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Petrodollar Warfare -- AKA the "Oil Currency Wars" (wikipedia.org)
13 points by espeed on April 23, 2011 | hide | past | favorite | 16 comments

The most renegade of the lot could be Libya and Iraq, the two that have actually been attacked. Kenneth Schortgen Jr, writing on Examiner.com, noted that "[s]ix months before the US moved into Iraq to take down Saddam Hussein, the oil nation had made the move to accept euros instead of dollars for oil, and this became a threat to the global dominance of the dollar as the reserve currency, and its dominion as the petrodollar."

From: http://www.atimes.com/atimes/Middle_East/MD14Ak02.html

Kind of obvious. When W. Bush took office, Iran, Iraq, and Venezuela were all threatening to stop using the US dollar for oil sales - all three were branded as part of the axis of evil and we started overt or covert military operations against all three countries.

Whether the huge military budget for protecting the dollar as the reserve currency of the world was a good strategy is still an open question. (But my guess is that given more historical perspective in 5 years, or so, it will look like a bad strategy.)

Having the dollar tied to oil allows the US to devalue the dollar without losing it. To understand the significance of this in terms of the bigger picture with China, watch this Charlie Rose interview with Gordon Brown (http://en.wikipedia.org/wiki/Gordon_Brown) where he talks about the US/China "currency wars" and the "race to the bottom" http://www.charlierose.com/view/interview/11343).

Kenneth Rogoff (http://www.economics.harvard.edu/faculty/rogoff/), a Harvard economics professor and former chief economist at the International Monetary Fund, says "A weak dollar isn’t necessarily a bad thing -- it can make the United States more competitive, bolster exports and help domestic companies that are vying against imported goods here in the United States" (http://www.washingtonpost.com/business/economy/the-dollar-le...).

The article goes on to say, "[Devaluing the dollar] effectively would be playing the China card against China in a battle for manufacturing jobs...Many fund managers say the only way out of that box is a weaker dollar, reducing the value of the massive amount of U.S. debt held by foreigners and increasing the value of American investments abroad, such as Buffett’s.

China artificially lowers its currency so its goods are relatively cheaper ("it's pegged to the dollar"), which keeps its foreign trade prices down and therefore boosts its exports. So how does the US "compete" with an artificially-lowered foreign currency to discount its debt and keep its exports up? Or, in other words, how does the US devalue its own currency in a "race to the bottom"...?

"'Countries like the United States do race to the bottom,' said Gross (http://en.wikipedia.org/wiki/William_H._Gross), though he added that Treasury Secretary Timothy F. Geithner would never say so. A weaker currency 'makes them more competitive and reduces the burden of debt,' Gross added. Americans own about half of the outstanding federal debt, but Gross said the rest is owed 'as Tennessee Williams would say, to strangers, outside the U.S. If the United States can devalue the value of those dollars that they owe, then all the better.'"

"A weaker currency 'makes them more competitive and reduces the burden of debt," - makes them more competitive? It makes the pricing lower but not more competitive. China and any other country that is racing to the bottom is playing a losing game in the long term. In short term, there may be some benefit but as with anything that becomes commoditized manufacturing is only as good as your last price.

As far as relief of debt that theory has been shown wrong for a good number of years. Lowering the value of a currency may look good to someone who is in debt but it makes those hold the debt less likely to lend which freezes capital and we all go into recession.

Should the US currency not be tied to world gas/oil and other commodity markets we could be seeing what's happening in Japan (pre-quake) where they were a a neg interest rate and are the most highly in debt country. They tried lowering their debt by devaluing but it hasn't and won't work.

Doesn't the dollar have value other than it being a default reserve currency? Even if oil is traded in other currencies, the US will still have excellent R&D and manufacturing ability, and the government will still be extremely creditworthy. That's where value really comes from.

As a thought exercise: are all the countries that use currencies other than the USD facing massive economic problems? Nope. So I doubt this is so serious that we need to overthrow governments. We do that for other reasons.

Having the dollar tied to oil allows the US to run up more "debt" and operate in a way that wouldn't otherwise be possible. See "Understanding the Modern Monetary System" (http://pragcap.com/resources/understanding-modern-monetary-s...).

Really? Exactly how?

From the article:

"Most oil sales throughout the world are denominated in United States dollars (USD). According to proponents of the petrodollar warfare hypothesis, because most countries rely on oil imports, they are forced to maintain large stockpiles of dollars in order to continue imports. This creates a consistent demand for USDs and upwards pressure on the USD's value, regardless of economic conditions in the United States. This in turn allegedly allows the US government to gain revenues through seignorage and by issuing bonds at lower interest rates than they otherwise would be able to. As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries. A stronger USD also means that goods imported into the United States are relatively cheap."

Yes, really. There is a huge amount of US dollars circling in the oil trade. If those were instead used to buy non-oil stuff, the price of non-oil things will go way up and so the value of dollar way down.

The issue is primarily one of the US electorate, as long as their dollar denominated assets increase everything is fine, if dollar denominated assets are seen to depreciate heads roll, therefore in order to maintain political power the assets of the electorate must be seen to continuously rise. (eg. It's ok if the dollar is worth 20% less as long as your house is worth 20% more dollars)

Obviously keeping oil flowing from the middle east is a cornerstone of US policy, and it is important for our allies in Asia and Europe too. But the currency wars concept is silly and unsubstantiated; in today's global forex markets it is trivial to shift from dollars to euros or whatever you want before or after trading for oil. There are a lot of reasons the dollar is the global reserve currency, and if US policymakers were truly concerned about the dollar you'd see different fiscal and monetary policy in Washington-- instead we are doing everything in our power to debase the dollar and increase the dollar price of oil.

"in today's global forex markets it is trivial to shift from dollars to euros or whatever you want before or after trading for oil."

You're right, but the point is that after all is said and done, you have to purchase oil in USD, which creates the demand for the dollar; countries are forced to convert currency to USD. The fact that it's easy to do this is irrelevant.

This is another component of the emerging "economic/currency wars," which is being discussed in this thread: "Warren Buffett is now betting against the US dollar" (http://news.ycombinator.com/item?id=2476584).

"Oil Not Priced in Dollars by 2018?: Some oil producing countries and big buyers are hatching a plan to move away from pricing oil in dollars—a potential blow to the greenback's prestige"


October 6, 2009: In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

The root cause seems to be the existence of independent central banks in those countries. That is what allows them to switch the trade to euros and provokes occupation by NATO.

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