US$: Forget Iran, the problem's at
home By John Berthelsen
Of all the things that could wreck the US
dollar - and there are many - the projected Tehran
oil bourse, which is tentatively scheduled to open
on March 20 to trade Iran's crude and other petroleum
products in euros rather than US dollars, is
probably not among them.
The much greater
threat to the US currency is the US current
account deficit, which ballooned to 7% of gross
domestic product
in
the fourth quarter of 2005. The announcement drove
the euro up to 1.202 against the US dollar as
skittish traders renewed their concerns about the
world's fiat currency.
The opening of the
Tehran bourse has been described by a Bulgarian
university professor named Krassimir Petrov as
''the ultimate nuclear weapon that can swiftly
destroy the financial system underpinning the
American empire". Both Petrov and William Clark,
writing in a publication called the Energy
Bulletin, have suggested that the decision by US
President George W Bush to attack Iraq on March
20, 2003, was to thwart then-dictator Saddam
Hussein's move to price his crude in euros rather
than dollars. They and other writers have been
warning that Iran's decision to open a
euro-denominated oil bourse places the mullahs in
the same danger of being attacked.
That
appears to be an overstretch. First, there is the
question of how much crude an Iranian oil bourse
would handle. Iran is the world's
fourth-largest producer of crude, pumping only
about 5% of the world total, and is unlikely to
add much to that, according to a Hong Kong-based
energy research analyst for a major US investment
bank in an interview with Asia Times Online. He
prefers to remain unnamed.
The
Iranian fields are mature and over the next decade
their production will probably begin to fall, the
Hong Kong-based energy analyst says. Other nations
that are likely to trade on the Tehran bourse
probably would include Venezuela, the world's 10th-largest
producer, run by President Hugo Chavez, who is
eager to tweak the US nose.
There appear to be few others at the
moment. Saudi Arabia, for instance, has very nearly
become a US client state, as has Kuwait.
Mexico, Canada and Norway appear unlikely to fall in
line in euro trade, Norway especially since neither
it nor the United Kingdom uses the euro as
its currency. Russian President Vladimir Putin
briefly floated the idea of pricing Russian energy
exports in euros in 2003, only to have the idea shot
down decisively when Prime Minister Mikhail Kasyanov
a few days later said: "This topic cannot even
be discussed. There can be no administrative
decisions here. The market decides … oil is a
commodity that is traded for dollars, and if it is
sold for dollars, it means that suits the buyers
and sellers."
According to an
independent financial research analyst based in Shanghai
also interviewed Asia Times Online, a decision by
any other country than Iran or Venezuela to trade
in euros in Tehran is going to be made on
a commercial basis and not a political one. At
this time, it is not a commercial decision that
appears to make sense despite the fact that a number
of Middle East nations, angered by the US decision
to block a Dubai state-owned company from buying
and operating six US seaports, said their
central banks are considering switching their
reserves from US dollars into euros.
According to a March 14 story in
The Independent of London, the United Arab
Emirates, which includes Dubai, said it was looking to
move a tenth of its dollar reserves into euros, and
the governor of the Saudi central bank
condemned the US move blocking Dubai Ports World
from taking over the US ports as
''discrimination''.
As an example of the
dollar's imperviousness to reports of
petro-switches, the UAE announcement had almost no
effect on world currency markets, whose traders
are skittish enough to respond to slight rumors of
wheat blight in the Caucasus to shift in and out
of currencies with lightning speed. The US dollar,
which spent last week strengthening against the
euro before the threats by the Middle Eastern
central bankers, fell slightly against the
European currency by a quarter of a percentage
point to a one-week high of $1.1945 - before it
retreated later.
Then there is the
question of which crude importers will want to pay
in petro-euros rather than petrodollars. Although
use of the dollar as the world's fiat currency has
been declining for about 30 years, some 70% of
international currency reserves, which finance
international trade, are in US dollars. Japan and
China alone have built up nearly US$2 trillion in
US Treasury bonds and other dollar holdings. China
in particular has floated trial balloons about
switching reserves out of the dollar, only to have
the trial balloons decisively shot down by the
People's Bank of China, the country's central
bank.
Japan and China now face a quandary.
They and their fellow international creditors are
as much hostage to their debtor as the US is
hostage to them. Any fall in the dollar that would
be driven by a switch to petro-euros risks
damaging their reserves.
The
peril of driving down the US dollar,
either intentionally or unintentionally, was illustrated on
July 21, 2005, when the People's Bank of
China discarded its strict peg of 8.28 yuan to
US$1, valuing its currency against a basket
of foreign currencies instead, and allowing the
trading band for the yuan to widen slightly, by 2%,
to 8.11:US$1. In hours, the yuan rose to its new
level. At that time, China was holding US$600
billion in foreign reserves. The 2% move against
the dollar cost China US$30 billion in dollar
reserves.
China and Japan are now two
of the world's largest importers of crude,
although both are dwarfed by the United States,
which produces only 7.61 million barrels of oil
per day against consumption of more
than 20 million barrels, according to the CIA
World Factbook.
Then there is the
question of what the holders of euros are going to
do with their money. With Britain and Norway, two
major oil producers, excluded from the euro
currency zone, the euro bond market is dwarfed by
the dollar bond market, to the point where there
is no place in Europe to invest prospective vast
sums of petro-euros.
By and large, once
crude transactions take place in euros, the euros
are exchanged for dollars. In November 2000, when
Saddam Hussein announced he would switch
international transactions from a US dollar
standard to euros, a United Nations study
estimated that Iraq's initial shift in pricing
cost the country at least $270 million in
transaction and other costs. Saddam recouped that
money when the euro rose 17% against the dollar on
other factors.
This obviously leaves the
world's holders of US Treasuries in a quandary.
There is little doubt that they would love to
diversify away from the US currency, not least
because of the growing danger of a dollar
collapse. But a possible dollar collapse is much
more likely to stem from the unsustainability of
the country's gigantic and growing trade and
budgetary deficits and the irrational fiscal
policies of the Bush administration.
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world's
fourth-largest producer of crude, pumping only
about 5% of the world total, and is unlikely to
add much to that, according to a Hong Kong-based
energy research analyst for a major US investment
bank in an interview with Asia Times Online. He
prefers to remain unnamed. 
