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I must have seen five different articles on the Iranian Oil Bourse over the past week or so. I have probably seen a hundred posts over the last year that the war in Iraq was because Hussein was going to price oil in Euros. These articles all make for sensational headlines but it is all nonsense. Perhaps we went to war in Iraq with intention of stealing their oil, but we sure did not go to war over pricing.
Following are some of the silliest statements I have ever heard on the subject:
Many have criticized Bush for staging the war in Iraq in order to seize Iraqi oil fields. However, those critics can’t explain why Bush would want to seize those fields—he could simply print dollars for nothing and use them to get all the oil in the world that he needs. He must have had some other reason to invade Iraq.
Benefits from Iraqi oil fields are hardly worth the long-term, multi-year military cost. Instead, Bush must have went into Iraq to defend his Empire. Indeed, this is the case: two months after the United States invaded Iraq, the Oil for Food Program was terminated, the Iraqi Euro accounts were switched back to dollars, and oil was sold once again only for U.S. dollars. No longer could the world buy oil from Iraq with Euro. Global dollar supremacy was once again restored. Bush descended victoriously from a fighter jet and declared the mission accomplished—he had successfully defended the U.S. dollar, and thus the American Empire.
This is what the author is saying
1) The oil fields are not worth holding
2) Bush could just print dollars and buy oil
3) What oil is priced in is more important than the oil itself.
Number 1 is laughable. The author cites the cost of the war as a detriment yet proposes Bush could just print dollars to buy oil but somehow can not print dollars to pay for a war. Of course the author ignores the consequences of printing dollars of number 2. The author also forgets that the US could just print dollars and buy Euros. Number 3 is of course patently absurd.
These articles are so obviously absurd I wonder why people keep shoving them at me.
Yet, here is another silly article that keeps making the rounds:
The Iranian Threat: The Bomb or the Euro?
Back in October I staked a claim on how silly these ideas were with
Oil Priced in Euros. Would it matter?
Perhaps a better case for how silly this all is was made in Strange ideas about the Iranian oil bourse.
For starters, you don't need to acquire any U.S. assets in order to purchase a barrel of oil that is priced in dollars. You could pay with eurodollars, which are dollar-denominated accounts that could be issued by any bank anywhere in the world.The KEY issue behind all of this hype is that of reserve status of the US dollar. The "Bourse Nonsense" seems to imply two things that simply are not true:
And even if the oil were purchased with dollars drawn on a U.S. bank, there is no reason at all that the seller needs to retain the proceeds in that form. Those selling oil could convert those dollars back to euros or Japanese yen or whatever their hearts desired, and likewise could convert euros obtained through sales on an Iranian bourse back into dollars, if they wished. What ultimately determines the demand for dollars is not the unit of account for the transaction, but rather the desired asset holdings of those who are accumulating the wealth.
You could buy gold right now in New York for dollars or in London for pounds. Which one is cheaper? Guess what-- you'll pay exactly the same price either place once you make the currency conversion at the current exchange rate. The same will surely hold for crude oil.
And the notion that the U.S. dollar is currently "backed by oil" is so nonsensical that it is difficult even to fathom what that phrase is intended to convey. When we say that under a gold standard, the dollar is backed by gold, I know exactly what that means-- it means you can surrender dollars at any time to obtain a fixed amount of gold promised by the government. But if you surrender dollars on any given day in January 2006, how much oil are you going to get back?
It varies literally by the minute, and the rate at which dollars get exchanged for oil has nothing to do with the promises made by any government and everything to do with market fluctuations in supply and demand.
Which is also my explanation for the prevalence of these theories on the internet-- there is a demand for a deeply conspiratorial interpretation of world events, and always someone willing to supply such.
- Oil will have to be priced in euros (or some other currency) for the US dollar to lose reserve status.
- As long as oil remains priced in US dollars the US will retain reserve status.
The point I would like to make is that regardless of the pricing unit on oil there will likely be a gradual shift away from US dollar assets and US dollar currency reserves. That is the key issue, and it will NOT take oil to be priced in Euros for that to happen any more that it will take gold to be priced in Euros for China, Russia, Argentina, and other countries to start accumulating gold.
We simply did not go to war with Iraq because Iraq was about to price oil in Euros.
Can we stop the nonsense?
Mike Shedlock / Mish