Why Iran's oil bourse can't break
the buck By F William Engdahl
A number of writings have recently appeared with the thesis that the announced
plans of the Iranian government to institute a Tehran oil bourse, perhaps as
early as this month, is the real hidden reason behind the evident march to war
on Iran by the Anglo-American powers. The thesis is simply wrong for many
reasons, not least that war on Iran has been in planning since the 1990s as an
integral part of the United States' Greater Middle East strategy.
More significant, the oil-bourse argument is a red herring that diverts
attention from the real geopolitical grounds behind the
In 1996, Richard Perle and Douglas Feith, two neo-conservatives later to play
an important role in formulation of Bush administration's Pentagon policy in
the Middle East, authored a paper for then newly elected Israeli prime minister
Benjamin Netanyahu. That advisory paper, "A Clean Break: A New Strategy for
Securing the Realm", called on Netanyahu to make a "clean break from the peace
process". Perle and Feith also called on Netanyahu to strengthen Israel's
defenses against Syria and Iraq, and to go after Iran as the prop of Syria.
More than a year before President George W Bush declared his "shock and awe"
operation against Iraq, he made his now-infamous January 2002 State of the
Union address to Congress in which he labeled Iran, along with Iraq and North
Korea, as a member of the "axis of evil" trio. This was well before anyone in
Tehran was even considering establishing an oil bourse to trade oil in various
The argument by those who believe the Tehran oil bourse would be the casus belli,
the trigger pushing Washington down the road to potential thermonuclear
annihilation of Iran, seems to rest on the claim that by openly trading oil to
other nations or buyers in euros, Tehran would set into motion a chain of
events in which nation after nation, buyer after buyer, would line up to buy
oil no longer in US dollars but in euros. That, in turn, goes the argument,
would lead to a panic selling of dollars on world foreign-exchange markets and
a collapse of the role of the dollar as reserve currency, one of the "pillars
of Empire". Basta! There goes the American Century down the tubes with the
onset of the Tehran oil bourse.
Some background considerations
That argument fails to convince for a number of reasons. First, in the case of
at least one of the oil-bourse theorists, the argument is based on a
misunderstanding of the process I described in my book, A Century of War,
regarding the creation in 1974 of "petrodollar recycling", a process with which
then-US secretary of state Henry Kissinger was deeply involved, in the wake of
the 400% oil-price hike orchestrated by the Organization of Petroleum Exporting
The US dollar then did not become a "petrodollar", although Kissinger spoke
about the process of "recycling petrodollars". What he was referring to was the
initiation of a new phase of US global hegemony in which the petrodollar export
earnings of OPEC oil lands would be recycled into the hands of the major New
York and London banks and re-lent in the form of US dollar loans to oil-deficit
countries such as Brazil and Argentina, creating what soon came to be known as
the Latin American debt crisis.
The dollar at that time had been a fiat currency since August 1971 when
president Richard Nixon first abrogated the Bretton Woods Treaty and refused to
redeem US dollars held by foreign central banks for gold bullion. The dollar
floated against other major currencies, falling more or less until it was
revived by the 1973-74 oil-price shock.
What the oil shock achieved for the sagging dollar was a sudden injection of
global demand from nations confronted with 400% higher oil-import bills. At
that time, by postwar convention and convenience, as the dollar was the only
reserve currency held around the world other than gold, oil was priced by all
OPEC members in dollars as a practical exigency.
With the 400% price rise, nations such as France, Germany and Japan suddenly
found reason to try to buy their oil directly in their own currencies - French
francs, Deutschmarks or Japanese yen - to lessen the pressure on their rapidly
declining reserves of trade dollars. The US Treasury and the Pentagon made
certain that did not happen, partly with some secret diplomacy by Kissinger,
bullying threats, and a whopping-big US military agreement with the key OPEC
producer, Saudi Arabia. At that time it helped that the shah of Iran was seen
in Washington to be a vassal of Kissinger.
The point was not that the US dollar became a "petro" currency. The point was
that the reserve status of the dollar, now a paper currency, was bolstered by
the 400% increase in world demand for dollars to buy oil. But that was only a
part of the dollar story. In 1979, after the accession to power of the
ayatollah Ruhollah Khomeini in Iran, oil prices shot through the roof for the
second time in six years. Yet, paradoxically, later that year the dollar began
a precipitous free-fall, not a rise. It was no "petrodollar".
Foreign dollar-holders began dumping their dollars as a protest against the
foreign policies of the administration of US president Jimmy Carter. It was to
deal with that dollar crisis that Carter was forced to bring in Paul Volcker to
head the Federal Reserve in 1979. In October 1979 Volcker gave the dollar
another turbocharge by allowing interest rates in the US to rise some 300% in
weeks, to well over 20%. That in turn forced global interest rates through the
roof, triggered a global recession, mass unemployment and misery. It also
"saved" the dollar as sole reserve currency. The dollar was not a
"petrodollar". It was the currency of issue of the greatest superpower, a
superpower determined to do what it needed to keep it that way.
The F-16 dollar backing
Since 1979 the US power establishment, from Wall Street to Washington, has
maintained the status of the dollar as unchallenged global reserve currency.
That role, however, is not a purely economic one. Reserve-currency status is an
adjunct of global power, of the US determination to dominate other nations and
the global economic process. The United States didn't get reserve-currency
status by a democratic vote of world central banks, nor did the British Empire
in the 19th century. They fought wars for it.
For that reason, the status of the dollar as reserve currency depends on the
status of the United States as the world's unchallenged military superpower. In
a sense, since August 1971 the dollar is no longer backed by gold. Instead, it
is backed by F-16s and Abrams battle tanks, operating in some 130 US bases
around the world, defending liberty and the dollar.
A euro challenge?
For the euro to begin to challenge the reserve role of the US dollar, a virtual
revolution in policy would have to take place in Euroland. First the European
Central Bank (ECB), the institutionalized, undemocratic institution created by
the Maastricht Treaty to maintain the power of creditor banks in collecting
their debts, would have to surrender power to elected legislators. It would
then have to turn on the printing presses and print euros like there was no
tomorrow. That is because the size of the publicly traded Euroland
government-bond market is still tiny in comparison with the huge US Treasury
As Michael Hudson explains in his brilliant and too-little-studied work Super
Imperialism, the perverse genius of the US global dollar hegemony was
the realization, in the months after August 1971, that US power under a fiat
dollar system was directly tied to the creation of dollar debt. The US debt and
the trade deficit were not the "problem", they realized. They were the
The US could print endless quantities of dollars to pay for foreign imports of
Toyotas, Hondas, BMWs or other goods in a system in which the trading partners
of the United States, holding paper dollars for their exports, feared a dollar
collapse enough to continue to support the dollar by buying US Treasury bonds
and bills. In fact in the 30 years since abandoning gold exchange for paper
dollars, the US dollars in reserve have risen by a whopping 2,500%, and the
amount grows at double-digit rates today.
This system continued into the 1980s and 1990s unchallenged. US policy was one
of crisis management coupled with skillful and coordinated projection of US
military power. Japan in the 1980s, fearful of antagonizing its US
nuclear-umbrella provider, bought endless volumes of US Treasury debt even
though it lost a king's ransom in the process. It was a political, not an
The only potential challenge to the reserve role of the dollar came in the late
1990s with the European Union decision to create a single currency, the euro,
to be administered by single central bank, the ECB. Europe appeared to be
emerging as a unified, independent policy voice of what French President
Jacques Chirac then called a multipolar world. Those multipolar illusions
vanished with the unpublicized decision of the ECB and national central banks
not to pool their gold reserves as backing for the new euro. That decision not
to use gold as backing came amid a heated controversy over Nazi gold and
alleged wartime abuses by Germany, Switzerland, France and other European
Since the shocks of September 11, 2001, and the ensuing declaration of a US
"global war on terror", including a unilateral decision to ignore the United
Nations and the community of nations and go to war against a defenseless Iraq,
few countries have even dared to challenge dollar hegemony. The combined
defense spending of all nations of the EU today pales by comparison with the
total of current US budgeted and unbudgeted military spending. US defense
outlays will reach an official, staggering level of US$663 billion in the 2007
fiscal year. The combined annual EU spending amounts to a mere $75 billion, and
is tending to decline, in part because of ECB Maastricht deficit pressures on
So today, at least for the present, there are no signs of Japanese, EU or other
dollar holders engaging in dollar-asset liquidation. Even China, unhappy as it
is with Washington's bully politics, seems reluctant to rouse the American
dragon to fury.
The origins of the oil bourse
The idea of creating a new trading platform in Iran to trade oil and to create
a new crude-oil benchmark apparently originated with the former director of the
London International Petroleum Exchange, Chris Cook. In a January 21 article in
Asia Times Online (What
the Iran 'nuclear issue' is really about), Cook explained the
background. Describing a letter he had written in 2001 to the governor of the
Iranian Central Bank, Dr Mohsen Nourbakhsh, Cook explained what he advised
In this letter I pointed out that the structure of global oil
markets massively favors intermediary traders and particularly investment
banks, and that both consumers and producers such as Iran are adversely
affected by this. I recommended that Iran consider as a matter of urgency the
creation of a Middle Eastern energy exchange, and particularly a new Persian
Gulf benchmark oil price.
It is therefore with wry amusement that I have seen a myth being widely
propagated on the Internet that the genesis of this "Iran bourse" project is a
wish to subvert the US dollar by denominating oil pricing in euros.
As anyone familiar with the Organization of Petroleum Exporting Countries will
know, the denomination of oil sales in currencies other than the dollar is not
a new subject, and as anyone familiar with economics will tell you, the
denomination of oil sales is merely a transactional issue: what matters is in
what assets (or, in the case of the United States, liabilities ) these proceeds
are then invested.
A full challenge to the domination of the US
dollar as the world central-bank reserve currency entails a de facto
declaration of war on the "full-spectrum dominance" of the United States today.
The mighty members of the European Central Bank Council well know this. The
heads of state of every EU country know this. The Chinese leadership as well as
the Japanese and Indians know this. So does Russian President Vladimir Putin.
Until some combination of those Eurasian powers congeal in a cohesive challenge
to the unbridled domination of the United States as sole superpower, there will
be no euro or yen or even Chinese yuan challenging the role of the dollar. The
issue is of enormous importance, as it is vital to understand the true dynamics
bringing the world to the brink of possible nuclear catastrophe today.
As a small ending note, a good friend in Oslo recently forwarded me an article
from the Norwegian press. At the end of December, Sven Arild Andersen, director
of the Oslo bourse, announced he was fed up with depending on the London oil
bourse trading oil in dollars. Norway, a major oil producer, selling most of
its oil into euro countries in the EU, he said, should set up its own oil
bourse and trade its oil in euros. Will Norway - a member of the North Atlantic
Treaty Organization - become the next target for the wrath of the Pentagon?
F William Engdahl is author of A Century of War: Anglo-American Oil
Politics and the New World Order (Pluto Press). He can be reached through his