Peak Oil and a developing trend to switch international oil trading from the weakening U.S. dollar to the Euro (€) may fuel more oil grabs, economic collapse, and further disregard for climate change
World governments, many of whom currently pay lip service to the present and future problems associated with a warming planet, are eager to add to these woes by arguing (and perhaps soon fighting?) over anticipated new oil discoveries as the arctic ice continues to shrink. We know burning fossil fuels causes global warming, but we are tripping over ourselves to find more to burn. This makes it expedient to review some of the factors involved in our continued free-for-all over oil. Some of what follows may surprise.
It is now generally accepted that the invasion of Iraq was prompted, not by legitimate concerns about weapons of mass destruction (WMDs), but over a desire to take control over Iraq’s oil reserves (there was never much doubt about this outside the United States). Iraq holds the second largest proven reserves in the world, next to Saudi Arabia. What is not commonly known, however, is that prior to the Iraqi invasion, Saddam Hussein had already used an economic form of WMD on the U.S., and one that set a precedent the superpower could ill-afford to ignore. Hussein’s action is regarded by some as a primary reason for the Iraqi invasion.
Hussein Targets U.S. with Economic ‘WMD’
More than two years prior to the U.S. engagement in Iraq, a nation struggling with more than a decade of trade sanctions after its occupation of Kuwait (this occupation also largely centred around oil), Saddam Hussein made what at the time looked like economic suicide by switching from trading oil in dollars, to using the Euro instead. There was no financial gain to be had from the move, in fact quite the opposite. The Euro was at a low ebb — it was purely an act of economic aggression, and one of the only remaining weapons the beleaguered nation could wield against the mighty U.S. of A.
From November 2000:
Iraq is going ahead with its plans to stop using the U.S. dollar in its oil business in spite of warnings the move makes no financial sense.
Baghdad this week insisted on and received UN approval to sell oil through the oil-for-food program for euros only after 6 November. Iraq had threatened to suspend all oil exports — about 5 percent of the world’s total — if the body turned down the request.
The move comes despite repeated cautions that Baghdad’s departure from the oil industry standard of the dollar will cost the country millions in currency conversion fees. UN officials have said Iraq will have to reduce the price of its crude oil by about 10 cents a barrel in order to compensate buyers for the additional costs. — RadioFreeEurope
Iraq’s threat to stop exporting oil had to be taken seriously. The U.N. approved Hussein’s desire to move away from the dollar — which he regarded as the currency of an “enemy state“. Why would Hussein further weaken his embattled nation by taking such a hit on oil sales? The dollar/euro exchange was considerably less favourable than it is today. In fact, it was predicted Hussein’s decision would cost his country around $270 million dollars.
Why a Switch from the Petrodollar to the Petroeuro is a Danger to the U.S.
In the early 1970s, a time when U.S. overspending on the Vietnam war had significantly depleted U.S. gold reserves, president Nixon removed the gold guarantee on the dollar — effectively making the dollar’s value dependent on demand in the global economy. After this time, money was essentially produced at the cost of just paper and ink — some refer to it as a “faith based” currency — but strong demand for the dollar, particularly for oil transactions, made this a workable situation, at least for a time….
Let me explain. After U.S. domestic oil production peaked in the late 1960s, the nation became increasingly dependent on oil imports. But rather than purchasing oil in a foreign currency, the U.S. negotiated with Saudi Arabia so that all oil transactions would be in U.S. dollars. In return Saudi Arabia was to be assured supplies of arms and assistance to help keep the Kingdom’s rulers in power. The Saudis agreed, and from this time on oil transactions worldwide were almost completely made with the greenback. The ‘petrodollar’ was born. Whether Saudi Arabia was selling to the U.S., or Venezuela was selling to Korea, etc., if you bought and sold oil it was in U.S. currency.
For the U.S., over the last forty years, this has been an absolute boon, and one that has helped create the energy/consumption-intensive U.S. lifestyle we witness today. It effectively created a ‘free shopping’ situation for U.S. consumers — like handing the nation a credit card with no limit. Here’s how it works: Country A wants to buy oil, but to do so it needs U.S. dollars. So, Country A sells products or services to the U.S., getting paper (dollars) in return. Country A then proceeds to purchase oil from Country B.
Dollars are thus required in vast sums by most of the world’s governments, and much of that money is never actually cycled back to the U.S. in the form of a purchase — i.e. the international need to keep stocks of U.S. currency ensures that the U.S. often doesn’t have to actually provide goods and services in exchange for the paper (money) it’s printing.
Heading for Disaster?
But, the writing is on the wall. If nations trading oil were to switch currencies en masse, the real value of the dollar will become evident, with significant adverse economic impacts for the U.S. and beyond. Their credit with the world would end, and the U.S. would begin to suffer for years of overspending. The results could make the current recession look like a walk in the park, and the world could witness a major shift in economic (and thus, military) power.
Several Nations Shifting Away from Petrodollar
As it turned out, Saddam Hussein’s shift to the euro didn’t bring the financial losses expected — as, after the defiant switch, the euro rose in value against the dollar. Hussein made a killing. Meanwhile, Iran, and other nations, took note….
Not long after, September 11 hit the U.S. psyche like a ton of bricks, and after the subsequent failure to quickly smoke Bin Laden out of Afghanistan, George Bush instead, rather promptly, turned his attention to other priorities — to what the Bush administration seems to have regarded as a bigger threat.
“Operation Iraqi Freedom” was marketed as a bid to protect the American people, and to bring freedom and prosperity to Iraqis. It has arguably done neither, but that’s quite possibly because those objectives were never the real intent. Instead, “Operation Iraqi Freedom” made its first priority to take control of, and privatise, Iraqi oil fields (amongst other things) — putting them under the control of U.S. and U.K. companies. And, wait for it, they promptly put all trading of Iraqi oil back into U.S. currency — despite the economic losses incurred as a result of the now reduced value of the dollar.
The action essentially said to other oil-trading nations, “you’re either with us, or against us”. Oil trading is to stay in U.S. dollars, or else.
Not a nation to be easily intimidated, neighbouring Iran also determined to move away from the petrodollar, adding itself to the list of ‘axis of evil’ nations. By December 2007 Iran had completely switched to trading in other currencies (mostly euros, with some in yen). The Bush Administration’s apparent impatient circling of Iran and questioning their nuclear program almost perfectly mirrors the kind of media-fostered psychological lead up to the Iraqi invasion.
The following clip shows some of the fear mongering efforts of the famously right-wing Fox News.
Some have, in the past, felt that war with Iran is inevitable, but with current U.S. and international opinion on a very messy, expensive, unjustified and illegal Iraq war turning very sour indeed, combined with a serious U.S. economic downturn, this seems unlikely.
Tensions are also rising with other Organization of the Petroleum Exporting Countries (OPEC) nations — like Venezuela that are moving in the same direction. Many suspect that Venezuela’s attempts to leave the U.S. out of the loop in oil trading caused the Bush administration to support the coup attempt against Chavez in 2002:
Venezuela, another important oil exporter, had started bartering some of its oil, thus avoiding the use of the dollar, and was encouraging OPEC to do likewise — and the US was widely suspected in having played a part in the attempted coup against the Venezuelan president, Hugo Chavez. — Feasta.org
And, it doesn’t stop there. Russia was considering moving to the petroeuro, but now seems to prefer not to prop up either the U.S. or European economies, and is looking to switch to its own ascending ruble instead.
And, the latest? The entire OPEC cartel is now considering a transition to the euro.
‘Transition’ for many of these nations is key, as they all have large dollar holdings, so have a vested interest in maintaining their value. But they have to balance this with the money they’re losing as the U.S. dollar continues to slide. China is another example of such moves.
So Where From Here?
The United States, as it drives its SUV along the crest of peak oil, has different directions it could take — none of them easy, but with very different potential outcomes. One way has light at the end of the tunnel, the other does not.
To date, the strategy has been to aggressively protect both the petrodollar and sources of oil, whilst simultaneously endeavouring to keep oil and other domestic consumption trends as business as usual (grow the economy, and with it, national debt). It has also joined other nations in a strutting, chest-beating display over anticipated fossil fuel spoils from the arctic. These strategies are a kind of preparation, like hoarding acorns for winter, but one that is wholly short-sighted — ignoring economic, resource and environmental realities. These are not only poisoned acorns, killing the planet, but they also happen to be the very last ones. This direction keeps the nation wholly dependent on a diminishing resource. People talk about oil ‘production’, but it’s not produced, any more than gold is produced. It is mined. The Bush administration intends to keep burning oil, profligately, until every drop has gone. The ‘strategy’ essentially enshrines the belief that the American lifestyle is not only non-negotiable, but also immortal. The words ‘major vulnerability’ come to mind — a disaster in the making.
The infrastructure developed in the United States, in particular, is wholly built around domestic transport and international trade. Sprawling suburbia, often miles from employment and important amenities, has led to a situation where virtually every adult requires a vehicle, simply to function. More importantly, unlike yesteryear, our food production and distribution is wholly dependent on fossil fuels. Running out of oil, with the present infrastructure, doesn’t bear thinking about. Cuba suffered this experience when communism fell in 1989 — when Russian oil-bearing ships stopped deliveries almost overnight. It was an extremely difficult transition for Cuba. It will be much harder for the United States.
American consumers are being lulled into apathy about the storm ahead — a world of ever depleting, and ever more expensive, oil. Essentially, the more money and time invested in Iraq (and, potentially, other future offensives) seriously undermines the country’s ability to prepare.
It is said that “direct US investments in the war, to date, could have paid for 100% of the renewable energy investments required for the coming 25 years to deal with global warming…” and “The $600 billion in direct appropriations for Iraq could have built over 9,000 wind farms of 50 mw capacity, with the total capacity to meet 25% of US electricity loads.” (Operation Iraqi Freedom and Global Warming?). But, it also needs to be recognised that every energy option — from clean energy alternatives like wind, wave, geothermal and solar, to polluting, resource hungry options like nuclear and coal — all need fossil fuel inputs to build, implement and maintain them (how do you think those enormous wind turbines get up onto the ridge?). Every gallon of oil guzzled in a race between the lights, means we’re less likely to win the race against time and escalating cost in procuring oil. Also consider that as developing countries like China continue to grow, their purchasing power enables them to outbid other nations — including the U.S. with its weakening dollar — for oil supplies.
President Bush has said his nation needs to end its addiction to oil, but beyond tying food prices to oil prices by blinkered investment in damaging ethanol plants, he seems to be contradicting himself with his actions. There is, of course, one major obstacle to alternative options — that is that the federal government’s oil industry buddies will fight it every step of the way. The mantra of business is that success means growth. Failure is not an option for these extremely powerful people. Yes, there will be a new president next year, but industrial influences won’t walk out of the Whitehouse with Bush.
The U.S., and the world, needs to simultaneously transition away from oil — not only because of climate change, but simply because it is running out. The realist in me advises that so long as there is demand, someone will try to supply. The United States, Russia, Canada, and Norway (yes, the Norway that paints such an environmentally conscious veneer over itself) and others will contest each other for the rights to new oil and gas fields. It’s a given. Not only because it’s a money machine, but also simply because we haven’t yet learned how to live without the black gold.
Time is running out on climate change. Time is running out on oil. And, it seems, time is running out on the dollar. Giving in to apathy, or despair, is not an option. There is much that can be done. Chiefly, reducing need reduces consumption. Those guys that ride bicycles in protest over the Iraq war know what they’re doing. They don’t want to contribute to, and be the reason for, the loss of American and Iraqi lives. How many more lives will be lost in the coming years if we continue to fight over the dregs of remaining oil deposits? Priorities must shift.
I’d encourage you to look at what some wise people are doing (see also). The things we need to do to prepare for peak oil and global economic woes, also happen to be the same things we need to do to not only mitigate, but also personally prepare for, the impacts of global warming.
“This is very important…. I never had a security briefing which said what some of these very serious, but conservative petroleum geologists say, which they think that, either now or before the decade’s out, we’ll reach peak oil production globally, and with the rise of China and India and others coming along, unless we can dramatically reduce our oil usage, we will run out of recoverable oil within 35 to 50 years. And that would mean that… in addition to climate change, we have a very short time in the life of the planet to turn this around…. We may not have as much oil as we think. So we need to get in gear.” — Former President Bill Clinton, Aspen Ideas Festival, July 2006
- The Real Reasons for the Upcoming War With Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth
- Petrodollar Warfare: Oil, Iraq and the Future of the Dollar
- Robert Newman’s History of Oil