Iran Drops US Dollar in Oil Pricing

In response to the US and its pals on the UN Security Council slapping sanctions on Iran over its nuke program, the mullahs have decided that they will no longer use US dollars in their oil transactions. While Tehran has been diversifying away from the dollar, Monday’s decision not to use the buck at all is political rather than economic. For the US, the move signals a paradigm shift that its own poor policies have created.

While Iran probably won’t turn dollar-laden customers away, Iranian crude will now be priced in euros and the local unit. Gholam-Hussein Elham, a government spokesman said, “There will be no reliance on dollars. This change is already being made in the currency reserves abroad.” This is a much more targeted move than a reduction in oil production, as it hits only the Great Satan and not the other western nations. It is a wedge.

While the US dollar remains the cornerstone of the global economy, that is less true than it once was. The euro appears to have made it through its early teething period, and the yen is as safe as it can be. There is now competition for the title of reserve currency of the planet. And the huge foreign exchange reserves held by China and others need to be diversified to retain most of their value. If Iran can make due without dollars, it will make it that much easier for other nations to do without them.

Naturally, the question is “so what if they do?” Part of the reason the US can do some of the things it does financially lies in the demand the rest of the world has for the dollar. When a Malaysian company buys oil in dollars from Iran, that demonstrates demand for the dollar beyond the needs of the US economy. When that demand lessens, the value of the US currency will drop. That in turn will make the dollar-denominated assets in various portfolios decline, potentially sparking a mass sell off, which could drive the dollar down even farther. In the end, the cheap imports Americans have come to view as their birthright will dry up.

Iran is a relatively small issue in the story of the dollar. However, the next Congress and the next president must act to return the US to fiscal responsibility – that means higher taxes, less spending and no more wars fought off the books. The only way to salvage the dollar standard is to make the dollar attractive again.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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