America: Protecting Her Economy

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Following on from yesterdays post discussing the threat the Euro poses to the petro-dollar cycle, The Shelf questions what lengths the US would go or has gone, to keep this cycle in place that her economy is so dependant upon. In the last of a series of three posts we revisit the Iraq II conflict as well addressing growing tensions with Iran, and whether these events could be part of a far greater plan to protect the American economy.

For some more background on the relationship between the dollar and oil we should recap two significant time periods over the last century.

The first is the Second World War, after which the US escaped much of the economic destruction suffered across Europe and Japan and amassed 80% of the worlds Gold. Based on this fact when the World Bank was founded in 1945 a fixed exchange currency was established based on gold, the gold standard dollar. As a result of this move the dollar currency was now pegged to the price of Gold.

The second is the Vietnam War (1967-72) proved which proved a turning point for the Gold standard dollar. The War Cost the US over $500 million, during which the US established hundreds of military bases across the world costing hundreds of millions of dollars a year to run, paid for by US dollars at the time backed by Gold reserves. The price of these bases ran the US treasury low as more and more dollars were printed to cover their running costs. In 1971 Nixon suspended dollar conversion into gold and the US dollar was floated on the international market.

At this same period of time US energy reserves began to deplete and American was becoming reliant on oil as an import. Its own production had peaked and demand was growing, and by encouraging Saudi Arabia to price oil in dollars it protected its currencies strength. Nearly four decades later the dollar has become an oil backed currency as opposed to gold backed, and therefore the power of the dollar in the world market is depended on oil.

After the first gulf war, brought on by the invasion in Kuwait, economic sanctions were placed on Iraq for twelve years by members of the UN security council ending around 2002. Towards the end of these sanctions Iraq could have been seen to want to hit back at the UK and US for their single handed threat to veto any lifting of the sanctions whilst Hussein remained in power.

In 2000 Iraq then decided to sell its oil exports in Euros, and went on to sell drilling contracts to European firms deeming the dollar the currency of an “enemy state”.

The US invaded Iraq in 2003. Amongst the initial stages vast oil fields were secured as part of the initial invasion strategy. Post war, as America rebuilt Iraq the oil they exported was reverted back into dollars, despite the Euro being 17% stronger at the time meaning the new Iraqi was actually getting less revenue for its oil that it was pre-invasion. Not only that but drilling contracts were then re-sold to American firms. This left the two largest oil exporters proven reserves in Saudi Arabia and Iraq firmly tied to the dollar.

Some sceptics say the Iraq war was also intended to deter Middle Eastern states from altering the currency export of oil. BUT, Iran has now stated it is to start exporting oil in Euros, and has already converted much of its treasury into Euros after growing tensions with the US. These tensions have come at the same time as a growing debate over Iran nuclear weapons program. :|

Saudi Arabia has also recently said OPEC may switch the currency it exorts oil in some time in the future, a move which would seal the end of the dollar dominance and turn economic power.

Having seen momentum grow in recent months for at least a duel currency split, selling oil in Euros and Dollars, the US sees OPEC a too large a cartel to excert influence on is Saudi Arabia changes its stance. To this end the US is paying increasing attention to Nigeria, an exsisting OPEC member, in the hope that with generous aid packages she will withdraw from the cartel and commit to serving US supply in dollars. It is not coincidence that there is also increasing attention being paid to the rest of the African continent and countries with vast untapped oil reserves.

                    

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