The world became a far more dangerous place last night after reports surfaced of a gold-for-oil deal between Iran and its second biggest oil exporting market, India.
According to an Israeli-based news website, New Delhi has agreed to purchase Iranian oil in gold while Tehran’s second largest export market, China, is poised to do the same. By cutting out Wall Street and The City of London, the gold-for-oil deal allows New Delhi (and Beijing if it follows suit) to ensure a steady flow of energy while circumventing US and EU sanctions punishing financial institutions that do business with Tehran. The biggest beneficiary of this new oil pricing model though is undoubtedly Iran. Not only does it make a laughing stock out of US-led sanctions; it has the power to severely curtail America’s death grip on the global economy.
Forget sabre rattling in the Strait of Hormuz; gold-for-oil poses the greatest threat to America’s influence on the world stage. The lynchpin of US power isn’t its massive military. It’s the dollar’s role as global reserve currency; a position it owes to a 1973 decision by OPEC to only accept dollars for oil. Every country which depends on oil (i.e. every industrialized nation on the planet) must keep dollar reserves both to secure their energy needs (the engine of economic growth) and defend against speculative attacks on their home currencies. This ‘dollar hegemony’ comes with serious perks, like paying cut-rate prices to borrow money on global debt markets despite running up a 15 trillion dollar national debt.
Now, imagine the fallout if the US dollar were de-linked from oil…
The blow to America’s economy would make the current recession seem like a paper cut. The US would have no choice but to get its fiscal house in order (a wrenchingly painful process it has thus far lacked the political will to undertake), reduce its trade deficit, ramp up its gutted manufacturing sector and pay a much higher rate of interest on the loans it takes out (US government debt).
It begs the question: how far would America go to defend the dollar’s role as the world’s reserve currency? Back in 2000, Baghdad decided to only accept Euros for Iraqi oil. While I don’t think this was the impetus for the 2003 US-led invasion, the reinstatement of petro-dollars post-Saddam must have been a welcome outcome. Some observers have suggested that Gadhafi’s plan to ditch the dollar in favour of gold-backed dinars for Libyan oil led to his downfall. Again, I don’t see this as the main incentive for NATO’s Libya campaign, but it must have made allying with a bunch of hard-boiled jihadists a bit easier to swallow.
If Iran is indeed accepting gold for oil that would mean Ahmadinejad is now taking a swipe at the dollar. I wonder how it will all work out…