Petroeuro Futures

Public statements by the administration, and stories in the mainstream media have not generally ascribed any economic implications to the war in Iraq. If the economy and the war in Iraq are connected in the political consciousness of most Americans, it may be, as recent polls show, only that most Americans now consider Bush's performance poor on both fronts. Meanwhile, most of the administration justifications for the war have now been shown to be false. Former Ambassador Joseph Wilson's public revelation in July that there was no Iraqi attempt to purchase fissionable material from Niger was apparently regarded as so threatening that administration officials may have committed felonies by identifying Wilson's wife, a CIA operative, in retaliation. As we've noted elsewhere in The Dubya Report, despite continuing efforts to link the war in Iraq to the terrorist attacks of September 11, 2001, Bush himself recently admitted there was no connection. Similarly, while Dick Cheney referred to an alleged Iraqi connection to al-Qaeda as recently as a September 14 appearance on Meet the Press, the likelihood of any recent relationship was dismissed by a Top Secret British intelligence report leaked to the BBC in February. The October report by former UN weapons inspector David Kay and his team of 1,500 investigators not only documents that no actual weapons of mass destruction (WMDs) have been found in Iraq, it also demonstrates that, while Saddam Hussein may have wanted to rebuild the weapons program he had in the 1980s, he was prevented from doing so by the UN sanctions and inspections.

The refutation of the Bush administration's justifications for the war in Iraq has provided fodder for critics' claims that the administration lied to the American people, and used intelligence selectively in support of its predetermined positions. The case of Joseph Wilson and his wife has prompted a criminal investigation of the White House. But questions about the "root" or "deep" reasons for the war also remain. Independent security consultants Stratfor, LLC have suggested that the main reason the US invaded Iraq was to pressure neighboring countries into suppressing al-Qaeda. While this might have been a plausible expectation, the latest edition of The Military Balance, a widely respected analysis of military capabilities, asserts that the war has "probably inflamed radical passions among Muslims and thus increased al Qaeda's recruiting power and morale and, at least marginally, its operating capability."

In an interview in May, following a conference on Asian Security sponsored by the International Institute for Strategic Studies (the same organization that publishes The Military Balance), Deputy Defense Secretary Paul Wolfowitz appeared to lend support to administration critics who had claimed for months that the US was after Iraqi oil, when he said that in Iraq "we had virtually no economic options ... because the country floats on a sea of oil." In context the statement was contrasting the situation in Iraq to that in North Korea, which does not have anything like Iraq's oil-based economy to help it resist economic pressures. But while an overt grab for oil resources figured somewhere in administration calculations for invading Iraq, the relationship between oil, foreign exchange, and balance of trade may have played a more important role than has been publicly acknowledged in spurring the administration's Arabian adventure.

Woild Wars

Perhaps not surprisingly in light of recent events, the first oil-producing country to emerge as a radical nationalist state in the Middle East was Iraq. Created from the Turkish Ottoman territory of Mesopotamia by a League of Nations Mandate after World War I, Iraq was initially a British colony. Despite having ceded political control of the area to Britain in the San Remo Agreement of 1920, in 1924 the French formed Compagnie Francaise des Pétroles to promote its oil interests in Mesopotamia. The US, which had received no share of the spoils, began denouncing its World War I allies, and discussing possible sanctions. An agreement reached in July 1928 granted a 25% share of Iraqi oil to a consortium of US companies. As James Paul wrote in October 2002, "Throughout this phase, as in all later phases of Iraq's oil history, major international powers combined national military force, government pressure and private corporate might to win and hold concessions for Iraq's oil."

The ownership of the Turkish Petroleum Company was set by the 1928 accord, known as the "Red Line" Agreement, as follows:

• Anglo-Persian Oil Company Limited, 23.75%
• Shell, 23.75%
• Compagnie Francaise des Petroles, 23.75%
• Near East Development Corporation, 23.75%
• Gulbenkian, 5%

A year later the company's name was changed to Iraq Petroleum Company (IPC).

During World War II, availability of petroleum from the US, Mexico, and Venezuela had provided a clear advantage to the Allied forces (a fact dramatized in the 1965 Hollywood film The Battle of the Bulge), and powered the Allied military success in Europe. In planning for the world after the war, the US State Department had emphasized the need to secure large quantities of oil. State Department analyst Herbert Feis and his colleagues identified the most likely and abundant source of oil as the Middle East, and in particular Saudi Arabia.

A cooperative venture of what are now Chevron and Texaco, later joined by what is now Exxon-Mobil, had been prospecting for oil in Saudi Arabia since 1933, and exported their first tanker of petroleum in 1939. The firm, which became known as the Arabian American Oil Company (ARAMCO) in 1939 was concerned about the political stability of the region, however, and advocated the US government assuming responsibility for the defense of Saudi Arabia.

On February 14, 1945, King Abdul Aziz Ibn Abdul Rahman Al-Saud, known as Ibn Saud, met with US President Franklin D. Roosevelt aboard the USS Quincy in the Great Bitter Lake in the Suez Canal. Roosevelt was returning from the conference at Yalta, where the US, the UK and Russia planned the partitioning of Germany, which was near defeat.

The secret meeting between Roosevelt and Ibn Saud was arranged by Col. William Eddy, the US diplomatic representative to Saudi Arabia. Ibn Saud, who had never before left his country, was uncomfortable in the cramped Navy quarters and insisted on pitching a tent outdoors on the bow of the ship. Details of the meeting have never been made public, but many observers have concluded that Roosevelt promised to provide security for Saudi Arabia in exchange for preferential access to Saudi oil. Although ARAMCO's Saudi investments were nationalized in 1976, ARAMCO continues to manage production and markets petroleum products outside Saudi Arabia.

Dollars for Gold

In the year before the historic meeting between Roosevelt and Ibn Saud, 730 people from 44 different countries met in Bretton Woods, NH, to try to stabilize and rationalize international currency exchange, which was in turmoil after the effects of World Wars I and II. The conference attempted to regain some of the predictability of the "gold standard" that had been in effect during the late 19th century, in which currency represents a fixed amount of gold that is actually held somewhere. The effect of the Bretton Woods agreements was to peg currencies either to gold or the US dollar. In 1958 the major European countries adopted a modified gold standard that allowed conversion of their currencies into dollars or gold for international payments. Gold transfers were still used internationally to settle obligations between the central banks of countries.

About this time the US began incurring persistent liabilities owed to the central banks of other nations. Within a decade there were insufficient US gold reserves to cover our international obligations.

In 1959 the major oil companies decided unilaterally to cut the posted price of Venezuelan crude by up to 25 cents per barrel, and Middle Eastern crude by 18 cents per barrel. In response, the First Arab Petroleum Conference, held in Cairo, adopted a resolution that opposed unilateral price changes by the oil companies, and advocated the creation of an "Oil Consultation Commission." Dismissing the conference's request, the following year the oil companies cut the price of Middle Eastern crude by an additional 10 - 14 cents. The government of Iraq then invited delegations from Iran, Kuwait, Saudi Arabia and Venezuela to meet in Baghdad to discuss the ramifications of the price cuts, and in September 1960 the Organization of Petroleum Exporting Countries (OPEC) was established.

The British-installed monarchy in Iraq was overthrown in 1958, and in 1961 the government of General Kassem issued Law 80, which limited IPC to the then current extent of its facilities, or 0.5% of the available oil. The remaining 99.5% was claimed for the government. IPC retaliated by limiting production of Iraqi oil to levels well below those of neighboring countries. Kassem was assassinated in 1963 as the Ba'ath party took control of the Iraqi government, and in 1964 the Iraqi National Oil Company (INOC) was established. Over the next several years Iraq suffered a period of considerable political instability, while the IPC continued to pressure for control of Iraqi oil rights. In response, Iraq turned to the Soviet Union, and in 1969 a joint venture of INOC and the Soviet Machinoexport Organization began building the infrastructure that would allow the extraction and transportation of oil from the Rumaila fields in northern Iraq.

In 1968 the US Congress repealed the requirement that dollars be backed with a gold reserve, but they could still be converted to gold at a fixed rate. In the late 60s into 1970, possibly due to the advent of the Vietnam War, loss of confidence in the dollar internationally led to substantial redemptions of dollars for gold. Moreover, the US incurred a huge balance of trade deficit between 1970 and 1971. In 1970 the US enjoyed a trade surplus of $2.6 billion, but in 1971 the trade balance was a deficit of $2.2 billion. The only other time in the 20th century that the US had incurred a trade account deficit was during the Great Depression (1934-1940). The Nixon administration had warned of a trade deficit as early as 1969, when the Department of Agriculture recommended government intervention to accelerate agricultural exports. The balance of payments, of which the balance of trade is a component, was in a similar downward spiral, growing from $17 billion in 1964 to $96 billion in 1970. In 1971 the US balance of payments deficit tripled, and on August 15, Richard Nixon declared that the US would no longer convert dollars to gold at a fixed rate.

With the dollar no longer convertible to gold at a fixed rate, the institutions established at the Bretton Woods conference (the International Monetary Fund and the Bank for International Settlements) had little choice but to resort to the dollar as a reserve currency -- in effect turning them into market mechanisms for the US dollar.

John Kenneth Galbraith wrote:

There is a notable asymmetry in the relation of the United States to the rest of the trading world. The United States is sufficiently self-contained in its economic relations with other countries so it can go far, given the will and wisdom, to stabilize its own prices. But if prices in the United States are rising, there are few other countries that can avoid the resulting impact. They can have more inflation than the United States; They cannot have less.

Prices Crisis and the Rise of Petrodollars

In 1971 the Organization of Petroleum Exporting Countries (OPEC) adopted the US dollar as its trading currency. Because of the importance of oil to industrialized society, this action made the dollar what Australian activist Geoffrey Heard called "the de facto major international trading currency." "If other nations have to hoard dollars to buy oil, then they want to use that hoard for other trading too. This fact gives America a huge trading advantage and helps make it the dominant economy in the world," Heard wrote.

In Iraq, the IPC had continued to try to obstruct INOC ventures, and tried interfere with Iraq's marketing of Rumaila oil. In May 1972 the Revolutionary Command Council demanded that IPC turn over its excess production, or idle producing facilities, or the Kirkuk fields to INOC. IPC did not respond satisfactorily, and on June 1972 its assets were nationalized. An agreement was eventually reached with IPC in February 1973, leaving INOC in full control of 75% of Iraqi crude oil production.

Between 1950 and the mid-1970s oil consumption in the US more than doubled. With 6% of the world's population the US was consuming one-third of the world's energy. In May 1973 Saudi Arabia and the US reached an informal agreement under which the Saudis would invest in the US in exchange for US assistance developing the Saudi domestic economy. Nonetheless in October of that year, OPEC declared an embargo on the shipment of oil to any country that had supported Israel in the "Yom Kippur War" with Egypt, and reduced production in stages by 25%. Writing in the Middle East Quarterly in 1999, Harvard University's Nawaf Obaid suggested that Saudi support for Egypt in the "Yom Kippur War" was primarily a response to domestic political pressure from the ulema or spiritual leaders.

The price of Arabian crude oil at its point of origin rose from $2.38 in 1972 to $11.65 in 1974. 1974, wrote Georgetown University economist Ibrahim Oweiss, "will stand in recent history as the year of energy crisis in industrialized countries, the year of conflict between oil-exporting and oil-importing countries, the year of unprecedented reallocation of resources intra and inter nations and the year of unconventional disequilibria in balance of payments in most of the countries of the world."

Oweiss coined the term petrodollars, to mean "the United States dollars earned from the sale of oil." noting, "if production is curtailed, both prices of oil and petrodollars will increase."

According to Oweiss, oil prices, while nominally set by the "market" were actually administered by the big oil companies known as the "seven sisters": Standard Oil of New Jersey (Exxon), Standard Oil of California (Socal), Standard Oil of New York (Mobil), Gulf Oil, Texaco, Anglo-Persian Oil (British Petroleum) and Royal Dutch Shell. These firms, wrote Oweiss, colluded to keep oil prices low, and maintained a disparity in pricing between Middle Eastern oil and that from other areas, especially Venezuela.

Three distinct prices figure in the discussion of oil pricing:

• The posted price, which is a number used for tax purposes and to calculate royalties to the government or ruler of the producing country.
• The market price, which is the price at which an actual transaction is concluded, and is usually less than the posted price.
• The buy-back price, which is the the price paid to the producing country on the percentage of production corresponding to the percentage of national ownership of the producing company. For example, in 1974 Saudi Arabia owned 60% of ARAMCO, so the buy-back price would apply to 60% of the oil produced in Saudi fields. The buy-back price is also less than the posted price. A buy-back price is not used in countries whose oil production has been fully nationalized.

Oweiss has demonstrated the posted price of oil declined 17% between 1947 and 1970, when adjusted for inflation using the US Wholesale Price Index, and 68% using an average Gross National Product Price Index of seventeen European countries. In other words, over time, Middle Eastern oil could be exchanged for less and less in commodity markets.

While the oil price spike had a negligible effect on demand and unemployment in Western Europe, Japan and the United States, according to Oweiss, the effect on oil-importing developing nations was extreme. Increases in foreign aid from oil-exporting countries helped to some extent, but Oweiss called for a comprehensive aid plan of financial and technical assistance, with developed nations and oil-exporting countries participating. (Oweiss noted that in the 70s industrialized countries contributed less than 0.25% of their Gross National Products in foreign aid, while oil-exporting countries contributed close to 10%.)

Oweiss's central observation may be that petrodollars don't represent real wealth to oil-exporting nations, but the means of acquiring wealth. It follows that economic development of oil-exporting nations requires converting petroleum resources into income-generating assets such as technology, education, infrastructure, etc. There is an optimum rate at which oil could be extracted so that the value of the income created in converting petrodollars to real assets is maximized. In practice, though, the oil is being pumped much too fast. Because demand for oil is "inelastic," less available oil would lead to higher revenues for oil-producing countries. Oweiss sees the difference between the volume of oil currently being produced, and the volume that would be optimal in terms of the national economic interests of the producing nations as "a subsidy these countries grant the Western world and Japan."

In 1973 petrodollars held by Arab oil-producing nations amounted to a little over $13 billion. By 1974 that increased to more than $50 billion. The management and allocation, or "recycling" of petrodollars became a matter of concern; large international funds transfers can disrupt financial markets, cause balance-of-payments disequilibria, and otherwise adversely affect national economies. Many western European nations imposed regulations of international funds flow including restrictions on currency conversion, required reserve deposits when borrowing from outside the country, and restricted advance payments for imports and advance receipts for exports.

Petrodollar surpluses are held primarily in US Treasury bonds and similar instruments in US and European banks. (Petrodollar surpluses refer to the net US dollars earned from the sale of oil that are in excess of internal development needs.) Having substantial amounts of petrodollars on deposit has enabled these banks to increase their lending, much of which has gone to developing countries in Latin America. Less-developed countries (LDCs) are then able to purchase oil and imported goods with money borrowed from Western commercial banks. The oil-producing countries then deposit their profits in the Western banks, as well, completing the cycle of transactions.

Oweiss has termed petrodollar deposits held in the US hostage capital, since these assets may be confiscated in times of political conflict, or controlled via regulations to achieve US political or economic objectives. The US used the weapon of confiscation in the 1980s against Iran and Libya, and has more recently frozen the assets of organizations believed to be funding international terrorism.

Oweiss pointed out that "governments placing their petrodollar surpluses in the United States may lose part of their economic and political independence. Consequently, the more petrodollar surpluses are placed in the United States by a certain oil-exporting nation, the less independent such a nation becomes."

As a hedge against the risk of confiscation, petrodollars also participate in the Euromoney markets. These are, generally speaking, accounts in European banks denominated in a currency different from that of the nation in which they are held. This market was created by the Soviet Union in the 1950s, when it opened a dollar-denominated account in London. The account was placed in Europe because the Soviet Union was concerned that its accounts in the US might be seized.

Oil prices spiked again in 1979, triggering expanded use and development of alternative sources, including coal, solar energy, and nuclear-powered generation of electricity. The high prices also encouraged conservation by consumers, and the development of energy-efficient motor vehicles. For a variety of reasons, world oil production continued to increase until the end of 1979. One reason for this was that Saudi Arabia increased its production to offset reduced production from Iraq and Iran, who were at war with each other. By 1982 an oil glut had replaced the oil shortage. In 1984 and 1985 when the dollar was strong relative to other currencies, the price of oil decreased relative to the dollar, but increased relative to other currencies. By 1986 declining interest rates in the US, coupled with the mounting balance-of-payments deficit, depressed the exchange rate for the dollar, and combined with an international price war, reduced oil revenues substantially

Preserving the "Established Order"

Speaking before the Senate Armed Services Committee in 1990, following the Iraqi invasion of Kuwait, then-Secretary of Defense Dick Cheney warned that whoever controls Persian Gulf oil has a "stranglehold on our economy and on that of most of the other nations of the world as well." Political economist Nick Beams noted that the economic reality that has prevailed during most of the 20th century turns Cheney's statement around: it is the US that has held an economic stranglehold over the economies of other nations.

Two years later, and shortly after the conclusion of Gulf War I, Cheney's Defense Departement distributed internally a "Defense Planning Guidance" whose preparation had been supervised by then then-under secretary of defense for policy, Paul Wolfowitz. The "Guidance" is a set of military guidelines used by planners in the Defense Department to provide a policy context for assessing their logistical needs. The 1992 "Guidance" created considerable controversy when it was leaked to the New York Times and the Washington Post, which published excerpts. (The White House subsequently directed then-Secretary of Defense Dick Cheney to rewrite the most controversial portions.)

Wolfowitz's "Guidance" stated that, in the post-Cold War era, "Our first objective is to prevent the re-emergence of a new rival." This included not only traditional defense considerations, but "in the non-defense areas, we must account sufficiently for the interests of the advanced industrial nations to discourage them from challenging our leadership or seeking to overturn the established political and economic order. Finally, we must maintain the mechanisms for deterring potential competitors from even aspiring to a larger regional or global role." This statement was interpreted by some observers as an attempt at the policy level to bring economic competition under the banner of national security.

"...[T]he United States should be postured to act independently when collective action cannot be orchestrated," the document stated, including responding to regional conflict that might threaten
"access to vital raw materials, primarily Persian Gulf oil." "In the Middle East and Southwest Asia, our overall objective is to remain the predominant outside power in the region and preserve U.S. and Western access to the region's oil." Seven case studies were outlined, with an emphasis on Iraq and North Korea.

An April 1997 study by the James A. Baker III Institute for Public Policy at Rice University, succinctly titled The Political, Economic, Social, Cultural, and Religious Trends in the Middle East and the Gulf and Their Impact on Energy Supply, Security, and Pricing warned of the "Threat of Iraq - and Iran" (the title of one section) on the "free flow of oil." (Yes, that's the same James Baker who was Secretary of State for Bush I, and generaled the Bush II election contest in Florida.) Arguing that the policy of "dual containment" of Iraq and Iran had the negative side-effect of highlighting the US role as "protector" of friendly Gulf states, especially Saudi Arabia, the study also identified the importance of nonmilitary measures: economic, political and social. "The US. should support the governments of the Middle East region in promoting political reform, privatization, and broader participation in the economic system," the study suggested.

As we've noted above, the "economic system" referred to in the Baker Institute study, and the "economic order" referred to in the 1992 "Guidance" have been based since 1944, and arguably to a greater extent since 1971, on the primacy of the US dollar as the currency of last resort in international transactions. (See Galbraith quote, above.) Writing in the Asian Times in August 2002, financier Henry Liu observed:

World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.

Euros for Dollars

On January 1, 1999 eleven members of the European Union adopted a common currency, which was named the "euro." The conversion rates between the euro and the national currencies of Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland were irrevocably fixed. (For example, 1 Euro = 1.95583 Deutsche Marks.)

In a major challenge to "dollar hegemony," in October 2000 the government of Iraq discontinued using the dollar for its reserves and international transactions, in favor of the euro. The value of the euro relative to the dollar was declining at the time, and commentators predicted that the move would be costly, because of the dollar's use in international oil trade. Between 2001 and February 2003 almost all of Iraq's oil exports were paid for in euros, amounting to approximately $30 billion. Over the same period, the value of the euro relative to the dollar increased by 30%.

Shortly after the Iraqi move, Jordan set in motion a bilateral trade arrangement with Iraq, also transacted in euros. By August 2002 Iran had converted more than half of its foreign exchange reserve fund to euros, and China had begun exchanging some of its reserve fund from dollars to euros. In the same period Russia's Central Bank doubled its euro holdings to 20% of $48 billion. Speaking to a Spanish Finance Ministry conference in 2002, senior Iranian oil official Javad Yarjani remarked that "It is quite possible that as bilateral trade increases between the Middle East and the European Union, it could be feasible to price oil in euros. This would foster further ties between these trading blocs by increasing commercial exchange, and by helping attract much-needed European investment in the Middle East."

For such exchange to work, either Britain or Norway would need to adopt the euro, so that North Sea "Brent" crude oil could be priced in euros. As the euro rises in value relative to the dollar, the
"redenomination" of oil transactions into euros would benefit the major European oil companies, such as Shell and TotalFinaElf. As of February 2003 the Iranian and Russian parliaments had discussed adopting the euro for oil sales. Analysts have noted that OPEC member countries would benefit from euro-denominated oil transactions because the European Economic Community represents the biggest importer of oil, while 45% of imports by Middle Eastern countries are from Europe.

As reported by the Observer (UK) a former US ambassador to Saudi Arabia told the US Congress last year:

One of the major things the Saudis have historically done, in part out of friendship with the United States, is to insist that oil continues to be priced in dollars. Therefore, the US Treasury can print money and buy oil, which is an advantage no other country has. With the emergence of other currencies and with strains in the relationship, I wonder whether there will not again be, as there have been in the past, people in Saudi Arabia who raise the question of why they should be so kind to the United States.

We've noted above that the "dollarization" of international oil trade has enabled the US to sustain essentially permanent trade deficits for 30 years. Because of the volume of dollars in circulation around the world, and held by central banks as reserves, the US can fund tax cuts, military spending, and consumer spending on imports by printing money. Because the US has the option of devaluing the dollar at any time, it can in effect force countries that export to the US to pay for economic problems in the US. The Observer (UK)'s Faisal Islam noted, "It's probably the nearest thing to a 'free lunch' in global economics."

Berkeley economist Brad DeLong has referred to this scenario as "exorbitant privilege." The trade deficits are sustainable as long as "America can keep selling international reserve and liquidity services, political risk insurance services, and future immigration options to the central banks and rich of the rest of the world...." At the time the euro was launched, Harvard economist Martin Feldstein observed that a single European currency could weaken the status of the dollar enough that "international military relationships" might be affected. If the world currency of last resort were to become the euro, the US would not be able to simply print money to fund its deficits. The result would be a shock to the US economy.

Suggestions that the US economy might be showing signs of recovery pushed the value of the dollar higher relative to the euro in mid-2003, but concern about the current account balance caused a return to the decline that has been the trend since early 2002. (The current account balance is the value of imports of goods and services plus net returns on investments abroad, minus the value of exports of goods and services. A negative account balance represents domestic investment financed by foreigners' savings.)

A statement by the so-called G7 -- rich industrialized countries -- meeting in Dubai in September called for "more flexibility" in exchange markets. Currency markets interpreted the statement as asking the governments of Japan and China to allow their currencies to rise relative to the dollar. Both governments had been maintaining an artificially low exchange rate by intervention in currency markets or other controls. The dollar dropped 5% relative to the Yen in about a week. Concerned about export competitiveness, stock markets in Japan and Europe reacted as well. The Nikkei index fell 5% in a week and the German DAX by 7%. In late September, the Economist predicted "further decline in the dollar seems all but inevitable."

A sudden decline in the dollar would likely trigger lower US stock prices, and higher bond yields as foreigners shifted money elsewhere. 40% of US Treasury bonds are owned by foreigners, as are 25% of US corporate bonds, and 13% of US equities. Morgan Stanley's Steven Roach has predicted that a 20% drop in the dollar over six months could produce a 1% decline in global growth over the following year.

In mid 2002 Morgan Stanley also predicted that the US current account deficit could reach 6% of the US Gross Domestic Product (GDP) by the end of 2003. A Federal Reserve study of current account deficits in developed economies found that they tended to reverse once they exceeded 5% of GDP. The reversal was accompanied by a 40% average decline in the exchange rate, and a slowdown of GDP. Commentator William Clark has quoted an anonymous former government economist who compared the effects on US citizens of a 40% decline in the value of the dollar to the Argentinean currency crisis that began in the late 90s. The effects of that crisis included:

• Unemployment reaching 30% and persisting for four years (or more)
• Widespread unemployment among the middle class
• Severe price inflation for foodstuffs, household goods, etc. By 2002 in Argentina prices could increase by 20% or 30% within a matter of days.
• Weekly limits on bank withdrawals
• Reduced standards of living among the middle class; increased hunger and homelessness among the poor.

Some observers have warned of parallels between the British experience in the Suez in 1956 and the US action in Iraq. In July 1956 Egyptian President Nasser took over the Suez Canal Company, 44 percent of which was British held, and nationalized the Suez Canal. Despite public opposition to the use of force, the British, French and Israelis developed a plan in secret at Sèvres, France, in which the Israeli army would invade Egypt, and then under the guise of intervention, British and French troops would retake the canal. British Prime Minister Anthony Eden, who had previously dismissed the United Nations as slow moving, now sought UN condemnation of Nasser, as a means of justifying the use of force against him. The secret plan went ahead; the Israelis attacked, and on November 5 a joint Anglo-French force landed Port Said.

US President Eisenhower was furious when he learned that the Israeli invasion had been arranged by the British and the French. He threatened to sell US holdings of the British pound, which would likely have caused a major devaluation. In a January 2003 editorial in the Independent (UK), Robert Fisk noted that this was the last time Britain would attempt to act internationally without US "endorsement." It also marked the beginning of the era in which the US would act unilaterally to "defend" the Middle East.

Former Canadian diplomat Peter Dale Scott, now at the University of California at Berkeley, has commented recently that "America's influence in the world has up to now been based largely on good will generated by its willingness to resolve matters multilaterally."

A multilateral approach to these core problems is the only way to proceed. The US is strong enough to dominate the world militarily. Economically it is in decline, less and less competitive, and increasingly in debt. The Bush peoples' intention appears to be to override economic realities with military ones, as if there were no risk of economic retribution.

The idea of a US-controlled Iraq offered the promise of limiting OPEC control over Middle East oil production, and perhaps preventing measures like switching the currency of oil transactions to the euro. But in practice that would require large investments in Iraqi oil infrastructure and production, something that requires a stable, reconstructed Iraq. If, as William Clark's anonymous economist put it, "... the dangers of American global hegemony are ever perceived as a greater liability than the dangers of toppling the international order," -- the likelihood of which has increased with the US exclusion of French and Russian interests from post-war Iraq, and the potential threat to OPEC -- the economic retribution that P.D. Scott refers to could take the form of replacing the petrodollars with petroeuros. If Iraq becomes the US's Suez, it may be said that the US won the battle of Baghdad, but lost the global economic war.

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Chris Kee suggested the topic for this article.