollars from the WB/IMF, which have to
be paid back, with interest, in dollars. This creates a great
demand for dollars outside the U.S. In contrast, the U.S. only
has to print dollar bills in exchange for goods. Even for its
own oil imports, the U.S. can print dollar bills without exporting
or selling its goods. For instance, in 2003 the current U.S. account
deficit and external debt has been running at more than $500 billion.
Put in simple terms, the U.S. will receive $500 billion more in
goods and services from other countries than it will provide them.
The imported goods are paid by printing dollar bills, i.e., "fiat"
Fiat money or currency (usually paper
money) is a type of currency whose only value is that a government
made a "fiat" (decree) that the money is a legal method
of exchange. Unlike commodity money, or representative money,
it is not based in any other commodity such as gold or silver
and is not covered by a special reserve. Fiat money is a promise
to pay by the usurer and does not necessarily have any intrinsic
value. Its value lies in the issuer's financial means and creditworthiness.
Such fiat dollars are invested or deposited
in U.S. banks or the U.S. Treasury by most non-oil producing,
underdeveloped countries to protect their currencies and generate
oil credit. Today foreigners hold 48 percent of the U.S. Treasury
bond market and own 24 percent of the U.S. corporate bond market
and 20 percent of all U.S. corporations. In total, foreigners
hold $8 trillion of U.S. assets. Nevertheless, the foreign deposited
dollars strengthen the U.S. dollar and give the United States
enormous power to manipulate the world economy, set rules, and
prevail in the international market.
Thus, the U. S. effectively controls the
world oil-market as the dollar has become the "fiat"
international trading currency. Today U.S. currency accounts for
approximately two-thirds of all official exchange reserves. More
than four-fifths of all foreign exchange transactions and half
of all the world exports are denominated in dollars and U.S. currency
accounts for about two-thirds of all official exchange reserves.
The fact that billions of dollars worth of oil is priced in dollars
ensures the world domination of the dollar. It allows the U.S.
to act as the world's central bank, printing currency acceptable
everywhere. The dollar has become an oil-backed, not gold-backed,
If OPEC oil could be sold in other currencies,
e.g. the euro, then U.S. economic dominance-dollar imperialism
or hegemony-would be seriously challenged. More and more oil importing
countries would acquire the euro as their "reserve,"
its value would increase, and a larger amount of trade would be
transacted and denominated in euros. In such circumstances, the
value of the dollar would most likely go down, some speculate
between 20-40 percent.
In November 2000, Iraq began selling its
oil in euros. Iraq's oil for food account at the UN was also in
euros and Iraq later converted its $10 billion reserve fund at
the UN to euros. Several other oil producing countries have also
agreed to sell oil in euros-Iran, Libya, Venezuela, Russia, Indonesia,
and Malaysia (soon to join this group). In July 2003, China announced
that it would switch part of its dollar reserves into the world's
emerging "reserve currency" (the euro).
On January 1, 1999, when 11 European countries
formed a monetary union around this currency, Britain and Norway,
the major oil producers, were absent. As the U.S. economy began
to slow down during mid-2000, Western stock markets began to yield
lower dividends. Investors from Gulf Cooperation Council nations
lost over $800 million in the stock plunge. As investors sold
U.S. assets and reinvested in Europe, which seemed to be better
shielded from a recession, the euro began to gain ground against
the dollar .
After September 11, 2001, Islamic financiers
began to repatriate their dollar investments-amounting to billions
of dollars-to Arab banks, as they were worried about the possible
seizure of their assets under the USA PATRIOT Act. Also, they
feared their accounts might be frozen on the suspicion that such
accounts fund Islamic terrorists. Iranian sources stated that
their banking colleagues felt particularly hassled as Washington
heated up its war of words and threats of military intervention.
This encouraged Tehran to abandon the dollar payment for oil sales
and switch to the euro. Iran also moved the majority of its reserve
fund to the euro. (Iran is the latest target of the U.S., which
has interfered by stirring up opposition forces, and making covert
OPEC member countries and the euro-zone
have strong trade links, with more than 45 percent of total merchandize
imports of OPEC member countries coming from the countries of
the euro-zone, while OPEC members are the main suppliers of oil
and crude oil products to Europe. The EU has a bigger share of
global trade than the U.S. and, while the U.S. has a huge current
account deficit, the EU has a more balanced external accounts
position. The EU plans to enlarge in May 2004 with ten new members.
It will have a population of 450 million; it will have an oil
consuming-purchasing population 33 percent larger than the U.S.,
and over half of OPEC crude oil will be sold to the EU as of mid-2004.
In order to reduce currency risks, Europeans will pressure OPEC
to trade oil in euros. Countries such as Algeria, Iran, Iraq,
and Russia-which export oil and natural gas to European countries
and in turn import goods and services from them-will have an interest
in reducing their currency risk and hence, pricing oil and gas
in euros. Thus momentum is building toward at least the dual use
of euro and dollar pricing.
The unprovoked "shock and awe"
attack on Iraq was to serve several economic purposes: (1) Safeguard
the U.S. economy by re-denominating Iraqi oil in U.S. dollars,
instead of the euro, to try to lock the world back into dollar
oil trading so the U.S. would remain the dominant world power-militarily
and economically. (2) Send a clear message to other oil producers
as to what will happen to them if they abandon the dollar matrix.
(3) Place the second largest oil reserve under direct U.S. control.
(4) Create a subject state where the U.S. can maintain a huge
force to dominate the Middle East and its oil. (5) Create a severe
setback to the European Union and its euro, the only trading block
and currency strong enough to attack U.S. dominance of the world
through trade. (6) Free its forces (ultimately) so that it can
begin operations against those countries that are trying to disengage
themselves from U.S. dollar imperialism-such as Venezuela, where
the U.S. has supported the attempted overthrow of a democratic
government by a junta more friendly to U. S. business/oil interests.
The U.S. also wants to create a new oil
cartel in the Middle East and Africa to replace OPEC. To this
end the U.S. has been pressuring Nigeria to withdraw from OPEC
and its strict production quotas by dangling the prospects of
generous U.S. aid. Instead the U.S. seeks to promote a "U.S.-Nigeria
Alignment," which would place Nigeria as the primary oil
exporter to the U.S. Another move by the U.S. is to promote oil
production in other African countries-Algeria, Libya, Egypt, and
Angola, from where the U.S. imports a significant amount of oil-so
that the oil control of OPEC is loosened, if not broken. Furthermore,
the U.S. is pressuring non-OPEC producers to flood the oil market
and retain denomination in dollars in an effort to weaken OPEC's
market control and challenge the leadership of any country switching
oil denomination from the dollar to the euro.
To break up OPEC and control the world's
oil supply, it is also helpful to control Middle East and central
Asiatic oil producing countries through which oil pipelines traverse.
The first attack and occupation was of Afghanistan, October 2001,
in itself a gas producing country, but primarily a country through
which Central Asia and the Caspian Sea oil and gas will be shipped
(piped) to energy-starved Pakistan and India. Afghanistan also
provided an alternative to previously existing Russian pipelines.
Simultaneously, the U.S. acquired military bases-19 of them-in
the Central Asian countries of Uzbekistan, Tajikistan, Kyrgyzstan,
and Turkmenistan in the Caspian Basin, all of which are potential
oil producers. After the invasion and occupation of Afghanistan
and Iraq, the U.S. controlled the natural resources of these two
countries and, once again, Iraq's oil began to be traded in U.S.
dollars. The UN's oil for food production program was scrapped
and the U.S. Iaunched its Iraqi Assistance Fund in U.S. dollars.
In December 2003, the U.S. (Pentagon) announced that it had barred
French, German, and Russian oil and other companies from bidding
on Iraq's reconstruction.
How would a shift to the euro affect underdeveloped
countries, most of which are either non-oil producing or do not
produce enough for their home consumption and development? These
countries have to import oil. One of the advantages that may accrue
to them is that they are likely to earn more euros than dollars
since much of their trade is with the European countries. On the
other hand, a shift to euro will pose a similar dilemma for them
as dollars. They will have to pay for oil in euros, have enough
euros deposited-invested in EU treasuries, and borrow euros if
they do not have enough for their oil purchases. If, as is projected,
the dollar and euro are in a price band (that is, prices will
stay within an agreed upon range), they may not have much of a
Oil for euros would be far more helpful
if oil-importing underdeveloped countries could develop some form
of barter arrangement for their goods to obtain oil from OPEC.
Venezuela (Chavez) has presented a successful working model of
this. Following Venezuela's lead, several underdeveloped countries
began bartering their undervalued commodities directly with each
other in computerized swaps and counter trade deals, and commodities
are now traded among these countries in exchange for Venezuela's
oil. President Chavez has linked 13 such barter deals on its oil;
e.g., with Cuba in exchange for Cuban doctors and paramedics who
are setting up clinics in shanty towns and rural areas. Such arrangements
help underdeveloped countries save their hard currencies, lessening
indebtedness to international bankers, the World Bank, and IMF,
so that money thus saved can be used for internal development.
Sohan Sharma is a professor emeritus at
California State University in Sacramento. Sue Tracy is a hazardous
waste material scientist in Sacramento. Surinder Kumar is professor
of economics In Rohtak, Inala.
New Global Economy