Oil is priced in dollars.
This means every nation in the world uses U.S. dollars if they want to buy oil.
And since there are only 12 countries in OPEC and 181 or so that import oil, these nations must stockpile a large amount of U.S. dollars.
This is great for free-spending American politicians and their connected cronies, like Goldman Sachs or GE. It's a system that creates consistent demand for the greenback, and ensures the dollar remains valuable.
It doesn't matter that the United States now has a debt-to-GDP ratio over 100%...
What matters is that the world must hold dollars if people want to do things like drive cars or heat food.
Whip Up Some Dollars
The dollars are created by the U.S. Treasury and sold to places like China, India, and Japan in the form of incredibly low-yielding U.S. Treasury bonds.
In turn, this cheap money helps pays the interest on our $15-trillion-dollar debt — and keeps the whole financial whirligig rocking along.
Thus the U.S. dollar is the global reserve currency, and the U.S. government can run higher deficits for a more prolonged period than it would otherwise.
The ancillary benefit of the petrodollar for the United States is that the price of oil is more stable because you don't have the varieties of currency fluctuation.
War for Oil
Obviously, the U.S. ruling class — and the people who vote for them — have no serious desire to rein in spending and deal with other countries from a position of economic strength.
Instead, it seeks to maintain its advantageous position through military force.
A few years ago, William R. Clark wrote a book on the subject called Petrodollar Warfare which postulates that the U.S. invaded Iraq, despite the tremendous logical weightings against it (no WMDs, lies about yellowcake, and so forth) to maintain the petrodollar status quo.
In his book, Clark explains:
... the upcoming Iran bourse will introduce petrodollar versus petroeuro currency hedging, and fundamentally new dynamics to the biggest market in the world — global oil and gas trades.
In essence, the U.S. will no longer be able to effortlessly expand its debt-financing via issuance of U.S. Treasury bills, and the dollar's international demand/liquidity value will fall.
The leaders of Iran believe this theory is true.
The Tehran Times recently wrote:
Recall that Saddam [Hussein] announced Iraq would no longer accept dollars for oil purchases in November 2000 and the U.S.-Anglo invasion occurred in March 2003...
Similarly, Iran opened its oil bourse in 2008, so it is a credit to Iranian negotiating ability that the 'crisis’ has not come to a head long before now.
The former dictator of Libya suggested switching to the gold dinar from the dollar for its oil trade. He was shot in the head by a guy wearing a Yankees cap.
Iran has the third-largest oil reserves in the world.
Iran has switched its trade with China and Japan to yen and yuan, respectively. It is in talks with Russia about moving to rubles as its trade vehicle...
India's Hindustan Petroleum has refused to stop buying Iranian oil, and is working out how to pay for it in rupees.
Two days ago, Iranian President Mahmoud Ahmadinejad announced he will soon unveil a "major" nuclear development.
Today we have news that Iran has car-bombed Israeli diplomats in India and Georgia.
The U.S. Navy is preparing for war in the Gulf. U.S. Defense Secretary Leon Panetta has said, “We have all options on the table and would be prepared to respond if we have to.”
Time is running out... The oil sanctions start on July 1.
This situation can only be resolved four ways:
The United States, Israel, or the Saudis take out Iran's nuclear bomb works.
The dollar loses value on the world stage.
Iran backs down and gives up on making a nuclear bomb.
Iran gets the bomb and the Middle East political dynamics become much more deadly.
The first two options mean the price of oil is going to spike in dollars terms.
I wouldn't bet on the last two options.
It doesn't look like Iran will back down, nor will the former commando and current Prime Minister of Israel, Benjamin Netanyahu, allow Iran to go nuclear.
If I was Mahmoud Ahmadinejad, I'd be plenty worried...
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.