Geopolitics

The Deep Breath Before the Plunge

By Ryan McGreal
Published May 16, 2006

Iranian President Mahmoud Ahmadinejad just announced that starting this July, Iran will stop trading oil for dollars. Instead, anyone who wants to buy oil from Iran will have to pay for it in euros.

Coming on the heels of the Iranian Oil Bourse (IOB), an energy exchange Iran just registered on the Island of Kish on May 5, this looks like a calculated effort to undermine the US dollar.

It's too early to say what firms will trade on the IOB, but Iran's decision to require all oil purchases to be made in euros certainly creates a natural market for a euro-denominated exchange. Iran currently produces just under four million barrels of oil per day, about five percent of the world's total. (All oil production figures cited from the CIA World Fact Book.)

In related news, Russian President Vladimir Putin has announced a similar plan: he is calling for Russia to establish an oil exchange denominated in rubles. Depending on how Russia is prepared to go in its requirements for selling oil, this could prove far more damaging to the global market for petrodollars.

Russia is the world's second largest oil producer after Saudi Arabia, producing some nine million barrels a day, or about ten percent of the world's total.

Combined, Russia and Iran account for fifteen percent of global oil production.

This may be just the opportunity that oil importing countries, particularly Europe, need to diversify their foreign currency holdings away from the US dollar, which currently dominates the global oil trade.

Many analysts have been warning for some time that the dollar rides on unstable economic fundamentals, in particular the colossal US current accounts deficit. The deficit is the difference between what America imports and what it exports, and last year it approached $800 billion.

Essentially, the United States "produces" little green pieces of paper, which it exchanges for real goods and services. Other countries use those little green pieces of paper to buy oil.

With the gathering momentum of oil producing countries away from the dollar and toward the euro, the foreign demand for dollars is falling. Falling demand for dollars lowers the value of the dollar against other currencies, reducing the buying power of Americans.

Until now, the threat of global economic instability has kept the major players - Europe and China particularly - in the dollar game. Now Iran sees a chance to tweak the nose of its prime antagonist, and Russia sees a chance to get back in the game of global power politics.

The best outcome for all would be a smooth, managed transition from a pre-eminent petrodollar system to a basket of oil trading currencies, including the dollar, euro, ruble, renminbi, and others. However, the Bush administration has made it very clear that it is not prepared to share power.

It remains to be seen just how far the United States will go diplomatically and militarily to preserve its hegemony, and how far Iran, Russia, and other potential rivals waiting in the wings will go to break that hegemony up.

Analysts from all over the political spectrum are speculating that this round of increasingly aggressive posturing could escalate into a major conflict, even another world war. The potential for global devastation is so appalling that whatever its likelihood, the parties involved should be doing everything they can to let careful diplomacy map a way out.

Unfortunately, the United States refuses to engage Iran diplomatically, choosing instead to conduct illegal reconnaisance missions into Iranian territory, force a confrontation in the fractious UN Security Council, and plan a military onslaught of missile strikes, possibly including tactical nuclear weapons, on Iranian targets.

The fallout - no pun intended - from that conflagration would certainly throw the world into a turmoil from which there is no way to predict what may emerge.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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By Robert Nilla (anonymous) | Posted May 17, 2006 at 15:00:58

It is high time for america to stop bullying the rest of the world. Empires don't like to have rivals! Well Mr Bush, It's a whole new world out there, and it's time to stop crying the blues, grow up and be part of the global community. But my instincts are telling me we are in for stormy weather in the near future. Peace to the world, Bob Nilla. Sheridan, Wyoming

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By reidvinette (registered) | Posted June 08, 2006 at 03:14:21

June 7, 2006

The world is now at Peak Oil for the United States with the five supergiant oil fields supplying this country now in decline as of March 16, 2005. It takes one year to realize an oil field is in decline.

Beginning on March 16, 2006 the energy crises for the United States began ... or did it.

If there is an energy crises, it is a crises which has been created by the oil companies and industrial governments like the United States and Canada.

There is an energy solution to power modern day vehicles and it is called on demand water fracturing into hydrogen and oxygen.

www.waterpoweredcar.com www.waterfuelcell.org

This technology is so powerful that industrial governments are trying to keep a lid on it.

Why?

Money.

Industrial governments cannot tax the water it takes to fill your water tank in your car.

Oil companies cannot profit from the sale of water it takes to fill your water tank in your car.

Discover water fracturing technology and begin experimenting in your garage.

The energy crises I believe is a myth now.

Water fracturing technology can preserve valuable oil for petro-chemical products, and agricultural uses. Water fracturing technology can be used for vehicle transportation, and energy to power electrical generating plants now dependant on natural gas.

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By Cathal Dunne (anonymous) | Posted June 08, 2006 at 13:08:32

This seems to be a welcome development, that Iranians and Russians are trading oil in currrencies different to the US Dollar. To me, it has always seemed unfair that an Irish oil company operating in Saudi Arabia selling to other European states would have to deal in a currency that is not used by any of these countries, the US Dollar.

I also welcome the rise of the €uro as a medium of exchange in as many global markets as possible. This is because I am a European Citizen living in Ireland. We have been living within the eurozone since 1999 and the EU then EEC since 1973. It is my opinion that a free, liberal, democratic world should not only look to a superpower like the US for guidance, I think a unified Europe, Europe being the birthplace of democracy,the Enlightenment, Renaissance and Industrial Revolution should also be a model.

It is through the international recognition of pan-European efforts like the €uro only bourse in Iran that the cause for European unification will be realised and the rebalancing of the world will occur.

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