Will Iran Kill the Petrodollar?
The official line from the United States and the European Union is that Tehran must be punished for continuing its efforts to develop a nuclear weapon. The punishment: sanctions on Iran’s oil exports, which are meant to isolate Iran and depress the value of its currency to such a point that the country crumbles.
The real matter at hand is the American dollar and its role as the global reserve currency. If the US dollar loses its position as the global reserve currency, the consequences for America are dire.
A 1970s deal between President Nixon and King Faisal of Saudi Arabia, and later OPEC in 1975, cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar’s value up, up, and away. In addition, countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit from which to draw.
The “petrodollar” system was a brilliant political and economic move. It forced the world’s oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world’s oil for free, since oil’s value is denominated in a currency that America controls and prints. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars.
We know where that situation led – to a US government suffocating in debt while its citizens face stubbornly high unemployment (due in part to the high value of the dollar); a failed real estate market; record personal-debt burdens; a bloated banking system; and a teetering economy. Other countries are starting to see that and are slowly but surely moving away from US dollars in their transactions, starting with oil.
Iran already supplies no less than 15% of China’s oil and natural gas. That makes Iran more important to China than Saudi Arabia is to the United States. So Iran will continue to have friends, and those friends will continue to buy its oil. More importantly, you can bet they won’t be paying for that oil with US dollars. Iran is already dumping the dollar in its trade with Russia in favor of rials and rubles. India is already using the yuan with China; China and Russia have been trading in rubles and yuan for more than a year; Japan and China are moving towards transactions in yen and yuan.
Russia, India, and China – three members of the rising economic powerhouse group known as the BRICs (which also includes Brazil) – are allied with Iran and are major gold producers. If petrodollars go out of vogue and trading in other currencies gets too complicated, they will tap their gold storehouses to keep the crude flowing.
If another currency, or gold, is generally accepted for oil, the US dollar would quickly become irrelevant, rendering the currency almost worthless.
[Read full story at ZeroHedge]