Iran stops trading oil in dollars

From Bloomberg:

By Robin Stringer

Dec. 8 (Bloomberg) -- Iran, the second-biggest producer of crude oil in the Middle East, has ``completely halted'' all oil transactions in dollars, the state-run ISNA news agency said, citing Oil Minister Gholamhossein Nozari.

Nozari said the U.S. currency was no longer reliable as the dollar continues to depreciate. The Organization of Petroleum Exporting Countries has set up a team to study pricing oil in another currency, the INSA cited Nozari as saying.

This is going to put further downward pressure on the value of the dollar against other currencies.

This will put pressure on the other OPEC nations to similarly stop trading for oil in dollars. If they choose to switch to the Euro then there will be a lot less international demand for dollars, and since there is already a severe oversupply of dollars, the effect will be to cause a sudden sharp drop in the value of the dollar, accompanied by an increase in the price of oil.

While the previous fall in the value of the dollar and the further expect drop is one reason for Iran to stop trading in it, the action very likely has political motivations. The fact that Hugo Chavez of Venezuela has threatened the same action, switching from the dollar to either the Euro or a basket of currencies is a strong indication that those nations America is attempting to strongarm find this a good way to get back at America.

The U.S. has two ways to influence Iran. One is economic sanctions and the other is to apply military power. America's military power has been seriously weakened as our ground troops are being chewed up in Iraq and Afghanistan. The recent release of the NIE on the Iranian nuclear weapons program will make it a lot harder for Cheney or Bush to instigate military action against Iran. So the Iranians need to degrade America's economic strength.

If Iran's action can trigger the switch of international oil pricing from the dollar, it will cause both the greater further drop of the dollar and it will make inflation in the U.S. a much more serious threat to the American economy. If the petrodollar is lost, America will go into serious stagflation. In addition, the further sharp increase in the price of oil will make it a lot harder for America to maintain two aircraft carrier groups in the Persian Gulf and one in the Mediterranean (which requires six carrier groups.) In addition, the price of flying sorties will increase, as will the cost of aviation training. That training and the resulting superiority of American air crews has more to do with America's general superiority over other air forces than does the quality of the American aircraft, but the superiority will disappear very quickly as flight time is reduced.

The major argument against OPEC nations switching away from pricing oil in the dollar is that most of them have major dollar-denominated investments that will also sharply lose value as the dollar drops. China, Japan and South Korea will have similar problems, but they are all net oil consuming nations.

So at a guess, I'd say that Iran and Venezuela, along with Russia, will pressure for a shift to pricing oil in either the Euro or a basket of currencies. But they all have relatively low dollar-denominated investments. Saudi Arabia will fight to keep oil priced in dollars, as will the Persian Gulf oil producing states. The rest of OPEC will be strung out in between.

The result is that the American economy is under severe threat at the moment, and America is going to find itself dependent on the charity of strangers with no effective actions that can be taken to actually control the situation. The outcome is very uncertain.

One thing that is very, very clear, though, is that Bush and Cheney's military bombast will be the very worst way to try to influence the nations in the rest of the world.