Monday, May 22, 2006

The Petrodollar: America's Achilles Heel By Virtual Chicano

Sometime during the Nixon administration, around 1973, the U.S. decided to back its currency with oil. The gold standard had become too unstable because it was easy for foreign central banks to manipulate the dollar by buying and selling incredibly large quantities of gold. Domestically, Americans bought the full faith and credit of the U.S. Government line but abroad world leaders demanded something more tangible so that the dollar would hold its value against inflation. So the U.S. devised a plan to back the dollar with oil and that oil would be priced in markets that the U.S. would control, hence, the Petrodollar.

The United States then rode on a wave of constant returns to scale for three decades until someone went and threw a wrench into that wheel. And that someone was Saddam Hussein. In 2003, Saddam Hussein demanded payment for Iraq s oil in Euros or Petroeuros. After 30 years many countries had grown discontent with the way the United States was inflating the dollar and thus making their dollar reserves lose value. So Saddam Hussein, with the blessing of the United Nations and, of course, Europe, refused to accept payment for its oil in anything but Petroeuros.

Of all the European countries, France had the most to gain because they had the bulk of contracts with the government of Iraq and Iraqi companies. This is why France did not support the war with Iraq. France did finally join in so as not to lose out on the rebuilding of Iraq, whenever that is. The U.S. has been stuck in the mud in this liberation of Iraq and has people recalling not just the Viet-Nam quagmire, but the stalemate in the Korean peninsula as well.

If you've been watching the news lately then you might know that the U.S. is finally ready to sign a peace treaty with North Korea, putting out the embers of war so that it can concentrate on Iran. Yes, Iran. Iran, not to be outdone by old Saddam, is creating its own oil trading market, The Iranian Oil Bourse, to compete with the New York Mercantile Exchange (NYMEX) and London s International Oil Exchange (IPE). And guess which currency it will use, the Petroeuro. Is all the talk about a nuclear Iran in reality an attempt by the U.S. to scare Iran out of establishing their Petroeuro based oil Bourse? Probably, because 70% of the world s foreign currency reserves are held in dollars. Just a 10% drop in this figure might trigger a de-stabilizing of the American economy from which it might never recover.

Although the dollar being the only game in town ads inflationary pressures to it, it is still better for the Americans this way as opposed to losing their world currency monopoly.

The Empire of the United States reached the crest of world dominance with its success in Europe and Asia at the end of WW2. Economic de-stabilization could push it over the edge where, in an act of self preservation, might cause it to attack its weaker neighbors to the south, Venezuela and Mexico. Therefore, it is important that every Latino understand what the Petrodollar is and the potential ramifications of the establishment of a major competitor, the Petroeuro.

The Petrodollar is the Achilles heel of the United States. And all it will take to send the U.S. over the edge is for countries that have been either bullied or bombed (or both) by the U.S. to band together and dump the Petrodollar and to demand payment for their oil in Petroeuros instead.

Virtual Chicano is webmaster and political commentator for