The Proposed Iranian Oil Bourse
Abstract: the proposed Iranian Oil Bourse will accelerate the
fall of the American Empire.
Krassimir Petrov, Ph.D.
I. Economics of Empires
Eagle" -- -- A nation-state taxes its own
citizens, while an empire taxes other nation-states. The history
of empires, from Greek and Roman, to Ottoman and British,
teaches that the economic foundation of every single empire is
the taxation of other nations. The imperial ability to tax has
always rested on a better and stronger economy, and as a
consequence, a better and stronger military. One part of the
subject taxes went to improve the living standards of the
empire; the other part went to strengthen the military dominance
necessary to enforce the collection of those taxes.
Historically, taxing the subject state has been in various
forms-usually gold and silver, where those were considered
money, but also slaves, soldiers, crops, cattle, or other
agricultural and natural resources, whatever economic goods the
empire demanded and the subject-state could deliver.
Historically, imperial taxation has always been direct: the
subject state handed over the economic goods directly to the
For the first time in history, in the twentieth century, America
was able to tax the world indirectly, through inflation. It did
not enforce the direct payment of taxes like all of its
predecessor empires did, but distributed instead its own fiat
currency, the U.S. Dollar, to other nations in exchange for
goods with the intended consequence of inflating and devaluing
those dollars and paying back later each dollar with less
economic goods-the difference capturing the U.S. imperial tax.
Here is how this happened.
Early in the 20th century, the U.S. economy began to dominate
the world economy. The U.S. dollar was tied to gold, so that the
value of the dollar neither increased, nor decreased, but
remained the same amount of gold. The Great Depression, with its
preceding inflation from 1921 to 1929 and its subsequent
ballooning government deficits, had substantially increased the
amount of currency in circulation, and thus rendered the backing
of U.S. dollars by gold impossible. This led Roosevelt to
decouple the dollar from gold in 1932. Up to this point, the
U.S. may have well dominated the world economy, but from an
economic point of view, it was not an empire. The fixed value of
the dollar did not allow the Americans to extract economic
benefits from other countries by supplying them with dollars
convertible to gold.
Economically, the American Empire was born with Bretton Woods in
1945. The U.S. dollar was not fully convertible to gold, but was
made convertible to gold only to foreign governments. This
established the dollar as the reserve currency of the world. It
was possible, because during WWII, the United States had
supplied its allies with provisions, demanding gold as payment,
thus accumulating significant portion of the world's gold. An
Empire would not have been possible if, following the Bretton
Woods arrangement, the dollar supply was kept limited and within
the availability of gold, so as to fully exchange back dollars
for gold. However, the guns-and-butter policy of the 1960's was
an imperial one: the dollar supply was relentlessly increased to
finance Vietnam and LBJ's Great Society. Most of those dollars
were handed over to foreigners in exchange for economic goods,
without the prospect of buying them back at the same value. The
increase in dollar holdings of foreigners via persistent U.S.
trade deficits was tantamount to a tax-the classical inflation
tax that a country imposes on its own citizens, this time around
an inflation tax that U.S. imposed on rest of the world.
When in 1970-1971 foreigners demanded payment for their dollars
in gold, The U.S. Government defaulted on its payment on August
15, 1971. While the popular spin told the story of "severing the
link between the dollar and gold", in reality the denial to pay
back in gold was an act of bankruptcy by the U.S. Government.
Essentially, the U.S. declared itself an Empire. It had
extracted an enormous amount of economic goods from the rest of
the world, with no intention or ability to return those goods,
and the world was powerless to respond- the world was taxed and
it could not do anything about it.
From that point on, to sustain the American Empire and to
continue to tax the rest of the world, the United States had to
force the world to continue to accept ever-depreciating dollars
in exchange for economic goods and to have the world hold more
and more of those depreciating dollars. It had to give the world
an economic reason to hold them, and that reason was oil.
In 1971, as it became clearer and clearer that the U.S
Government would not be able to buy back its dollars in gold, it
made in 1972-73 an iron-clad arrangement with Saudi Arabia to
support the power of the House of Saud in exchange for accepting
only U.S. dollars for its oil. The rest of OPEC was to follow
suit and also accept only dollars. Because the world had to buy
oil from the Arab oil countries, it had the reason to hold
dollars as payment for oil. Because the world needed ever
increasing quantities of oil at ever increasing oil prices, the
world's demand for dollars could only increase. Even though
dollars could no longer be exchanged for gold, they were now
exchangeable for oil.
The economic essence of this arrangement was that the dollar was
now backed by oil. As long as that was the case, the world had
to accumulate increasing amounts of dollars, because they needed
those dollars to buy oil. As long as the dollar was the only
acceptable payment for oil, its dominance in the world was
assured, and the American Empire could continue to tax the rest
of the world. If, for any reason, the dollar lost its oil
backing, the American Empire would cease to exist. Thus,
Imperial survival dictated that oil be sold only for dollars. It
also dictated that oil reserves were spread around various
sovereign states that weren't strong enough, politically or
militarily, to demand payment for oil in something else. If
someone demanded a different payment, he had to be convinced,
either by political pressure or military means, to change his
The man that actually did demand Euro for his oil was Saddam
Hussein in 2000. At first, his demand was met with ridicule,
later with neglect, but as it became clearer that he meant
business, political pressure was exerted to change his mind.
When other countries, like Iran, wanted payment in other
currencies, most notably Euro and Yen, the danger to the dollar
was clear and present, and a punitive action was in order.
Bush's Shock-and-Awe in Iraq was not about Saddam's nuclear
capabilities, about defending human rights, about spreading
democracy, or even about seizing oil fields; it was about
defending the dollar, ergo the American Empire. It was about
setting an example that anyone who demanded payment in
currencies other than U.S. Dollars would be likewise punished.
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
History teaches that an empire should go to war for one of two
reasons: (1) to defend itself or (2) benefit from war; if not,
as Paul Kennedy illustrates in his magisterial The Rise and Fall
of the Great Powers, a military overstretch will drain its
economic resources and precipitate its collapse. Economically
speaking, in order for an empire to initiate and conduct a war,
its benefits must outweigh its military and social costs.
Benefits from Iraqi oil fields are hardly worth the long-term,
multi-year military cost. Instead, Bush must have gone 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.
II. Iranian Oil Bourse
The Iranian government has finally developed the ultimate
"nuclear" weapon that can swiftly destroy the financial system
underpinning the American Empire. That weapon is the Iranian Oil
Bourse slated to open in March 2006. It will be based on a euro-oil-trading
mechanism that naturally implies payment for oil in Euro. In
economic terms, this represents a much greater threat to the
hegemony of the dollar than Saddam's, because it will allow
anyone willing either to buy or to sell oil for Euro to transact
on the exchange, thus circumventing the U.S. dollar altogether.
If so, then it is likely that almost everyone will eagerly adopt
this euro oil system:
The Europeans will not have to buy and hold dollars in order to
secure their payment for oil, but would instead pay with their
own currencies. The adoption of the euro for oil transactions
will provide the European currency with a reserve status that
will benefit the European at the expense of the Americans.
The Chinese and the Japanese will be especially eager to adopt
the new exchange, because it will allow them to drastically
lower their enormous dollar reserves and diversify with Euros,
thus protecting themselves against the depreciation of the
dollar. One portion of their dollars they will still want to
hold onto; a second portion of their dollar holdings they may
decide to dump outright; a third portion of their dollars they
will decide to use up for future payments without replenishing
those dollar holdings, but building up instead their euro
The Russians have inherent economic interest in adopting the
Euro - the bulk of their trade is with European countries, with
oil-exporting countries, with China, and with Japan. Adoption of
the Euro will immediately take care of the first two blocs, and
will over time facilitate trade with China and Japan. Also, the
Russians seemingly detest holding depreciating dollars, for they
have recently found a new religion with gold. Russians have also
revived their nationalism, and if embracing the Euro will stab
the Americans, they will gladly do it and smugly watch the
The Arab oil-exporting countries will eagerly adopt the Euro as
a means of diversifying against rising mountains of depreciating
dollars. Just like the Russians, their trade is mostly with
European countries, and therefore will prefer the European
currency both for its stability and for avoiding currency risk,
not to mention their jihad against the Infidel Enemy.
Only the British will find themselves between a rock and a hard
place. They have had a strategic partnership with the U.S.
forever, but have also had their natural pull from Europe. So
far, they have had many reasons to stick with the winner.
However, when they see their century-old partner falling, will
they firmly stand behind him or will they deliver the coup de
grace? Still, we should not forget that currently the two
leading oil exchanges are the New York's NYMEX and the London's
International Petroleum Exchange (IPE), even though both of them
are effectively owned by the Americans. It seems more likely
that the British will have to go down with the sinking ship, for
otherwise they will be shooting themselves in the foot by
hurting their own London IPE interests. It is here noteworthy
that for all the rhetoric about the reasons for the surviving
British Pound, the British most likely did not adopt the Euro
namely because the Americans must have pressured them not to:
otherwise the London IPE would have had to switch to Euros, thus
mortally wounding the dollar and their strategic partner.
At any rate, no matter what the British decide, should the
Iranian Oil Bourse accelerate, the interests that matter-those
of Europeans, Chinese, Japanese, Russians, and Arabs-will
eagerly adopt the Euro, thus sealing the fate of the dollar.
Americans cannot allow this to happen, and if necessary, will
use a vast array of strategies to halt or hobble the operation's
Sabotaging the Exchange-this could be a computer virus, network,
communications, or server attack, various server security
breaches, or a 9-11-type attack on main and backup facilities.
Coup d'état-this is by far the best long-term strategy available
to the Americans.
Negotiating Acceptable Terms & Limitations-this is another
excellent solution to the Americans. Of course, a government
coup is clearly the preferred strategy, for it will ensure that
the exchange does not operate at all and does not threaten
American interests. However, if an attempted sabotage or coup
d'etat fails, then negotiation is clearly the second-best
Joint U.N. War Resolution-this will be, no doubt, hard to secure
given the interests of all other member-states of the Security
Council. Feverish rhetoric about Iranians developing nuclear
weapons undoubtedly serves to prepare this course of action.
Unilateral Nuclear Strike-this is a terrible strategic choice
for all the reasons associated with the next strategy, the
Unilateral Total War. The Americans will likely use Israel to do
their dirty nuclear job.
Unilateral Total War-this is obviously the worst strategic
choice. First, the U.S. military resources have been already
depleted with two wars. Secondly, the Americans will further
alienate other powerful nations. Third, major dollar-holding
countries may decide to quietly retaliate by dumping their own
mountains of dollars, thus preventing the U.S. from further
financing its militant ambitions. Finally, Iran has strategic
alliances with other powerful nations that may trigger their
involvement in war; Iran reputedly has such alliance with China,
India, and Russia, known as the Shanghai Cooperative Group,
a.k.a. Shanghai Coop and a separate pact with Syria.
Whatever the strategic choice, from a purely economic point of
view, should the Iranian Oil Bourse gain momentum, it will be
eagerly embraced by major economic powers and will precipitate
the demise of the dollar. The collapsing dollar will
dramatically accelerate U.S. inflation and will pressure upward
U.S. long-term interest rates. At this point, the Fed will find
itself between Scylla and Charybdis-between deflation and
hyperinflation-it will be forced fast either to take its
"classical medicine" by deflating, whereby it raises interest
rates, thus inducing a major economic depression, a collapse in
real estate, and an implosion in bond, stock, and derivative
markets, with a total financial collapse, or alternatively, to
take the Weimar way out by inflating, whereby it pegs the
long-bond yield, raises the Helicopters and drowns the financial
system in liquidity, bailing out numerous LTCMs and
hyperinflating the economy.
The Austrian theory of money, credit, and business cycles
teaches us that there is no in-between Scylla and Charybdis.
Sooner or later, the monetary system must swing one way or the
other, forcing the Fed to make its choice. No doubt,
Commander-in-Chief Ben Bernanke, a renowned scholar of the Great
Depression and an adept Black Hawk pilot, will choose inflation.
Helicopter Ben, oblivious to Rothbard's America's Great
Depression, has nonetheless mastered the lessons of the Great
Depression and the annihilating power of deflations. The Maestro
has taught him the panacea of every single financial problem-to
inflate, come hell or high water. He has even taught the
Japanese his own ingenious unconventional ways to battle the
deflationary liquidity trap. Like his mentor, he has dreamed of
battling a Kondratieff Winter. To avoid deflation, he will
resort to the printing presses; he will recall all helicopters
from the 800 overseas U.S. military bases; and, if necessary, he
will monetize everything in sight. His ultimate accomplishment
will be the hyperinflationary destruction of the American
currency and from its ashes will rise the next reserve currency
of the world-that barbarous relic called gold.
About the Author: Krassimir Petrov
(Krassimir_Petrov@hotmail.com) has received his Ph. D. in
economics from the Ohio State University and currently teaches
Macroeconomics, International Finance, and Econometrics at the
American University in Bulgaria. He is looking for a career in
Dubai or the U. A. E.
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