Petrodollar became the essential basis for the US economic hegemony in the 1970s

If a significant part of petroleum trade were to use euros instead of dollars, many more countries would have to keep a greater part of their currency reserves in euros. According to a June 2003 HSBC report, even a modest shift away from dollars, or a change in the flow, would create significant changes. The dollar would then have to directly compete with the euro for global capital. Not only would Europe not need dollars anymore, but also Japan, which imports more than 80 percent of its oil from the Middle East, would have to convert most of its dollar assets to euros. The US, too, being the world's largest oil importer, would have to hold a significant amount of euro reserves. This would be disastrous for American attempts at monetary management: the US administration will be compelled to significantly change its current tax, debt and trade policies, all of which are severely unstable.

Today Americans spend 700 billion dollar a year more than they produce, so they have to borrow that 700 billion. This means that in average each US citizen enjoys $3,000 more imported products than he/ she earns. They get this large amount of money from the Central Banks of China, Japan and European countries, because they keep dollar reserves. China is currently the largest holder of US currency reserves with $853.7 billion, and Japan is the second largest with over $850 billion in dollar assets. So the rest of the world are sellers - China, Japan, India, and the EU. The rest of the world invests, produces, exports to the US, and they lend more and more to the US. The increasing fragility of the US economy is underlined by the 2005 report from the IMF. This report pointed out that the US economy is increasingly being supported by what the IMF report called 'unprecedented borrowing' from foreigners. The report went on to saying that the US deficit is unsustainable in long-term. David M. Walker, Comptroller General of the US, warned of the US's deteriorating financial situation, on 14 March 2006, saying that 'too many Americans - from individual consumers to elected officials - are spending today as if there is no tomorrow. Many Americans, like their government, are living beyond their means and are deeply in debt.' What does all of this have to do with Iraq and Iran ?

The 2003 Invasion of Iraq

The interplay between the reserve currency role of the dollar and link with the oil producing countries can be observed in the recent conflict in Iraq. On 6 November 2000, while Americans were distracted by the controversial Florida presidential vote count, the Iraqi government announced that it was no longer going to accept dollars for oil sold under the UN's Oil For-Food Program and decided to switch to the euro as Iraq's oil export currency - hence launching the so-called 'secret weapon' of Iraq. This was the first time an OPEC country dared violate the dollar-price rule. And since then, the value of the euro has increased and the value of the dollar has steadily declined. Libya has been urging for some time that oil be priced in euros rather than dollars. In 2001, Venezuela's ambassador to Russia spoke of Venezuela switching to the euro for all their oil sales. Iran , Russia , and other countries also indicated that they would like to denominate their petroleum in euros. Since the oil trade is a central factor underpinning the dollar's hegemony, all these are potentially very significant threats to the strength of the US economy, and US global hegemony.

The US , in alliance with Britain , intervened in Iraq militarily in March 2003, and installed its own authority to run the country. The invasion and subsequent occupation of Iraq may well be remembered as the first 'oil currency war'. There is now a wealth of evidence to suggest that the invasion of Iraq had less to do with any threat from Saddam's WMD programme and certainly less to do with fighting international terrorism than it has to do with gaining control over Iraq's oil reserves and in doing so maintaining the US dollar as the dominant currency for the international oil market. In June 2003, Paul Wolfowitz, then US Deputy Defense Secretary, was asked why Iraq , which didn't have weapons of mass destruction, was invaded, while North Korea, which claimed to have a nuclear deterrent, wasn't. Wolfowitz said that 'the most important difference between north Korea and Iraq was that economically we had no choice in Iraq'. There was, of course, a complex of forces and motives which impelled the US government toward war on Iraq . Among these factors, it seems to preserve the U.S. dollar as the leading oil trading currency was a leading motive -- perhaps the fundamental underlying motive, even more than the control of the oil itself.

Two months after the invasion, the Iraqi euro accounts were switched back to dollars, and it was announced that payments for Iraqi oil would be once again in US dollars only. Global dollar supremacy was once again restored. But the story does not end there. Wars often don't work out as planned. Ironically, the invasion of Iraq with its 'thousands' of 'tactical' mistakes -- as recently admitted by Secretary of State Condoleezza Rice -- was meant to solidify and ensure the US 's post Cold-War global dominance. Paradoxically, despite all these military and political advances and the rapidly increasing grip of US military