I didn't know where to post this. Its from today's Age and seems relevant to oil and the USD as well.
The pricey well-oiled military superpower
By Kenneth Davidson
August 11, 2005
The cost of oil could change the balance of power in the world, writes Kenneth Davidson.
Apart from the irritation felt by motorists when they fill up their fuel tanks and find they have to pay $1.20 a litre (a result of world oil prices rising 45 per cent to a record $US64 a barrel) there is no sense of crisis about the fact that the price spike is a harbinger of inflation, rising interest rates and depression.
This is what occurred in the wake of the two oil "shocks" in 1973 and 1979, which arguably were major factors in the destruction of the Whitlam government in 1975 and the Fraser government in 1983.
For various reasons connected to the narrow focus of financial markets, relative indifference to the implications is understandable. But there is one big difference: in the '70s oil prices peaked because the oil producers' cartel, OPEC, was setting prices by restricting production, whereas today oil producers are endeavouring to maximise production. The price of oil is increasing because the major existing fields are entering the depletion stage, demand from China and India is growing at an explosive rate and worldwide discovery of new oil is not expected to keep pace with world demand.
We are now living in a world in which it is realistic to foresee a future in which energy-intensive economic growth is switched to conservation-intensive development, which will involve the transformation of our cities and the way we live.
If we attempt to maintain our existing growth trajectory it will mean every country will be trying to increase its share of oil. It will be a zero-sum game in which the major powers' prime preoccupation will be with resource security, which history shows often leads to war — such as World War II in the Pacific.
Certainly oil, and more importantly how the US was going to pay for it, is a far better explanation for the invasion of Iraq than the threat of WMD or the wish to bring democracy to the Iraqis. Likewise the US threat to Iran and Venezuela.
Latest US intelligence estimates suggest that Iran is up to 10 years away from developing nuclear weapons and while the US did not like the result, the election of President Mahmud Ahmadinejad was a reasonable reflection of Iranian public opinion.
There is no doubt about the democratic bona fides of Venezuela's Hugo Chavez and his popularity has been enhanced by the three failed US-backed attempts to force him out of office via a coup in 2002, the oil strike in 2003 and a recall referendum in 2004.
Apart from oil, the common factor in US hostility to all three governments was their plans to change the currency in which they wanted to be paid (euros not US dollars) for their oil exports.
Why is this of crucial importance? Briefly, it means that if payments are required in euros, the US has to do the same as every other oil importer — it must first earn foreign exchange from exports in order to pay for the oil, instead of simply getting the Federal Reserve to print more US dollars or "greenbacks". US dollars were given this nickname by Union troops in the Civil War, who were paid with this coloured paper which was backed by nothing except itself.
According to US banker Henry C. K. Liu, writing in the Asia Times: "The dollar is not backed by gold, not backed by US productivity, not backed by US export prowess, but backed by US military power. The US trade deficit is about 6 per cent of GDP, while its military budget is about 4 per cent of GDP. In other words, the trading partners are paying for 1½ times the cost of a military that can be used against any one of them for any number of reasons including trade disputes."
In September 2000 Iraq said that it would no longer accept US dollars for oil sold under the UN Oil-for-Food program. After Saddam's defeat in 2003, the US occupying power announced payment for oil would be switched back to dollars, even though the cost to Iraq was probably far greater than the UN corruption associated with the program which the US has been assiduous in pursuing.
Iran has announced that from March 2006 it will be using a Euro-based international oil trading mechanism in competition with the New York and London oil markets, which trade in US dollars.
The US has shown it was prepared to go to war in 1991 and 2003 in order to maintain its control over Middle East oil. The Iranian initiative is potentially more threatening to US oil hegemony than that posed by Saddam.
Iran is surrounded by US military bases on three sides — Afghanistan, Iraq and Azerbaijan (under notice of eviction) — but Iran's military has not been debilitated by more than a decade of sanctions and bombing and it has sophisticated missiles which give it control of the Strait of Hormuz. Iran would have the support of Russia and China in the Security Council of the UN. Even if the US was initially successful in a blitzkrieg, it would risk setting the whole of the Middle East against the US and the collapse of US dollar hegemony — on which US superpower status depends — unless America's biggest creditors — Japan and China plus the EU — came to the rescue.