The Proposed Iranian Oil Bourse
Krassimir Petrov, Ph.D.
January 15, 2006
Abstract: the proposed Iranian Oil Bourse will accelerate the fall of the American
I. Economics of Empires
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
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 empire.
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
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 mind.
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 exchange:
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
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 available option.
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
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.
William Clark "The Real Reasons for the Upcoming War in Iraq"
William Clark "The Real Reasons Why Iran is the Next Target"
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.
Also by this author
"China's Great Depression"
"Masters of Austrian Investment Analysis"
"Austrian Analysis of U.S. Inflation"
"Oil Performance in a Worldwide Depression"