End of the petro-dollar? Is Tehran about to deploy an economic weapon potentially more deadly than a nuclear bomb?

If Iran is years away from developing a nuclear weapon, why is Washington girding for war within a matter of months, or weeks? Some economic analysts believe that the real weapon of mass destruction Tehran is preparing to deploy is not a nuclear bomb, but rather the proposed Iranian Oil Bourse (IOB), which is scheduled to open in March.

The IOB, writes Dr. Krassimir Petrov of the American University in Bulgaria, will be a petroleum commodity market "based on a euro-oil-trading mechanism that naturally implies payment for oil in euro," rather than in dollars. This would constitute a direct challenge to the "petrodollar" economy that has existed since the mid-1970s.

In 1971, notes Dr. Petrov, the Nixon administration severed the last remaining link between the dollar and gold. From that point, "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." The link between the dollar and oil, Petrov asserts, resulted from "an iron-clad arrangement with Saudi Arabia to support the House of Saud in exchange for accepting only US Dollars for its oil."

F. William Engdahl, author of A Century of War: Anglo-American Politics and the New World Order, describes the U.S.-Saudi pact in detail:</p>

<pre> By their firm agreement with Saudi Arabia, as the largest OPEC oil producer.... Washington guaranteed that the world's largest commodity, oil, essential for every nation's economy, the basis of all transport and much of the industrial economy.... could only be purchased in world markets in dollars. The deal [was] fixed in June 1974 by Secretary of State Henry Kissinger, establishing the US-Saudi Arabian Joint Commission on Economic Cooperation. The US Treasury and the New York Federal Reserve would "allow" the Saudi central bank, SAMA, to buy US Treasury bonds with Saudi petrodollars. In 1975, OPEC officially agreed to sell its oil only for dollars. A secret US military agreement to arm Saudi Arabia was the quid pro quo. </pre> <p>"The economic essence of this arrangement," points out Dr. Petrov, "was that the dollar was now backed by oil." The emergence of an alternative petroleum market setting the price in a different currency, such as the euro, would cause a rapid flight from the greenback. Should the IOB go into operation, Petrov predicts, "it will eagerly be embraced by major economic powers and will precipitate the demise of the dollar."

Petrov, Engdahl, and other analysts point out that in 2000, Saddam Hussein began to demand euros, rather than dollars, for his oil exports; once Saddam was deposed, Iraq's oil exports were once again sold in dollars. This illustrates that the war 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," Petrov concludes.

Other analysts aren't entirely convinced.

"While the international prices of record for crude oil may be denominated in dollars, there is nothing stopping buyers and sellers from making any kind of contract arrangements they want in whatever currencies they want--euros, zlotys, rubles, yuan, bolivars, gold dinars, whatever," comments Charles Featherstone, assistant editor of Oil Daily. "Even barter is possible. There are no laws or international regulations that require oil be bought and paid for in dollars." Furthermore, he continues, although "Iraq demanded payment in Euros, Saddam's demand was small fry--few nations were going to follow his lead into Euroland. I doubt it was a serious motivation for the 2003 invasion."

James D. Hamilton of the University of California-San Diego also finds serious flaws in the "petro-dollar" theory. "Well, 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," he wrote in an essay for Energy Bulletin. "You could pay with eurodollars, which are dollar-denominated accounts that could be issued by any bank anywhere in the world. 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."

Christopher Cook, former director of the International Petroleum Exchange, refers to the IOB-centered war scenario as "a myth being widely propagated on the Internet." "As anyone familiar with the Organization of Petroleum Exporting Countries will know," wrote Cook in a January 21 Asia Times op-ed column, "the denomination of oil sales in currencies other than the dollar is not a new subject, and as anyone familiar with economics will tell you, the denomination of oil sales is merely a transactional issue: what matters is in what assets (or, in the case of the United States, liabilities) these proceeds are then invested."

All of those qualifications and caveats taken into account, the proposed Iranian Oil Bourse would adversely affect the dollar. The IOB "would eventually lead to lower demand for dollars as well as create an alternative banking system that flows through something other than New York. One that could not be policed, sanctioned or shut down by the US government," observes Oil Daily's Featherstone. "It's also very likely that America's ruling elites would not like such a system, either. And it would be fairly easy to bomb that bourse out of business. Eventually, someone will get a non-dollar oil bourse off the ground, likely in Singapore, Hong Kong or Shanghai, and not in Tehran. American military and economic power is finite, and is becoming more and more finite all the time."