The risk to the petro-dollar from the Iraq war and Iranian
crude oil exchange
by Jim Willie
The focus on gold and the US dollar alone lacks a crucial factor in
maintaining the world currency reserve on its fragile pedestal. The petro-dollar
is a term used to describe the close relationship between the US dollar and
the crude oil export business dominated by Saudi Arabia, manifested in the
superstructure of the global banking system. So one could say the oil world
provides the pool from which the dollar exchange rate valuation is applied
The gold community pays far too little attention to crude oil factors in my
opinion, but Adam Hamilton does indeed. Gold investors love to point to Iran
war tensions as a factor to lift the gold price, but they might overlook how
the associated earthquakes in banking shift the very ground under the world
Iran has begun to sell its oil in euro currency transactions, already to
China, and next to Japan. The gold market should rejoice, when they are
actually not paying attention to this grand development. Petro sales outside
the dollar realm represent the first of several tectonic shifts in global
banking. Direct impact is assured to gold, once the certain changes are
realized to bank systems.
Imagine Japan changing the emphasis of their entire FOREX reserves
management because they purchase a large block of crude oil from Iran, and
pay in euros. How much more Persian Gulf oil will China purchase? How much
will their future bills be due in euro terms?
This article contains a capsule summary taken from the energy section of the
April Hat Trick Letter, with a finale based in dark humour.
As a preface, the Gulf Arab currency talks ended with little progress in
Medina Saudi Arabia. The meeting was to work toward a monetary union plan by
its deadline of 2010. Governor of the United Arab Emirates central bank Al-Suweidi
cast doubt in January that the six key Persian Gulf oil producers could
hammer out any currency exchange rate regime as preparation for a single
currency. The group wishes to clinch a deal like what the European Union has
in place. My gut says such a unified currency would help defend the US
dollar and its unofficial oil standard, by means of a single controllable
device. The US Government and bankers might require this device in order to
exert strong influence on the increasingly independent sheikdoms scrambling
to prevent massive losses in the foreign reserves.
Great strain has come when Persian Gulf nations, friendly sheikdoms, decide
to diversify their vast FOREX holdings away from dollar-based securities.
When Qatar last autumn announced some minor diversification of their
national FOREX savings account, the US Military ordered a pullout of several
thousand troops. There lies evidence of a connection, the quid pro quo in
the protection game to fortify the sheiks in power, as they each sit atop
When South Korea in 2005 twice suggested similar diversification of their
FOREX account, suddenly US Military exercises were conducted off their
shore, visible from the office buildings. Anyone who misses the linkage
between foreign reserves held in dollar-based securities and US Military
support for the global banking system is at best in need of broader
exposure, and at worst ignorant, compromised, or deceived. The US dollar is
backed by many forces and factors, including a powerful military on an
increasing basis. For four years running, the military has had a prominent
presence in the centre of the Middle East, inside Iraq.
The petro-dollar background
The history of the petro-dollar could be described as a syndicate contract
between the United States and Saudi Arabia to subsidize the US dollar, to
prop up the Western banking system, to enable the Arab royals (sheiks and
emirs) to continue to claim their national treasures as their private
property. Without the contract, the United States would not be able to
perpetuate the privilege abused by the US Government and Wall Street,
whereby money is printed at will, private entities benefit routinely,
trillion dollar budgets are hammered out, and no process exists either for
foreign participation or approval.
Bear in mind that the Saudi economy has among the highest national debt per
capita among prominent nations, and has a pathetic per capita income among
its citizens. The Saudi royals have cornered their national treasure,
invested broadly across the world in private accounts, in a manner which
seems totally beyond simple reproach.
The US Government requires three extremely important concessions from the
Saudi Royal family. They stand as cornerstones to the petro-dollar system
(if not defacto standard):
-- The Saudis must honour oil sales only in dollar transactions from their
vast production fields across the kingdom.
-- They must recycle their vast ill-gotten wealth (due to its private
nature) in New York and London banks, so as to support the dollar-based
banking system, and thus enable the funding of vast loan portfolios for
-- They must purchase vast military weaponry in order to secure their grip
of power and to keep stability in the hostile Persian Gulf region.
An aside, to drive home the point of corruption among Saudi royal families.
The dirty little secret in Saudi business life is what is called
“appropriation” among the citizens. The royals are attempting to halt the
practice, but that is like Wall Street attempting to eliminate insider
information used for profitable gain. Royal underlings extort independent
business owners into selling their businesses for 10 % of value, under
threat of imprisonment on trumped up charges like tax evasion, sexual
misconduct, or other serious crimes.
The basis of the petro-dollar contract is that the Saudis keep firm its
foundation, that being a strong link between the US dollar and oil sales. A
better description is that OPEC members, led in particular by the Saudis,
have subsidized the US dollar since 1971 when Nixon broke the Bretton Woods
Accord for the gold backed US dollar. That is why in my work, the name petro-dollar
Standard has been used, despite the lack of any formal standard. It is a de
facto standard. Such a link between oil and dollar serves as a fait accompli
for entire national banking systems being dollar-based in their foundations.
The petro-dollar basis for banking is not well understood nor publicized.
That is because its vulnerability is so huge, and US institutions take it
for granted. Foreign nations discuss the concept, while US circles do not.
If the petro-dollar prop were to be removed, entire national banking systems
like the Japanese or Korean or German would shift, which would come as a
delivered shock wave to the US Treasury Bond complex. The UST Bond system is
the active working manifestation of the US dollar, the world reserve
currency. Large blocks of FOREX reserves held in dollar-based securities
would undergo change if the system changed, all harmful to the US dollar.
Nowhere has the vulnerable condition of the petro-dollar been more
pronounced than in the year 2000 when Saddam Hussein demanded payment for
oil in euro currency. Probably near the top in reasons why Iraq was annexed
and its oil reserves commandeered, his euro-based oil sales remain near the
bottom in stated reasons in the subservient US press & media, if mentioned
at all. That issue has returned to the forefront, with Iran.
Enter the Islamic Republic of Iran
Iran has, with some measure of hesitation if not trepidation, travelled down
the same path as Saddam. Back in the summer of 2005, Tehran leaders
indicated their intention to create an Iranian Oil Exchange by September of
that same year on the Isle of Kish. For various reasons, they delayed. Back
then my sources informed me that fear of connection with European and London
banks was a deep concern. Once integrated, the Western banks could inflict
damage by formal bank seizures or blockage in some manner.
Tehran officials also were fearful of computer viruses injected by probing
Westerners. Iranian leaders are not so much kooks as thieves, who like their
Saudi counterparts, raid their national treasures. In Tehran the practice is
more akin to “skimming” from operations whereas in Riyadh it is outright
plunder of wealth.
On March 28th, The International Herald Tribune provided an update on
Iranian oil finances, with of course little or no coverage inside the US
press. To do so would have put forth a secondary motive for pressure aimed
at Iran by the United States. Their national affairs have been reported
frequently, mainly nuclear in nature. Little focus has been given to
tangents aligned with the oil business and banking systems tied to the petro-dollar
The IHT piece said “More than 50 % of Iran's oil income is paid in other
currencies. We are reducing the dollar share and asking clients to pay in
other currencies,” Sheibany said. Sheibany said that almost all of Iran's
European clients and some of its Asian customers have accepted making
payments in non-dollar currencies. This is the first public admission, or
boasting, made by an Iranian official on non-dollar oil sales. This is
highly significant, and could be construed as a realistic cause for war by
those who choose to think without the usage of red state prisms or blue
Iranian oil sales attack the fragile global banking system extended from the
Western dominated financial world. There are only two important props to the
United States Govt and Economy, according to William Engdahl: ownership of
the dollar world reserve currency, and command of the US Military. This was
conveyed at the Munich Gold conference last November in a brief private
conversation. He is a brilliant man who has specialized in the political,
financial, and military aspects of the oil wars, with particular emphasis on
the United States versus Russia.
Japan and China have been pushed into a corner by Iran. Of course, neither
nation wishes to anger the United States. The precedent is important for
payment in oil in euro transactions, much like a crack in the dike. If
Chinese leaders were to push for all their oil imports to be purchased in
euro terms, then the US Government and its US dollar and its UST Bonds have
a big problem indeed.
Japan continues to pay for oil sales from Iran in US dollars. Tokyo leaders
are dragging their feet. Tehran leaders want euros for their oil sales, but
to date do not demand euros, that is clear. Nippon Oil, a major Japanese
refiner, along with other purchasers from Japan, received “inquiries” from
Iran to pay for oil sales in euros. It seems like Tehran wants Japanese
firms to “volunteer” to pay in euros.
To further complicate the matter, the US Government has pressured Japan not
to purchase Iranian oil. The cited reason was “doing business with terrorist
states” or something to that effect. Consequently, more Iranian oil has been
purchased by China and South Korea. In the process Japan has been left
vulnerable. Watch both Japan and China in this tug of war, the former
subservient, the latter unruly. Details on these several relevant points are
provided in the April report.
Something is worth stressing related to the Shanghai Coop Org (SCO) cited at
the end of the outlined points. The SCO has the potential muscle of OPEC for
new energy supply but also the potential military power of NATO on the
security side. Obstructing, undermining, and interfering with the SCO
formation and cooperation might be an integral motive for the US Government
and US Military as it engages Iran on its embryonic nuclear program. SCO is
a very big problem, also never mentioned in the US press.
Mixed into the dangerous bubbling cauldron is Israel, which has been openly
threatened by Iran 's leader Ahmadinejad (a.k.a. My Dinner Jacket) in a
manner to whip up emotion regularly. Mullahs are bad business men, who do
not think or plan beyond the next few months, hence do not invest prudently
in future oil production. Their refinery business leaks enormous amounts of
oil and end product, as much as Iranian leaders leak blather as though
addressed to school pep rallies.
This is a cat & mouse game, but a deadly one. A crack in the petro-dollar
foundation coincides with US Military pressure put upon Iran for its
“nuclear ambitions” when the true motive might be to avert fracture of the
This is otherwise known as a protection racket coming unglued (see next
Flashback to April 2005 (full circle 360)
What is described on the periphery of the petro-dollar foundation is a
protection racket. Financial support is provided, or money is outright
extracted, from one wealth centre or source (here the Saudis with UST Bond
support), in return for prevention of their ouster from corrupt rule and
access to a national treasure.
Check out my past public article “petro-dollar & Protection Racket” from
April 2005, which is still highly relevant today. Since the time of that
written article, Norway has moved to sell oil in euro transactions in the
Brent Crude market. The petro-dollar superstructure, so labelled since it
includes not only transactions but also banking systems, is as shaky and
weak now as the US Economy and banking system is vulnerable to the housing
and mortgage crisis underway. That is not a coincidence in my view.
This article has resulted in more reader comments and kudos from fellow
analysts than any other article penned by me, bar none. It hit a nerve.
Here, two years late, the petro-dollar factor serves as the crosshairs for
weapons aimed. The target is not Iraq but rather Iran.
In fact the forces described are more relevant today than when written,
since the Iraq War is going so badly, military forces are stretched fatigued
recycled, more questions arise on accurate intelligence information
(falsified or politically steered), and another war is seen as an additional
morass and larger disaster potentially.
Taken as excerpts from the 2005 article, several quoted points made are:
-- What we have is a system for purchasing minerals and resources, totally
bound in dollar denomination pricing and transaction settlements. The most
visible element is energy trade, whose supplies clearly make for the largest
-- The petro-dollar system is the practical commercial flipside, the visible
evidence to the US dollar as world currency reserve in central banks. The
financial effect is for banking systems across the globe to accumulate
reserves in dollar-based assets. What began as a checking account for oil
payments has morphed into a gigantic bloated beast of a dangerous financial
pyramid whose foundation has corroded and weakened as the US dollar bear
-- The euro-dollar was created for many purposes. One was to facilitate
payment for energy supplies in dollar terms, without the necessary step to
convert trade surpluses back to Deutsche Marks or Swiss francs or British
pound sterling. A euro-dollar is a dollar held in European banks, not
converted to local currency units, and serves as a buttress to support the
-- The world is “obliged” to sop up and purchase all the debts we generate,
whether they approve or not of our policies, behaviour, tendency, or
justification for military actions. Almost without enforced discipline, the
US system has evolved with unchecked abuse on a massive scale.
-- US federal debt, mortgage debt, and indirectly household debt are all
absorbed by Asia. Exporters are somewhat bound to buy our US Treasury debt
in order to continue selling in our market. Foreign central banks have few
alternatives to sock away $ 20 to $ 30 bn per month, each month, every
-- Asia feels obliged to continue, in order to keep their industries and
work force busy (avoid unemployment), and to prevent their banking systems
from imploding. They cannot abandon support for the US dollar, and
demonstrate that support with frequent central bank interventions.
-- The petro-dollar system is under new attack. Russia and fringe nations of
OPEC are responsible for dissension. Their motive is self-preservation.
Rather, they desire a stable or rising currency. If a nation can manage to
trade a host of commodities (like oil, natural gas, copper, iron, cotton,
coffee) in euro denomination, that national economy would be far less
subject to the distress of systemic rising prices.
-- The Iraq War [had] numerous grounds for its justification, surely the
weapons of mass destruction among them (although not taken seriously by me
here). Also, stemming the sale of Iraqi crude oil in euro denomination was
another motive, which in my view was far more important even in March 2003,
just as important two years later now. The petro-dollar system is that
important to defend.
-- OPEC refuses to confront the USA, since it owns no military and is quite
dependent upon the USA for its protection. They sell us oil; we protect
their leadership (see Kuwait and Saudi Arabia and Qatar).
-- The new Shanghai Cooperative Group represents a potential supply network
which will have member nations of China, India, Russia, former Soviet
Republics, and Iran as its core. Energy (crude oil & natural gas),
industrial metals, and more are to be bought and sold by this new network,
outside OPEC and its gaggle of disunity and diverse puppet strings held by
Washington, DC. The COOP is a direct answer to the corrupted OPEC cartel,
which seems overly influenced by US leaders.
-- Pricing oil in euros helps nations to reduce domestic price inflation
within their own economies, and to add to incoming revenue from oil sales.
Removal of the petro-dollar system [would] have a magnificent effect on the
crude oil price or the US dollar exchange rate or US Treasury yields. An
effect on currencies and bonds as a secondary effect. Then we might see a
gold effect. An acceleration down with US dollar could trigger a world bank
Energy titbits, broad implications
The stability of the petro-dollar depends heavily on keeping the confidence
of the Persian Gulf oil producers. JP Morgan activities emanating from the
Bank of Baghdad cannot be dismissed. Effectively,after JP Morgan was chosen
to run the Iraqi Central Bank, they began issuing letters of credit using
Iraqi oil assets to collateralize the loans.
What exactly is this powerful bank and derivative book (mis)manager doing
with the entrusted Letters of Credit on payments for Iraqi oil? When my
writing expressed distrust of US Administrators and their integrity in
managing the Iraqi oil, the response was hate email. My distrust was
justified. The advent of a large new phenomenon in crude oil futures
contracts coincides with the arrival of JPM and the US presence in Iraq. See
the data for evidence and oily fingerprints. Details are provided in the
April report, where some fine sleuth detective work by Rob Kirby is cited.
When explaining the crude oil price, politics and war account for most
variation, not economics bound by supply & demand. It might be:
-- the prospects of Iran War, or the military barrage probe on Beirut in
-- the grand scale of US Military sale of crude oil & diesel inlate summer
-- the Goldman Sachs Commodity Index adjustment of the gasoline weight just
three months before the US Midterm Elections
-- the State of the (dis)Union message related to the Strategic Petroleum
-- the total relaxation of pressure on Iran during those same Midterm
-- the latest pressure on Iran.
An analysis is given. The greatest dynamics for the crude oil price changes
emanate from decisions by the White House, the Pentagon, and offices at JP
Morgan & Goldman Sachs. Arguments to the contrary seem very secondary and
immaterial, much like noise.
Lastly, hats off to Peter Schiff during a CNBC interview opposite clownish
Ned Reilly. It was worth a loud laugh and a captured quote by Peter. The US
stock markets are hitting new highs in true Weimar fashion. Pundits and
anchors suspect something has gone awry, since the European euro and British
sterling currency are pounding away at new highs.
The US S&P500 index is not doing well at all in euro and sterling terms over
the last 3 or 4 years. Peter made a point that the higher stock prices are
offset by a weaker dollar exchange rate and diminished purchase power within
the US Economy. That has been precisely my point for a couple years also.
The S&P has maintained constant value, even if higher price. Schiff
delivered a quote worth saving on the office wall. Pardon me if not word for
word, as I was busy making myself an egg omelette, with onions and red
peppers and olives and cheese. My prices for food have dropped by 30 % since
arrival in Costa Rica. Oh yes, fresh luscious cantaloupes for 80 cents, or a
half dozen bananas for 20 cents. Pura Vida!
Peter said: “The Dow [and US stocks generally] cannot even compete in price
with a carton of eggs in the United States, which is up 30 % just last
The challenge for the Dept of Treasury and US Federal Reserve is that in
order to defend the US dollar, they must keep numerous fingers well placed
in the dikes for the gold market, the oil market, the housing & mortgage
market, the China trade war, the hedge fund mushroom, the credit derivative
market, and the foreign central bank revolt. The US Treasury market is
surrounded by several bands of hostile barbarians. The latest bizarre news
has that Freddie Mac will purchase $ 20 bn in acidic bonds.
Do taxpayers get stuck with the bill? Do their bond investors bear the risk?
The watch word is desperation. US GOVERNMENT OFFICIALS DON'T GOT ENOUGH
FINGERS TO PLUG THE DIKES. There are simply too many digits to the debt and
money growth (pun intended)!!!