http://www.tompaine.com/opinion/2001/03/09/index.html
SADDAM’S LAST LAUGH
The Dollar Could be Headed for Hard Times if OPEC Switches to the Euro Arjun
Makhijani is president of the Institute for Energy and Environmental Research
in Takoma Park, Maryland.
For a considerable time the United States has enjoyed a position of
undisputed power among the world's countries. The superpower has been able,
with some exceptions, to shape critical global policies to serve its own
internal needs. Yet, its huge appetite for oil has left it dangerously
vulnerable to the policies of Middle Eastern oil exporters and to the
vicissitudes of the Israeli-Palestinian conflict.
Historically, the fact that oil prices are denominated in U.S. dollars has
accorded the United States a position of strength. This was bolstered by a
strong military presence in the Middle East, which was welcomed until
recently by at least some oil exporting states. But the global potential of
the European Union's currency (the euro) and the rising anti-U.S. sentiment
in the Middle East coupled with a series of other recent events, may lead
OPEC to change oil pricing from the dollar to the euro -- a decision which
could have a drastic effect on the U.S. economy and on global financial
stability.
Setting the Stage for Crisis
U.S. domestic policy has generally been dominated by sentiment on two streets
-- Wall Street and Main Street. But since the Israeli-Arab war in 1973 and
the accompanying Arab oil embargo against the United States, the importance
of a third "street" -- which might variously be called Oil Street or Middle
East Street -- has grown steadily. Before the year is out, this last street
may well dominate the scene.
Oil is the energy and financial lifeline of the United States, Europe and
Japan. It's a lifeline that runs through an area of intense conflict, where
antagonism to U.S. and Israeli policies is as widespread as it is heated. In
that context, rising tensions between the United States, the European Union,
Russia and China could make for a dangerous and volatile crisis. Of the major
powers, the United States is, in many ways, the most vulnerable. It certainly
has the most to lose.
Take the issue of oil imports. In 1973, the U.S. imported 34 percent of the
oil it consumed. By 1989, that had grown to 41 percent. Today, the U.S.
imports over half of the oil it consumes, and consumption is growing
steadily. Western Europe imports about half the oil it consumes, but that is
down from 80 percent two decades ago, and consumption has stabilized. China
imports 30 percent of its oil. Russia is an oil exporter.
Historically, the fact that oil prices have been denominated in dollars has
benefited the U.S. economy enormously, as fluctuations in the value of the
dollar had no direct effect on the price of oil for Americans. If the
currencies of other countries decline against the dollar, the oil prices
increase for those countries' citizens. For instance, last fall, oil prices
increased faster for Europeans than for Americans, because the euro was
plunging as petrol bills were soaring, triggering massive protests.
At the Bretton Woods international economic conference in 1944, the U.S.
dollar was assigned a fixed value of $35 to an ounce of gold, and so pricing
in dollars essentially meant pricing in gold. That system unraveled between
the mid-1960s and the early 70s because the "guns-and-butter policy" during
the Vietnam War created high inflation. Foreign dollar holders began losing
confidence and converted their depreciating dollars into gold in increasing
amounts.
By the early 1970s, U.S. gold supplies were running low. The U.S. devalued
the dollar relative to gold in 1971 and, in 1973, unilaterally 'de-linked' it
from gold. The U.S. dollar was no longer "as good as gold." Yet, oil
exporters -- led by Iran, Venezuela and Saudi Arabia -- decided to continue
denominating the price of oil in U.S. dollars, ostensibly a sign of
confidence in the United States and in its money. But, in fact, these
countries had little choice but to continue to use U.S. dollars -- there was
simply no realistic global alternative at the time.
With oil linked to the dollar, and a substantial U.S. military presence in
the Middle East, the position of the dollar seemed to be strong. At that
time, Iran was the closest U.S. ally in the Persian Gulf and welcomed U.S.
military presence. Iran was also the most powerful military force and the
most populous country in the region, as well as the world's second largest
oil exporter.
To date, the oil-dollar link has given the United States a huge advantage in
international trade. Corporations and countries carry out trade in U.S.
dollars, making the U.S. Treasury and the U.S. Federal Reserve Board the
ultimate arbiters of global monetary policy. However, the stability of the
U.S. dollar, and by extension the global monetary system, partially depends
on the financial policies of Persian Gulf countries that control nearly
two-thirds of the world's reserve of "black gold."
That weakness became evident in 1979, when the Shah of Iran was overthrown by
Ayatollah Khomeini's Islamic revolution, and the United States lost its main
military ally in the global oil patch. The price of oil shot up to $40 a
barrel (about three times today's level in real terms) and the value of the
dollar plummeted relative to other currencies. The price of gold soared to
$800 per ounce. The U.S. had to drastically increase interest rates -- to 15
to 20 percent, causing the most severe recession since World War II -- to
encourage foreigners to hold onto their U.S. dollars rather than dump them
for other currencies.
Today in the Middle East
We're now in the midst of the worst Israeli-Palestinian crisis in a
generation and the situation is at least as unstable as the 1973-1979 period.
U.S.-Iranian relations are hostile and tense. The U.S. has troops based in
Saudi Arabia, but they are not welcome. In the early 1990s, several
governments and many people in the Persian Gulf region tolerated and even
welcomed the presence of U.S. troops out of fear of Iraq's dictator Saddam
Hussein. Today, U.S. support to Israel in the face of the Palestinian
struggle for statehood is not seen as that of an even-handed mediator.
Rather, it has fueled more anti-U.S. sentiment.
Ariel Sharon who, as Defense Minister, presided over a terrible massacre of
Palestinians during the Israeli invasion of Lebanon in 1982-83, has just
become Prime Minister of Israel. He has vowed that Israel will maintain
sovereignty over an undivided Jerusalem, the holy city claimed by both
Israelis and Palestinians. Saddam Hussein, the architect of brutal internal
repression in Iraq, has proclaimed himself a military champion of the
Palestinian cause. Many in the region welcome him in that role, now more than
ever, as a counterweight to Mr. Sharon.
The U.S. also has an uneven policy in the Middle East concerning nuclear
proliferation, winking at Israel's development of a substantial nuclear
arsenal, and even selling it military hardware. Israel has avoided signing on
to the Nuclear Non-Proliferation Treaty (NPT), to which Egypt and other Arab
states belong. It is likely that Iraq, which has long sought nuclear weapons,
still has nuclear ambitions. The United States has never promoted sanctions
against Israel for its nuclear arsenal, but the U.S. supports sanctions
against Iraq, Iran, and Pakistan. This contradiction has angered many
countries in the region and may have stoked the ambitions of some of them for
acquiring nuclear weapons.
Israel has so far refused to participate in discussions regarding a Middle
East nuclear-weapons-free zone. The specter of a black market in nuclear
materials has increased with the economic woes of Russia, making nuclear
proliferation in the Middle East a growing threat.
U.S. Relations with Europe and Russia
Increasingly, the U.S. is at loggerheads with other global powers. In the
past two years, U.S. and Russia have clashed more and more over security
issues such as national missile defenses and the expansion of NATO. Russia,
China and France have regularly opposed the U.S. and Britain regarding UN
Security Council sanctions against Iraq. Given the Bush administration's
determination to build national missile defenses and President Bush's stated
indifference to the Anti-Ballistic Missile (ABM) Treaty, U.S.-Russian
tensions are likely to flare up even more. China has already warned that
existing non-proliferation arrangements may not survive should the U.S.
decide to violate the ABM treaty.
U.S.- European relations are testy on a number of issues, ranging from trade
to Europe's plan to create its own security force (the European Rapid
Reaction Force), to the U.S. proposal to install a national missile defense
system.
In this context of global tension, the U.S. economic vulnerability to Oil
Street is particularly poignant. In the last two years, the euro has risen as
a possible alternative currency to the U.S. dollar. OPEC, unhappy with U.S.
Middle East policies, could decide to create the financial equivalent of the
1973 oil embargo against the United States by changing oil pricing policy
from dollars to euros. That would make the euro a major global competitor
with the U.S. dollar.
Linking Oil to the Euro
Last autumn, as a protest against U.S. Middle Eastern policy, Iraq asked the
United Nations for permission, which the UN granted, to be paid for its oil
in euros. (It needed UN permission because Iraq is selling oil under a
supervised United Nations sanctions regime. Other countries would not need
permission.) Iran subsequently raised the possibility of doing the same. Both
these moves hint at the potential for a change in OPEC oil-pricing policy.
Pricing oil in euros rather than dollars could cause a tremendous flight from
the dollar -- possibly far greater than the one that led to the collapse of
the gold-dollar connection in 1973 or the one that caused the steep decline
of the dollar in 1979-80. Like any other currency, the U.S. dollar is
vulnerable to the fast, panicky currency trades made possible by the
computerization of the financial world. Yet the dollar also has its own
special vulnerability. Since it is the pre-eminent global currency, a large
proportion of all the U.S. currency -- half or more -- is held abroad.
The desire of foreigners to hold dollars provides the United States with a
great deal of financial power. But it could also make for a far faster fall,
should holders of dollars decide to dump them. Though the underlying value of
U.S. companies and real estate could stem the dollar's decline as those
assets become cheap enough for holders of other currencies to want to buy,
there is no predicting whether chaos and uncertainty would take hold first.
In any case, the U.S. economy would likely be deeply damaged.
Russia has from time to time expressed an interest in tying itself closer to
the euro. This would be more likely if the arms control dialog between the
United States and Russia breaks down. If Persian Gulf oil exporters were to
carry out an oil-pricing switch from dollars to euros in collaboration with
Russia, a dangerous multi-sided confrontation could develop.
In sum, a dangerous confluence of events has emerged very rapidly in the last
two years: a Middle East political crisis, rising U.S.-European Union
differences, the introduction of the euro, U.S.-Russian and U.S.-Chinese
tensions, and the inauguration in the United States of an administration that
has far more unilateralist proclivities than any since the end of the Cold
War.
U.S. Domestic Implications
United States domestic actions -- such as attempts to open the Arctic
National Wildlife Reserve (ANWR) to oil drilling -- will not solve the global
conflict over oil, money and Israel-Palestine. Opening ANWR would not make a
significant dent in U.S. oil imports for years to come, if at all. Nor would
ANWR drilling ease the complex political-military-financial issues that have
made the U.S. dollar vulnerable. Opening ANWR would, however, create internal
U.S. political strife and divert attention from the crisis on the Middle
Eastern Oil Street.
Neither military power nor money will enable the United States to address
global crises unilaterally, so the country has no choice but to abandon its
overbearing unilateral policies and position itself as a better global
citizen. For starters, it must foster cooperation with Europe and Russia, as
well as create a just and even-handed Middle Eastern policy. For the world's
sole super power to thumb its nose at the world is far more dangerous than
most Americans realize. A cooperative approach would not only be more
prudent; it would give the United States and the rest of the world the
opportunity to consider new global monetary arrangements, which are needed in
any case for a less vulnerable and more equitable global financial
architecture.
