Is Bush petrified of the petro-euro?

national | miscellaneous | news report

Monday February 24, 2003 11:03

by Coilin Nunan - FEASTA: The Foundation for the Economics of Sustainability

feasta at anu dot ie

In November 2000, Saddam Hussein made a momentous decision: he decided that henceforth Iraq would sell its oil on the international market for euros rather than dollars. In doing so, Baghdad branded the dollar a tool of US hegemony.

Is there in fact some validity in this claim and could Iraq’s decision help explain the current policy divisions between the US and Eurozone countries, France and Germany, on Iraq?

At present, the dollar is the de facto world reserve currency, giving the US an inherent economic advantage by allowing it to import far more than it exports. The need for dollars outside the US to buy oil, repay IMF debts and carry out international trade means that foreign countries must supply the US with extra goods and services to acquire dollars which the US issues at virtually no cost. It is the demand for dollars which enables the US to live beyond its means, currently importing nearly 50% more than it exports.

The euro, however, now provides a credible alternative to the dollar. But even if the dollar only had to share the status of world reserve currency with the euro, the economic consequences for the US would be extremely serious, including large dollar and stock-market devaluations.

There is one major obstacle to this happening: oil. For many oil-importing countries like Japan, there is no point in converting their huge dollar reserves to euros if the only currency that can be used to buy oil is the dollar.

Maintaining international oil trade in dollars is therefore crucial to US economic health. But ‘axis of evil’ member and major oil exporter Iran not only welcomed Iraq’s euro move, but is considering doing likewise. OPEC member Venezuela also welcomed Baghdad’s move and has established barter deals for trading its oil with 13 different countries and encouraged OPEC to set up systems of electronic barter. Even major oil producer Russia welcomed the Iraqi move and OPEC itself has said it is considering the benefits of selling its oil for euros.

If part of the motivation for the proposed war against Iraq and the coup attempt in Venezuela is a power struggle between two competing currencies, then this underlines the importance of Feasta’s proposals for reforming the international monetary system and introducing a neutral world currency for all international trade.

Further reading: http://www.feasta.org/documents/papers/oil1.htm