Proposed Iranian oil Bourse

nevadan · Mar 10, 2006

"Why Iran's oil bourse can't break the buck"
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Dcraig

You point is excellent as is the article from the Asia Times. The authors assertion that the Iran oil bourse being a non starter with respect to the strength of the dollar is debatable though. He claims that the dollar was revived in the Arab oil embargo by the price shock of a sudden 400% increase in the price of oil. I would say that this is not entirely accurate.

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.
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What actually happened here is along with scrapping the Bretton Woods agreement was a devaluation of the US dollar. This in effect discounted the price of oil (same size barrel of oil purchased with dollars of less value). The Arabs, not being entirely stupid, recognized this and said "screw you Mr. Nixon, we will close the spigot until the price of oil rises enough for us to recoup our losses. They in effect sued for damages and won--Big Time.

Englund then argues that the Iranian crises did not result in an increase in demand for the dollar, instead it began to decline. This he claims disqualifies the concept of a "petrodollar".

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.
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Note the common thread here regarding the level of US dollars held by foreign governments and the value of the dollar. He also states elsewhere that the Europeans and others wouldn't dream of attacking the dollar for fear of reprisal. This is true but the Iraninans may not be as clear in their thinking. If they can improve their position by selling oil in euros while causing the US some grief at the same time (and they are the #5 producer in the world)I suppose it would be a win-win situation for them. I don't claim to have a clue with regard to whether the powers that be will view competion with the dollar as a real threat or not. I would say this though. If you poke a stick at the big dog you run the risk of being bitten. It dosen't matter if it is just a little stick, the bite you get will probably be about the same.

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Proposed Iranian oil Bourse

nevadan