A good friend of mine from the GamingForce Political Palace, who happens to be an extremely qualified military historian, told me the best justification yet for the Iraqi invasion in a recent conversation we had. Rather than summarize it, I’m just going to paste the conversation directly (edited for relevance and linearity). I have yet to do substantive research on the matter yet, but if the argument he makes is true, then there was far more at stake in the situation with Iraq than most people ever imagined.
Lord Styphon 01: I finally figured out what drove France and Germany a year ago. Oil and the money that buys it.
Stephen Touset: Um, well yeah. Nobody mentioned the oil contracts to you? I mean, admittedly, we also had an interest in Iraq because of oil. Our entire country *is* pretty dependent on the stuff. Maybe not for the short term, but for the long term I think it was an icing-on-the-cake kind of thing.
Lord Styphon 01: That’s not what I’m talking about. Those could have been written off, and wouldn’t have justified the level of opposition France and Germany put up.
Stephen Touset: Then what information did you get recently that points more towards oil?
Lord Styphon 01: Simple. What keeps the dollar from collapsing from insane inflation?
Stephen Touset: Well, since I was educated in a public school, I’m going to say the government. 
Lord Styphon 01: The core of the dollar’s value is based on OPEC selling its oil for U.S. dollars. As long as oil is the lifeblood of the world economy, it will be in demand. And as long as you need dollars to buy oil, dollars will be in demand.
Stephen Touset: That’s a good point. So France and Germany would like to see oil companies sell based on the Euro?
Lord Styphon 01: Yeah. And Iraq switched to selling its oil for euros in November 2002. If the rest of OPEC followed suit, demand for dollars would drop, inflation would balloon overnight, and all the many many many billions of dollars in circulation around the world would become worthless.
Stephen Touset: I see.
Lord Styphon 01: If the dollar becomes worthless, the U.S. economy collapses.
Stephen Touset: You really think the dollar is that dependent upon OPEC?
Lord Styphon 01: It is.
Stephen Touset: I’m not challenging you, I’m just curious as to why.
Lord Styphon 01: And if the U.S. economy collapses, the economies of countries of sell us stuff also collapse.
Stephen Touset: I haven’t done enough research to say either way, but I have to say that I’d be surprised to find it is so dependent upon something so seemingly esoteric as the currency oil is traded in.
Lord Styphon 01: What else would it be based on? We don’t make much anymore. It used to be useful as a major trading currency, and other currencies value could be assigned against it. And because dollars were good almost anywhere, countries kept reserves of them. The dollar was the only currency like that. Until the euro was introduced. The euro could compete with the dollar as a global currency, and so demand for it went up. As did its value. As the demand for and value of the euro went up, demand for and value of the dollar decreased. Whatever you could do with the dollar in the past, you could now do with the euro, as well. Except buy oil.
Stephen Touset: So you’re saying as the dollar becomes less ubiquitous, it loses value? Countries have less of a desire to have them, because they have fewer utils than, say, the Euro?
Lord Styphon 01: As demand for something deceases, it loses value. And since the Federal Reserve has printed so many dollars, the value decreases even further.
Stephen Touset: I know about supply and demand =P I was just confirming that that was the argument you were trying to make.
Lord Styphon 01: Pretty much.
Stephen Touset: I see. I’m not sure if its as dramatically dependent on the currency oil is traded with as you make it out to be, but I’d never thought of it from that sort of perspective before. It’s interesting to say the least. The very least. I’ll have to look into that–I may write a blog entry on it.
Lord Styphon 01: It also made Iraq the grave threat to the United States that the administration said it was. Far more dangerous than any weapons of mass destruction.
Stephen Touset: Although not for the same reasons.
Lord Styphon 01: Of course not. The real reasons wouldn’t be accepted by the masses. End result: the euro becomes what the dollar was for the past 50 years, and the EU becomes the dominant economic power the US was during that time. Which is a big enough potential reward for France and Germany to risk their ties with the U.S. over.
Solomon | 12-Feb-04 at 8:15 pm | Permalink
You might be interested in this exchange. I read this article which made a similar claim: http://www.ucsdguardian.org/cgi-bin/opinion?art=2003_02_13_03
It perplexed me a bit. I’d never heard the argument before, and I’ve read a lot, so I passed it on to a friend of mine, who just happens to be an Economics Professor, for his reaction. Here it is:
Well, first off, exchange rates (and particularly those of developed
nations: $, DM, Euro, Pound, etc) are actually my area of expertise, so I
really know something about this!!!
Second, my initial reaction was “what a load of crap!” But there’s actually
a little something to it. My take:
* I seriously doubt that the international value of the $ is motivating
this; the US has a long record of not giving a damn about what its currency
value does (in fact, I even have an article on this!).
* I also seriously doubt that the change in the value of the $ and Euro has
anything to do with Saddam changing oil denomination. I don’t know if this
link will work for you, but in fact the Euro recovered and then nosedived
again after Saddam switched:
http://www.economagic.com/em-cgi/charter.exe/fedstl/exuseu And it’s still
not back to its original value (the Euro). To me, it looks like it’s
recovering to it’s original level rather than gaining tremendously at the
expense of the dollar.
* Dollar depreciation makes exporting much easier for us, which is not a bad
thing; though the author is correct that it can be inflationary.
* The author is also correct that it is easier to run big trade deficits if
folks will take your currency as the reserve (I want some of your stuff,
will you take a pretty picture of George Washington in exchange?); it would
be a bit of a problem for the US if our currency weren’t #1 any more.
* But, our trade deficit, in terms of GDP, isn’t substantially different
from it was in (…checks…) the late 1980s (see
http://www.levy.org/docs/pn/00-1.html).
* Furthermore, as long as we have the largest and one of the most productive
economies in the world, shifting oil denomination from $’s to Euros is a)
unlikely to happen, at least 100% (especially if you want to stay our
friend!) and b) not going to be a devastating blow to the value of the
dollar.
In conclusion, he has a point. But he made waaaaaaaaaay too much out of it.
It’s like jumping from saying that coffee can cause cancer to, “I guess
you’ll be dead by morning.” We are NOT going to experience financial
meltdown if oil is no longer denominated in dollars.
[end quote - sorry for formatting]
So, my reaction remains the way I usually feel about situations like this - never look for a covert agenda when the overt will do. There’s been reams and reams of articles, and interviews, and speeches and books written providing a rationale for the invasion, all by smart people with no reason not to throw this rationale on the pile, and yet I’ve never heard this particular economic argument for invasion put forward by any serious advocate. Is it possible it’s part of the overall economic picture and a partial explainer for the European’s and other’s behavior? It may certainly be a piece of the pie. I feel the anti-war agenda was far more driven by economics than the pro-war side was this time around. It doesn’t seem like something that should be overstated, though.
Solomon | 12-Feb-04 at 8:17 pm | Permalink
OMG…I swear I hit return in there to create a few paragraphs somewhere!
Stephen Touset | 12-Feb-04 at 9:50 pm | Permalink
It was my fault, actually. I’d taken a lazy path for XHTML compliance, which involved disabling the auto-formatting of line-breaks in comments. I’ve now grown a pair and redone it the sensible way
Stephen Touset | 12-Feb-04 at 10:09 pm | Permalink
It’s nice to see some feedback with a person well-grounded in economics. The only people I’ve had the opportunity to discuss the theory with are political historians, so the economics portion was never really examined in any great detail. I’m still doing some research into the topic, however, and I’ll keep you posted if I find any relevant details.
Solomon | 12-Feb-04 at 11:11 pm | Permalink
Glad you found it interesting.
Hawkley | 05-Mar-04 at 9:22 pm | Permalink
Couple of things:
- Iraq switched to Euro in November 2000;
- The motivations of this war were hidden to prevent foreign investors from abandoning the US stock markets and dollar-denominated assets.
In either case, he is correct however, you may be downplaying the effects of this. For example, if OPEC were to switch to the euro as the standard for oil transactions, Oil-consuming economies would have to flush the dollars out of their central bank holdings and convert them to euros, and thus, a quick depreciation of the U.S. dollar (some economists estimate a possible 40% drop of the U.S. dollar). Imported products would cost Americans a lot more, and the trade deficit would be magnified (huge inflation).
It is also foreign demand for the US dollar that funds the US federal budget deficits. Foreign investors flush with dollars typically look to US treasury securities as a means of secure investment. With a large reduction in such investment, the country could potentially go into default.
So, where does Iraq fit into all of this? Well, as your friend pointed out, the core of the dollar’s value is based on OPEC selling its oil for U.S. dollars. Iraq has the third largest oil reserves in the world (behind Saudi Arabia and Canada). The U.S. or it’s “puppet regime” could increase Iraqi oil production to levels well beyond OPEC quotas, driving prices down worldwide and weakening the economies of the oil producing nations, thus lessening their likelihood of abandoning the dollar. It would have the short term effect of reducing the profits of domestic oil companies, but the long term effect of securing America’s economic hegemony.