US economy and Iraq

As an economist I would like to put 'paid' to the myth that the US in in Iraq to "get their oil". Tony Blair's argument that "The fact is that, if the oil that Iraq has were our concern I mean we could probably cut a deal with Saddam tomorrow in relation to the oil." (news.bbc.co.uk...) is absolutely correct. They did not go in to 'get' Saddam's oil. Neither did they go in to disarm Iraq of WMD, or to spread democracy, or any of that other stuff.

They went in because Saddam Hussein was refusing to sell his oil in $US. That is why Iran is being threatened now (they too have dropped the $US and are threatening to begin selling oil in Euros). America doesn't care who Iraq or Iran sells their oil to, but it certainly cares what currency they use. Why? Because of Dollar Hegemony.

The US dollar has been hegemonous pretty much since 1946 when France (the final holdout) finally signed on to the Bretton Woods Agreement. The dollar remained hegemonous throughout pretty much the rest of the century, surviving the 'balance of payments' crisis in the '60's, and even surving the OPEC oil embargo. This is primarily because there was no other currency on the planet that could really take its place.

This is not the case anymore. The USD is not nearly as attractive anymore, now that the US has gone on a devaluing war with China (the latest round is tariffs! On November 5 the US announced it would impose tariffs against Chinese textiles! Your GWB is one strange bird; he talks free trade out of one side of his mouth and cries protectionist out of the other!). That means that the only way the USD can remain the hegemonous currency (the reserve currency of choice, which is America's true economic engine) is if it begins to enforce the currency denomination sections agreed to in the 1974 embargo-ending "US-Saudi Joint Economic Cooperation Agreement", which states that all oil sold on world markets by OPEC nations must be denominated in USD. Why does the US care? Because if countries around the world are suddenly allowed to buy oil in a currency other than the US dollar, why would they keep that increasingly feeble currency as their primary reserve? Really, who wants to hold onto a depreciating asset?

The only way now that the USD can remain hegemonous is through the retention of this "oil standard". Because of the hostility of so many members of the OPEC community (plus the fact that the Euro now represents a strong currency in its own right) the only way this "oil standard" can continue is through military might. That is why the US tried to depose Hugo Chavez (Venezuela), why they did depose Saddam Hussein, and why Syria and Iran are now in their sights.

Do you never wonder why it is the US can support $US7.4 trillion in debt without the USD spiralling off into inflationary oblivion? Do you ever wonder how a country can actually spend $US 1/2 trillion more than it earns every year? The answer is dollar hegemony. No other country in the world can run a deficit or a debt of that proportion (over 5% GDP).

There is no question that the US economy is on a road to disaster. It is really only a matter of when.

The Iraq invasion killed many birds with one stone. One is the US dollar hegemony as you mentioned. Another is to lessen the power of OPEC. And the other was to get other countries in the Middle East to help in the fight against Al Qaeda. After the invasion Saudia Arabia started to work with us as well as other middle eastern intelligence agencies. This is important because the US does not have very good information and or assets that can infilitrate Al Qaeda but middle eastern countries do since they have been either working with them and or at least keeping tabs on them. In essence we made them fear us more then Al Qaeda. Are you more afraid of an invasion of the US or a truck bomb set off by Al Qaeda?

I can not agree more with you, but remember before the war american oil base companies could not get their hands on the Iraqi oil, one of the spoils of this war is that oil, and as soon the government is to control that country and keep allawi in power, the nationalized Iraqi oil is going to become privatized and it will be divided into all the american base oil companies.

So OPEC is weakend due to the Iraq war?
If they were to change to the euro.. which is not unlikley, how big of an impact would this have on the US doller? I do know that many developed countries (i.e. russia among others) has been changing up to 1/5th of their reserves from dollers to euro for obvious reasons.

Do you think economic disaster, leading to depression would affect the world in a major way, or would the americans get it worst, but there be a knockon effect on the Euro?

How does the GBP (Great Britian Pound) fair in all of this?

" PROVEN CRUDE OIL RESERVES
The location of proven world crude oil reserves is far more concentrated in OPEC countries than current world oil production. According to one independent estimate (Oil and Gas Journal), of the world's 1.27 trillion barrels of proven reserves, 870 billion barrels (69%) are held by OPEC, as of January 2004. The non-OPEC reserves include Canadian non-conventional reserves. Not including Canada, the world's proven oil reserves are about 1.09 trillion barrels. In the future, the inclusion of non-conventional oil reserves for other countries may also significantly impact OPEC member Venezuela, as well as non-OPEC countries such as Australia. Non-conventional reserves may not be on average as economic as conventional reserves. Because non-OPEC countries' smaller reserves are being depleted more rapidly than OPEC reserves, their overall reserves-to-production ratio -- an indicator of how long proven reserves would last at current production rates -- is much lower (about 26 years for non-OPEC and 88 years for OPEC, based on 2003 crude oil production rates). This implies increased OPEC production as a proportion of world production over the long term." source of quote

So with non-opec oil becoming a smaller percentage of the overall oil supply each year gives opec countries more price leveraging. Opec could agree to cut production and raise the price of oil substatially. In essence they would set the price of oil and not the market. The majority of recessions in the US have occured after spikes in energy prices. In the book the End Of Oil the author points out that the last recession iin the US was started when natural gas spiked causing the most recent layoff and downsizing of manufacturing starting in late 2000 and early 2001.

So by taking Iraq out of OPEC (it is believed Iraq has the third largest oil reserves) this will help to aleviate some of the price leveraging power OPEC will have in the future.

[edit on 14-11-2004 by cryptorsa1001]

[edit on 14-11-2004 by cryptorsa1001]