In a move seven years in the making, Iran has stopped all sales of oil in US dollars, electing to sell other countries instead.
Iran has been selling oil for other currencies for a few years, but it is taking the next step and phasing out dollar sales completely. If you want to buy oil from Iran, you will need euros or yen.
To understand just how significant this is, look at this table of current account balances by country.
The US, with four percent of the world's population, has a current accounts deficit of $829 billion.
A nation's current accounts is the difference between the value of goods and services it exports and the value of goods and services it imports. A deficit means a country imports more than it exports.The US current accounts deficit is ten times higher than the country with the next highest deficit (Spain) and double the total current accounts deficits of the other 89 countries with deficits.
That's right: the US is singlehandedly responsible for two thirds of the entire planet's current accounts deficits.
Of the 60 countries with current accounts surpluses, the top two are Japan and China, with surpluses of $165.5 billion and $160.8 billion, respectively.
These two countries are major holders of dollar-denominated securities, and both have been slowly, quietly reducing their dollar holdings.
So how is Iran refusing to sell oil for dollars is connected to the US current accounts deficit?
Normally, when a country runs a current accounts deficit, it must pay the difference in cash. However, since the early 1970s, the US has had a special deal.
When OPEC formed, the US government negotiated a deal that all OPEC countries would only sell oil for dollars and dollar denominated securities. In other words, if you want to buy oil from an OPEC country, you need to buy dollars first.
This was a great deal for the US because it could essentially print dollars and sell them abroad to cover its trade shortfalls. Other countries had to buy those dollars so they could buy oil.
The OPEC countries, in turn, tended to invest their wealth back into the US (this is called petrodollar recycling) so the US economy could essentially enjoy its benefits without actually having to produce anything to earn it.
The run-up in oil prices since 2000 has been a bonanza for the US economy despite higher prices at the pump since the international demand for US dollars has grown in lockstep. This has allowed the US current accounts deficit to reach its present state of unimaginable bloat.
If OPEC changed its policy and allowed people to buy oil with other currencies, it would be a disaster for the US economy, because international demand for all those little green pieces of paper would evaporate.
Despite the high oil prices, the value of the dollar has been flagging against the euro since 1999 when the common European courrency was first introduced. This reflects the poor fundamentals of the US economy - other than the petrodollar system, US currency isn't backed by any real economic foundation.
For a much more in-depth examination of what's at stake, I highly recommend William Clark's book Petrodollar Warfare (reviewed in RTH).
Back in 2005, I wrote that the American sabre-rattling against Iran had less to do with its plan to develop nuclear power, which it is legally entitled to do under the Non Proliferation Treaty, than with its plan to launch a euro-based oil bourse, or stock exchange for trading energy.
(The article generated some interest and even landed me an interview on the Sky documentary Conspiracies: Iraq. A low-res version in Real Media format is available for download.)
The plan to launch the bourse seems to be on indefinite hold, but otherwise, Iran is still proceeding with its strategy of undermining petrodollar hegemony by making long-term energy deals with China and refusing to trade oil for dollars.
While pundits hollar at each other over whether Iran is trying to acquire nuclear weapons, the country has quietly lit the fuse to a financial time bomb that could leave the US economy looking like a war zone once its staggering trade obligations are called in.
Amazingly, almost no one seems to have noticed. The International Herald-Tribune carried a story about it, but the New York Times, which owns the Tribune, did not.
The next time you read or hear someone claiming Iran is a threat, remember that the real threat is that Iran's actions might trigger the collapse of the American economic house of cards.