Petrodollar warfare

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The term, petrodollar warfare, refers to the alleged motivation of US military offensives as preserving by force 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 war is sometimes used with the same meaning.

The hypothesis[edit]

The United States dollar remains de facto world currency.[1] Accordingly, almost all oil sales throughout the world are denominated in United States dollars (USD).[2] 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 ostensibly supports the USD's value, regardless of economic conditions in the United States.

According to proponents of the petrodollar warfare hypothesis, this in turn allegedly allows the US government to gain revenues through seignorage and by issuing bonds at lower interest rates than supposedly they otherwise would be able to. As a result, the U.S. government, according to this theory, can run higher budget deficits at a more sustainable level than most other countries can. The theory points out that a stronger USD also means that goods imported into the United States are relatively cheap (although the country's exports become relatively more expensive for the rest of the world).

Another component of the hypothesis is that the price of petroleum 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. As the price of oil can be an important political factor, U.S. administrations are quite sensitive to the price of oil.

Political competitors 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.

History[edit]

The petrodollar system originated in the early 1970s in the wake of the Bretton Woods collapse. President Richard Nixon and his Secretary of State, Henry Kissinger, feared that the abandonment of the international gold standard under the Bretton Woods arrangement (combined with a growing US trade deficit, and massive debt associated with the ongoing Vietnam War) would cause a decline in the relative global demand of the U.S. dollar.[3] In a series of meetings, the United States — represented by then U.S. Secretary of State Henry Kissinger — and the Saudi royal family made an agreement. The United States would offer military protection for Saudi Arabia’s oil fields, and in return the Saudi's would price their oil sales exclusively in United States dollars (in other words, the Saudis were to refuse all other currencies, except the U.S. dollar, as payment for their oil exports).

By 1975, all of the oil-producing nations of OPEC had agreed to price their oil in dollars and to invest surplus oil proceeds in U.S. government debt securities in exchange for similar offers by the U.S.[4]

Political events[edit]

In 2000, Iraq converted all its oil transactions under the Oil for Food program to euros,[5] even though the move was deemed by analysts to "fly in the face of financial logic.",[5] since, it meant that Iraq would earn less interest on its oil revenues, which were held in a UN-monitored escrow account in New York. Also, the switch would create "cumbersome new administrative processes" because Baghdad decided to keep also its existing deposits in dollars, which meant that the oil-for-food program would maintain two accounts, one in dollars and one in euros.[5]

After the U.S. invaded Iraq in 2003, Iraq returned the denomination of its oil sales to the US Dollar, despite the greenback's then-fall in value.[6]

The Government of the Islamic Republic of Iran ostensibly takes this theory as fact. As retaliation to this policy, which is seen by Tehran as "neoimperialism",[7] Iran made an effort to create its own bourse, which started selling oil in gold, euros, dollars, and Japanese yen.[8] In mid-2006 Venezuela indicated "support" of Iran's decision to offer global oil trade in the euro currency.[9] Muammar Gaddafi, of Libya had tried to implement the gold-for-oil plan,[10] in 2011, and the introduction of a Libyan gold dinar.

In 2005, William Roberts Clark, Professor and Faculty Associate, Political Science Department, Center for Political Studies, University of Michigan, Ann Arbor, published a work which claimed that a "petrodollar warfare" was under way between mainly the Euro and the United States Dollar waged in the field of world petroleum trade.[11]

Over the years, multiple scholars expressed the view that the Iraq War conducted to re-assert the dollar hegemony in the wake of Saddam Hussein's attempts to switch from petrodollar in the oil trade and to sell Iraqi oil in exchange for other currencies or commodities.[12][13][14]

See also[edit]

Notes[edit]

  1. ^ Schulmeister, Stephan (2000-03). "Globalization without Global Money: The Double Role of the Dollar as National Currency and World Currency". Journal of Post Keynesian Economics. 22 (3): 365–395. doi:10.1080/01603477.2000.11490246. ISSN 0160-3477.  Check date values in: |date= (help)
  2. ^ "Ahmadinejad: Remove US dollar as major oil trading currency", China Daily, 19 November 2007
  3. ^ Clark, William R. (2005). Petrodollar Warfare. Canada: New Society Publishers. p. 20. ISBN 0-86571-514-9. 
  4. ^ Clark, William R. (2005). Petrodollar Warfare. Canada: New Society Publishers. p. 30. ISBN 0-86571-514-9. 
  5. ^ a b c "Iraq: Baghdad Moves To Euro" by Charles Recknagel, Radio Free Europe website, 1 November 2000
  6. ^ "Iraq returns to international oil market" by Carola Hoyos and Kevin Morrison, Financial Times, June 5, 2003 (from TheDossier.com archive)
  7. ^ What the Iran 'nuclear issue' is really about by Chris Cook, Asia Times Online, January 21, 2006
  8. ^ Why Iran's oil bourse can't break the buck by F. William Engdahl, Asia Times Online, March 10, 2006
  9. ^ "Venezuela mulls euro oil switch". BBC News. 22 December 2006. 
  10. ^ "Gaddafi gold-for-oil, dollar-doom plans behind Libya 'mission'?". www.thepeoplesvoice.org. Retrieved 2018-09-04. 
  11. ^ Petrodollar Warfare website of William R. Clark
  12. ^ Shipley, Tyler (2007-03). "Currency Wars: Oil, Iraq, and the Future of Us Hegemony". Studies in Political Economy. 79 (1): 7–34. doi:10.1080/19187033.2007.11675090. ISSN 0707-8552.  Check date values in: |date= (help)
  13. ^ Shor, Francis. "War in the era of declining US global hegemony." Journal of Critical Globalisation Studies 2 (2010): 65-81.
  14. ^ Gokay, Bulent. "The beginning of the end of the petrodollar: What connects Iraq to Iran." Alternatives: Turkish Journal of International Relations 4.4 (2005).

References[edit]

  • Clark, William R. Petrodollar Warfare: Oil, Iraq and the Future of the Dollar, New Society Publishers, 2005, Canada, ISBN 0-86571-514-9