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.
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