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Oil, War and the Euro

Submitted to Axis of Logic by author Allan Rubin
December 23, 2003

In attempting to make sense of the Bush administration's drive to war in Iraq, we have heard much from the White House of Iraq's weapons of mass destruction. When that rationale proved to be an illusion, the administration turned to “liberating” Iraq from Saddam Hussein’s brutal regime.

What has become clear is that the administration’s primary goal is liberation—liberating Iraq from its oil reserves. This immediate goal satisfied three of the administration's longer term goals: establishing permanent bases in the region (in order to facilitate US dominance of this oil-producing region, especially after having pulled out of all our bases in Saudi Arabia); ensuring control over the world’s second largest oil reserves—to ensure oil supplies for the US and dominance over potential rivals such as the European Union (EU), Russia or China; and protecting the value of the dollar from threats that Organization of Petroleum Exporting Countries (OPEC) and other oil-producing countries will price their oil in euros (the EU currency). And certainly, there are financial benefits to administration-connected oil-producing, oil services and construction companies.

The oil depletion problem

Depletion of the world’s oil reserves will cause worldwide oil production to peak within the next six to eight years. That is the time when oil production will fail to meet worldwide demand. Starting at that time, we can expect oil production to decline by around 2 percent per year, using today's demand figures. In the face of increasing demand (also around 2 percent per year) for an increasingly scarce resource, the shortfall will be increasing by around 4 percent a year (unless high oil prices and a failing world economy reduce demand). An oil crisis will occur not when the world runs out of oil, but when worldwide oil production fails to keep up with demand. [1]

The long-term consequences of oil depletion will be enormous. There is no good substitute for oil. Neither coal, solar cells nor uranium can run cars or airplanes. Our electric grid, transportation and industrial processes are all dependent on cheap fossil fuels. Less obvious is that our food and water supplies are as well. Modern industrial agriculture is extremely energy-intensive. Energy is needed for running farm machinery, producing fertilizers and pesticides, pumping water for irrigation and transporting farm production vast distances to the places where it is consumed. All of these uses are now threatened. The administration is aware of the oil depletion issue and has been concerned with gaining control of the world’s remaining oil supplies. Clearly, if the US controls much of the world's remaining oil supply, it will have a stranglehold on industrial societies that require it.

A temporary solution to the oil depletion problem might have been to accelerate production from the Caspian Sea area and the Persian Gulf—especially Saudi Arabia and Iraq, the countries with the largest proven oil reserves. The problems with this were an uncertain political climate in Saudi Arabia (an ailing king and much internal pressure for a less repressive society), uncertain production from Iraq (due to years of sanctions and neglect) and dwindling expectations for the Caspian Sea reserves. The original estimates placed the Caspian Sea reserves at 50 to 200 billion barrels, almost as large as Saudi Arabia's estimated 250 billion barrel reserves. But when drilling was started in the Caspian Sea region it was found that many of the wells were dry and the remaining wells produced oil of a very poor quality.

US dollar dominates the world economy

The Bush administration's desire to strengthen the dollar by controlling the pricing of oil is perhaps less straightforward, but potentially at least as important. It is clear that the US dominates the world, both militarily and economically. The US dollar dominates the world’s economic transactions. Eighty percent of the world’s foreign exchange transactions and half of the world’s exports are denominated in US dollars. Two-thirds of the world’s official exchange reserves—dollars held by countries’ central banks to back their own currencies—are in US dollars.

What is less clear is how precarious the US economic position is. The US government’s economic policies have been disastrous. The US is suffering from huge federal budget deficits worsened by unaffordable tax cuts, massive unemployment, widespread corporate accounting abuses, near zero personal savings, record personal debt and declining corporate profits. In large part because the US has pushed the corporations’ so-called free-trade agenda, the US has been cannibalizing much of its industrial base (and its service jobs as well) and exporting those jobs to low-wage countries. Estimates of jobs lost to overseas countries since the start of the recession in March 2001 range from 500,000 to 1,000,000 , with professionals representing around 15 percent of the total.[2] One result is a large outflow of US dollars to foreign countries to pay for goods and services that used to be available from American manufacturers. Consequently, the US balance of payments (“current accounts”) deficit is running $554 billion per year and rising. This is quadruple what it was ten years ago and is above 5 percent of the US gross national product for the first time in history.[3]

In light of these economic realities, any further threats to the dollar could be disastrous. The major support for the value of the dollar is demand from around the world. Countries must have dollars to buy oil, to participate in world trade and to back their own currencies. This demand for dollars—over and above US purchases of goods and services—is what allows the US to run its large deficits with impunity. Much of this demand comes from the fact that most of the world's oil transactions are priced in dollars—that has been the case since 1973. Oil-importing countries must have dollars if they are to buy oil. If OPEC were to switch its oil exports to euros, oil-importing countries would have to convert dollars held by their central banks to euros. This would reduce the worldwide demand for dollars, causing the dollar to drop in value; the likely result would be foreign investors abandoning the US stock market (and other dollar-denominated assets such as real estate). As the dollar falls in value, countries’ central banks will start to move their reserves into other currencies. Some of this scenario has already started to occur, as evidenced by the recent rise in the euro versus the dollar, up 28 percent in the last 18 months.[4] This series of events will have very serious consequences for the US economy in its present state.

The euro was set up by the European Union as an alternative to the dollar. Other countries are beginning to see the euro as an attractive alternative as well. They would like to switch to the euro both for their own economic well-being and out of fear of the power of the US empire and its unilateral, militaristic policies. As nations switch to the euro for oil sales or currency reserves, it will become increasingly difficult for the US to maintain its huge budget and trade deficits, and the dollar will drop in value. Iraq started pricing its oil in euros in November 2000, an unforgivable offense in the eyes of the Bush administration. Iraq also converted $10 billion of its currency reserves to euros. These were really their “weapons of mass destruction”—from which they profited greatly because of the rise in the value of the euro. Iran has been talking publicly about pricing its oil in euros. In 2002, Iran converted most of its reserve currency to euros. In October 2003, Russian President Vladimir Putin announced that Russia might price its oil in euros as well.[5] Venezuela, another OPEC member, has also indicated that it may switch to euros. North Korea has also decided to ask for payment in euros for its exports.


The Bush administration saw as critical the need to secure the world’s major oil fields at a time of impending world shortages. The expected oil from the Caspian Sea region never really materialized. The threat to the US economy from a trend to price oil in euros is very real. The moribund US economy would not stand it without serious consequences—think 1929. In addition, the EU would like to see the euro become the world's reserve currency, a real challenge to US hegemony. US takeover of Iraq secured the world’s second largest oil reserves, allowed the US to take control of Iraq's oil industry and eventually price Iraq’s oil in dollars instead of euros, secured for the US a vote in OPEC and introduced the real possibility of either destroying OPEC or at least increasing Iraqi oil production beyond OPEC quotas, thereby reducing oil prices in the short term and reducing the threat to the dollar and the US economy.



[1] Jeff Gerth, “Report Sees Vast Needs for Energy Capital,” New York Times, Nov. 5, 2003; Charles Arthur, “Oil and Gas Running Out Much Faster Than Expected, Says Study,” Independent (UK), Oct. 2, 2003.

[2] “A Statistic That's Missing: Jobs That Moved Overseas,” New York Times, Oct. 5, 2003.

[3] “Foreigners May Not Have Liked the War, but They Financed It,” New York Times, Sept. 12, 2003.

[4] “Currencies,” New York Times, Nov. 19, 2003.

[5] “Putin: Why Not Price Oil in Euros,”, October 10, 2003,


Peak oil resources:

The Association for the Study of Peak Oil and Gas,

Campbell, Colin J. “Peak Oil.” Presentation at the Technical University of Clausthal, December 2000.

Campbell, Colin J. “Peak Oil: An Outlook on Crude Oil Depletion.”,outlook.html.

Campbell, Colin J. “Peak Oil: A Turning Point for Humankind.” Culture Change, Issue 19,

Campbell, Colin J., and Jean H. Laherrère, “The End Of Cheap Oil,” Scientific American March 1998,

The Coming Global Oil Crisis,

Die Off,

Heinberg, Richard. The Party's Over: Oil, War and the Fate of Industrial Societies. New Society Publishers, 2003.

Monbiot, George, "Bottom of the barrel The world is running out of oil - so why do politicians refuse to talk about it?", The Guardian (UK), December 2, 2003,,9321,1097674,00.html

“Oil as a Finite Resource: When Is Global Production Likely to Peak?” World Resources Institute, March 1996, updated March 2000.

Oil and the economy resources:

Clark, W. “The Real Reasons for the Upcoming War with Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth.”

Fingleton, Eamonn. “American Trade: Hurtling towards the Tipping Point.”, Nov. 18, 2003.

Heard, Geoffrey. “The War on Iraq: US and Europe Clash for World Economic Dominance.” The Age (Melbourne, Australia), March 20, 2003.

Henderson, Hazel. “Iraq, the Dollar and the Euro.” Globalist, June 2, 2003.

Islam, Faisal. “When Will We Buy Oil in Euros?” Observer (UK), Feb. 23, 2003.

Nunan, Cóilín. “Oil, Currency and the War on Iraq.”

Research Unit for Political Economy, Mumbai, India. “Behind the Invasion of Iraq.” 2003.

Peter Dale Scott, “Bush's deep reasons for war on iraq: oil, petrodollars, and the opec euro Question.”

U.S. Department of Labor, Bureau of Labor Statistics,

U.S. Department of Commerce, Bureau of Economic Analysis,


© Allan Rubin, 2003