Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse, page 1

Originally posted by mbkennel
The currency it is priced in is not relevant as long as it is highly liquid and universally available. Both dollars and euros work here, they are nearly interchangable.

I could not disagree more. It's fundamentally about power and control and the way the American economy is built.

One needs to understand the role of the "petrodollar" and "dollar hegemony" in the world economy to see why a challenger to the petrodollar will have far reaching consequences.

Some easily found background:

- Everyone accepts dollars in their reserves because you can buy oil in dollars.

- Every country that buys oil therefore needs dollars.

- The fact that all central banks keep US dollars inflates the value of the dollar beyond what a "free" market would assign to it.

Trade between nations has become a cycle in which the U.S. produces dollars and the rest of the world produces things that dollars can buy.

Nations no longer trade to capture comparative advantage but rather to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves in order to sustain the exchange value of their domestic currencies. In an effort to prevent speculative and potentially harmful attacks on their currencies, those nations' central banks must acquire and hold dollar reserves in amounts corresponding to their own currencies in circulation. This creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold even more dollar reserves, making the dollar stronger still.

This phenomenon is known as "dollar hegemony," which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil.

The reality is that the strength of the dollar since 1945 rests on being the international reserve currency for global oil transactions (i.e., "petro-dollar"). The U.S. prints hundreds of billions of these fiat petro-dollars, which are then used by nation states to purchase oil and energy from OPEC producers... . These petro-dollars are then re-cycled from OPEC back into the U.S. via Treasury Bills or other dollar-denominated assets such as U.S. stocks, real estate, etc. The recycling of petro-dollars is the price the U.S. has extracted since 1973 from oil-producing countries for U.S. tolerance of the oil-exporting cartel. [the US - Saudi deal]

Dollar reserves must be invested in U.S. assets which produces a capital-accounts surplus for the U.S. economy.

Since it is the U.S. that prints the petro-dollars, they control the flow of oil. Period. When oil is denominated in dollars through U.S. state action and the dollar is the only fiat currency for trading in oil, an argument can be made that the U.S. essentially owns the world's oil for free. - source - several good essays on this topic!

That capital accounts surplus created by dollar hegemony is currently offsetting the record fiscal and trade deficits of the US economy.

All of this means that the value of the US dollar is artificially inflated because of the FED's role as middle-man in the exchange of goods for oil and something called Seigniorage (the revenue derived from the issuance of currency - not sure I understand this bit).

The arrival of a new middle-man to end the monopoly enjoyed by the US is a very significant event.

The US is facing a global shift in economic power which is why I think the timing of the announcement the stop publishing M3 in March will facilitate intervention of the Plunge Protection Team to try and prop-up the dollar.

Does this description sound earily familiar?

The Pound Sterling was the primary reserve currency of much of the world in the 18th and 19th centuries. But perpetual current account and fiscal deficits financed by cheap credit and unsustainable monetary and fiscal policies to finance wars and colonial ambitions eventually led to the pound sinking.

That was before the oil based economy took over our lives.

The only thing propping up the US economy right now is the petrodollar and dollar hegemony IMO.

Whether or not the US succeeds in maintaining dollar hegemony with the existance of a Euro based oil exchange remains to be seen. (don't bet on it

)

Wars are fought for such power and control.
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