Iran, Oil and Euros

17 February 2006

Iran, Oil and Euros: The War Scenario

By Gwynne Dyer

Here’s the scenario. On 20 March Iran opens a new “bourse” (exchange) on which countries all over the world can buy and sell oil and gas not only for dollars but also for euros. It also establishes a new oil “marker” (oil pricing standard) based on Iranian crude and denominated in euros, in open rivalry to the existing West Texas Intermediate, Norway Brent and UAE Dubai markers, all of which are calculated in US dollars.

The Iranian bourse is a instant success with countries and companies that are unhappy about having to hold huge amounts of overvalued US dollars to finance their oil transactions, all of which must presently be conducted in that currency. Very large sums start to shift from the dollar to the euro, although exactly how much is unknown because the US Federal Reserve System (by pure coincidence, of course) has chosen late March as the time to stop publishing the data that would make it easy to know how fast the haemorrhage was.

But the US government knows, and is deeply alarmed by the danger that the dollar may be losing its status as the world’s only reserve currency. Given the huge deficits that plague the US economy, the US dollar’s value would collapse if other countries began to see it as just another currency, so the euro must be prevented from emerging as an alternative reserve currency. In practice, that means the Iranian experiment with a euro-denominated oil bourse must be stopped — and the only way to do that is to attack Iran.

Some of the scenario-mongers would change the sequence of events and have the US launch a “preventive” attack against Iran before it even opens the bourse. An alternative scenario has Washington persuading Israel to do the dirty work of actually launching air strikes against Iran. But a lot of people are genuinely worried that the whole crisis over Iran’s alleged nuclear weapons programme is being whipped up to give Washington cover for a strike against Iran that is really meant to halt the bourse.

In support of this thesis, they argue that a similar initiative by Saddam Hussein, who began insisting that Iraq’s oil exports be paid for in euros in 2000, led directly to the US invasion of 2003. The Iranians are going much further, and they will be punished too. How seriously should we take this argument?

Although final details on the way the Iranian oil bourse will operate are still lacking, it’s clear that a euro-denominated oil exchange could catch on, and would indeed challenge the US dollar’s unique advantages as the world’s sole reserve currency. However, it is less clear that the Bush administration actually knows or cares about this.

There is no real evidence linking Saddam Hussein’s demand to be paid in euros for Iraq’s oil with the subsequent US invasion of Iraq. Those two events occurred almost three years apart, and in any case Saddam merely asked to have the cheques made out in euros, so to speak. Iraq’s actual oil sales continued to go through the New York or London exchanges and to be conducted in dollars.

Besides, those were the early years of the Bush administration, and US dollar was much less vulnerable because the twin US deficits on the federal budget and the foreign trade account had not yet had time to swell to their present massive size. The euros-for-oil story is just one of many motives that people have proposed to explain the Bush administration’s attack on Iraq, given that Saddam had neither terrorist ties nor weapons of mass destruction, but it fails to convince.

The rapidly deteriorating financial position of the United States probably does explain the Federal Reserve’s announcement that on 24 March it will stop publishing data on the M3 money supply, which tracks how many US dollars are held by foreigners. If you are worried about a panic flight from the dollar, then you want to keep any downward trend in overseas holdings of US dollars out of public sight. But the Fed might well be doing this around now even if no Iranian oil bourse were on the horizon, and no dramatic conclusions need to be drawn from it.

In order to believe that the US government is planning an attack on Iran to head off the challenge to the dollar that a euro-based Iranian oil bourse would represent, you must first believe that the Bush administration actually worries about such things, and there is little proof that it does. It certainly should, but if it truly did, would it have pushed through the biggest tax cuts in American history?

The Bush administration is reckless enough to contemplate an attack on Iran, but it is too ignorant about fiscal and monetary matters to worry about such esoteric matters as the potential connections between a shift to euros in the oil market, foreign investor confidence in the US dollar, and the sustainability of the massive US budget and trade deficits. As Vice-President Dick Cheney said to former Treasury Secretary Paul O’Neill when the latter protested over the huge Bush tax cuts (an issue on which he later resigned): “Ronald Reagan proved that budget deficits don’t matter.”

If the US does attack Iran, it will be for other motives.


To shorten to 725 words, omit paragraphs 7 and 8. (“There is…convince”)