Iran's Pre-Emptive Strike

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No, I don’t
mean its arrest of fifteen British low-rank military people who
were taking a boat ride in long-disputed waters dividing Iraq and
Iran. That was just a bit of old- fashioned tail-twisting of the
British lion, which has been close to toothless ever since 1945.
I mean this:
Iran
is planning to stop using the U.S. dollar to price oil, with less
than half of its oil income now paid in the U.S. currency, Iran’s
central bank governor said.
This March 28th
Associated Press story belonged in every American newspaper, if not
on the front page, then at least the front page of the business section.
But you probably missed it. The only American mainstream media outlet
that bothered to run this story was The International Herald Tribune,
which is owned by The New York Times. The
story appeared in the Trib’s business section (March 28).

“More
than 50 percent of Iran’s oil income is paid in other currencies.
We are reducing the dollar share and asking clients to pay in other
currencies,” Sheibany said.

Sheibany
said that almost all of Iran’s European clients and some of its
Asian customers have accepted making payments in non-dollar currencies.

The fact that
Iran is now pricing its oil in currencies other than the dollar
is reminiscent of Saddam Hussein’s similar decision in September,
2000. This was one month after Hugo Chavez met with Hussein in Iraq.
He was the first head of state to visit Hussein since the 1991 Gulf
War. Oil was then around $30.
[A
good introductory book on this whole question is William Clark's
Petrodollar
Warfare
. Read especially Lt. Col. (ret.) Karen Kwiatkowski's
Afterword.]
On April 10, 2001,
the Council on Foreign Relations and the James A. Baker III Institute
issued a joint, bipartisan publication, “Strategic
Energy Policy: Challenges for the 21st Century
.” Baker is a former
Secretary of State under Bush, Sr., and was regarded as the number-one
advisor to Bush. He also ran the Reagan White House whenever Reagan
did not lay down the law on a specific issue. When the CFR and Baker
issue a joint report, we had better take it seriously as a statement
of what the Powers That Be are thinking — or want the public
to think — about government policy. The CFR’s press release summarized
the report’s findings.
Ironically,
the economic boom of recent years has exacerbated the potential
for an energy crisis. Strong growth in most countries and new demands
for energy have led to the end of previously sustained surplus in
hydrocarbon fuels.

As a result,
the world is now precariously close to using all its available
global oil production capacity. If an accident or other disruption
in production occurred — whether on the Alaskan oil pipeline,
in the Mideast or elsewhere — the world might be on the brink
of the worst international oil crisis in three decades.

The invasion
of Iraq by Bush and the resistance to the occupation have created
just the kind of disruption that the CFR warned about. It is no
accident that when the Establishment’s independent Iraq Study Group
presented a supposedly practical alternative to the Administration’s
Iraq policy, Baker was co-chairman. The problem is, the report was
yada, yada, yada — the standard Establishment bloviation, which
offered no meaningful, clear-cut solution to the problem because
there is no agreement within the foreign policy Establishment regarding
America’s Middle East policy, and hasn’t been since May 1, 1948.

Concern about
a looming war with Iran is continuing to force oil prices upward.
An actual war will drive prices much higher, just as the Iraq war
has.

THE
EURO WORRY

The euro was
introduced in 1999 at an exchange rate of $1.17. It started falling
almost immediately. It bottomed in October, 2000, a few days after
Hussein’s announcement, at 83 cents. It stayed low until October
2001, after the 9-11 attack, when it started rising. So, initially,
Hussein’s announcement did not have any visible economic effect
on the dollar/euro exchange rate. A month before the Iraq war began,
the euro was around $1.10. It continued to rise after the war began
in March, 2003. It was at $1.16 in May.

The U.S. dollar
is the world’s reserve currency. About 65% of all central bank foreign
exchange reserves are held in the dollar. A March 30 report on Bloomberg
provides the figures.
The
dollar’s share of global foreign-exchange reserves fell to the lowest
level in at least eight years as central banks accelerated their
purchases of euros, the International Monetary Fund said.

Dollars
accounted for 64.7 percent of reserves last quarter, down from
65.8 percent in the prior three months, the IMF said today in
Washington. The share of euros climbed to 25.8 percent from 25.1
percent, reaching its highest proportion since the single currency
was introduced in 1999. . . .

The euro
climbed 11.4 percent against the dollar last year, its fourth
annual gain in five. The advances have enhanced the attractiveness
to central banks of the currency now shared by 13 European Union
nations. Reserve holdings in euros climbed 8.3 percent last quarter,
the most in two years, IMF data show.

What the report
does not mention is that these figures are essentially unchanged since
the end of 2004. The dollar was then 66% and the euro 25%. The big
change has come since 2002. In early 2002, the euro figure was 10%.

THE
SAUDI CONNECTION

The dollar
has been supported by Saudi Arabia ever since 1971. When Nixon unilaterally
broke the United States government’s agreement to sell gold at $35/oz,
the dollar has floated against other currencies. Foreign central
banks have held T-bills as foreign exchange reserves because of
the dollar’s universal acceptability for international trade.

The Saudis
could have undermined the dollar’s role in trade if they had accepted
yen or pounds sterling in addition to dollars. But the Nixon Administration
negotiated a not-so-secret secret agreement. The Saudis would accept
the dollar, and only the dollar, in oil sales, no matter who was
buying the oil. At any time, the Saudis could have bailed out, but
they didn’t — not even during the OPEC oil embargo. Look at
the chronology.
August
15, 1971: Nixon closes the gold window, imposed price and wage controls,
and floated the dollar.

September
22, 1971: OPEC directs members to negotiate higher prices for
oil due to the falling dollar.

December
5: Libya nationalizes British Petroleum’s holdings.

January
20, 1972: Six OPEC nations raise prices 8.49% to compensate them
for the falling dollar. Saudi Arabia is one of them.

June 1:
Iraq nationalizes the foreign-owned Iraq Petroleum Company’s holdings.

October
27: OPEC announces 25% ownership of Western oil operations in
six countries, with 51% by 1983. Saudi Arabia is one of them.

March 16:
Shah of Iran nationalizes all foreign-owned oil companies.

September
1: Libya nationalizes 51% of all other oil companies.

I don’t want to
belabor this. You can see what happened. The nationalizations continued
for another year.

On October
6, 1973, the fourth Israeli-Arab war broke out. On October 17, OPEC’s
six Middle Eastern nations raised the price of oil to $3.65 from
$3.12. On October 19, they declared an oil embargo against the United
States. On October 19, they embargoed the Netherlands. The Netherlands
is where the world’s oil exchange operates. Oil rose. On December
22, the six Gulf states raised the price from $5.12 to $11.65, effective
January 1, 1974. You
can see the chronology here.

The initial
domino in the sequence is clear: the closing of the gold window
on August 15, 1971. But at no time did the Saudis or OPEC officially
abandon the dollar as the sole unit of account.

This was when
the flow of petrodollars began to accelerate. The Saudis sold their
oil for dollars, but they deposited the money mainly in multinational
banks headquartered in New York City. The banks then lent the money
around the world.

The Saudis
could have pulled the plug at any time. All they had to do was allow
other currencies in exchange for oil. Then they could have ceased
doing business with U.S. banks. They could have switched to London,
Germany, and Switzerland. They didn’t.

There had
to be a reason. But what reason makes sense?

PROTECTION
MONEY

The Saud family
runs the country. It is a fiefdom. The family cannot protect itself
militarily without weapons. It also needs a buffer against enemies.
It gets both from the United States.

After the
fall of the Shah in 1979 and the capture of the American embassy
by Iran’s revolutionary guards, the Shi’ite threat to Saudi Arabia
grew. The Saudis support the Wahhabi Sunni sect, which has always
been officially supportive of the Saud family. This goes back over
two centuries.

Iran under
the mullahs became an immediate threat to the Saud family. The oil
fields of Saudi Arabia are in the east, which is where Shi’ites
are dominant.

The military
equipment and other support given to Hussein by the U.S. in the
Iraq-Iran war (September 1980 to August 1988) was a shield for Saudi
Arabia. It kept a pro-Sunni leader in power in an otherwise Shi’ite-dominated
country on Saudi Arabia’s border. When Hussein moved into Kuwait
in 1991, the Saudis agreed to help fund the Gulf war. When Bush
encouraged the Shi’ites to revolt after the war ended, and they
did, the United States let Hussein’s troops slaughter them. This
was a benefit for the Saudis. They did not want Shi’ite forces on
their border. They still don’t. The Shi’ites and Kurds will be the
big winners if and when the U.S. departs. The Saudis will then have
a Shi’ite state on its border. Across the water is Iran, which is
facing a crisis within a decade, as its oil exports decline, possibly
to zero. Iran will have to make its move soon. The prospects of
a Shi’ite kingdom are fading.

The quid pro
quo for the dollar’s sole acceptability in Saudi Arabia and the
other Sunni members of OPEC is protection. As long as the United
States keeps the State of Israel on a tight leash beyond its own
borders, the Saudis need fear only the Shi’ites.

This is why
there has been no hue and cry from the Saudis regarding the second
American invasion of Iraq. This is why there is silence regarding
the two carrier task forces in the Gulf, with the third leaving
San Diego today to join the other two.

IRAN
BREAKS THE STRANGLEHOLD

With Iran
now selling oil only for other currencies, it has offered a challenge
to the other OPEC exporters. They can get out of the petrodollar
trap by switching to the euro. Iran is about to set the precedent.
Iraq did, but it was invaded. Then the old arrangement was reimposed
by the Americans: oil for dollars only.

By telling
other oil exporters that it’s a good idea to do business in other
currencies, Iran threatens to cause a shift in central bank holdings.
If the euro continues to rise, central banks are better off by buying
euros. At the margin, they will make money. But the dollar will
fall: reduced demand for dollars. The downside of this is two-fold:
(1) a falling dollar means fewer exports to America; (2) a falling
market price of their existing holdings of T-bills. This will hurt
Japan and China the most.

This threat
to U.S. foreign policy is great. The threat to the domestic economy
is worse. The dollar has been subsidized by OPEC nations for 35
years.

The dollar’s
looming fall in value in relation to other currencies is a minimal
threat to the American economy compared to rising oil prices. We
are importers of oil. If gasoline prices rise, voters will seek
vengeance. Republicans know this. So, Iran is now a threat to Bush
and the Republicans in 2008.

The British
Broadcasting Corporation reported
on the same interview with
Iran’s central bank governor.
The
Reuters news agency reported Chinese sources as saying that state-owned
oil producer Zhuhai Zhenrong Corporation had moved out of the dollar
for its Iranian trade late last year.

If correct,
this would be significant since Zhuhai imports 240,000 barrels
of oil a day from Iran while China is one of Iran’s most important
customers.

Japanese
oil producers continue to pay for their crude in US dollars, Reuters
reported, pending an official request from Tehran to change their
approach.

Then what
about Japan? The Japanese are not looking to rock the boat —
at least not until they are officially asked to rock it. The
Arab Times reported:

Japanese
buyers, including top refiner Nippon Oil Corp, said they had all
received inquiries from Iran to pay on non-US dollar terms, but
were awaiting an official request. “We are looking at it so that
we can switch the currencies any time, but we have not gotten any
official requests from them (NIOC). We are doing the transactions
in dollars (now),” Nippon Oil chairman Fukuaki Watari told reporters
last week.

All it will
take is an official request. Clearly, Iran can gain Japan’s cooperation
at any time.

CONCLUSION

The Israelis
would like Iran removed as a regional center of power. On this point,
they are in full agreement with the Saudis.

The Administration
does not want to see a dramatic fall of the dollar in relation to
the euro.

An attack
on Iran will produce a spike in the oil price, no matter what currency
is used to settle accounts. Oil importers don’t want that. Oil exporters
will cry crocodile tears, and then hike their prices. It’s called
“meeting the market.”

The potential
for disrupting the flow of oil has never been greater.

If
I were James Baker and his associates at the Council on Foreign
Relations, I would be ordering several cases of Depends. They are
running out of time to rein in Junior.

April
4, 2007

Gary
North [send him mail] is the
author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 19-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

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