From today’s Omega Letter by Jack Kinsella:

OPEC’s second largest oil producer — and therefore a major player in the international oil cartel, is the Islamic Republic of Iran.

And, as the world’s second largest producer of oil, Iran insists it needs nuclear power to meet its domestic energy needs.

For reasons that confound logic, that conundrum presents no challenge for much of Europe, the Chinese, the Russians, and even some of the Sunni Islamic states that have the most to fear from a nuclear-armed Shi’ite Islamic republic.

But what is even more baffling is the fact that Iran seems determined to use its oil wealth to force a military confrontation with the United States.

Iranian President Mahmoud Ahmadinejad called the depreciating dollar a “worthless piece of paper” at a rare summit last year in Saudi Arabia attended by state leaders from the Organization of Petroleum Exporting Countries.

Now he’s going to prove it. This week, Iran announced it was ending all oil transactions in US dollars.

“The dollar has totally been removed from Iran’s oil transactions,” Oil Ministry official Hojjatollah Ghanimifard told state-run television Wednesday. “We have agreed with all of our crude oil customers to do our transactions in non-dollar currencies.”

Iran’s oil ministry says that it will only accept euros or the Japanese yen for oil, a direct slap at the struggling US dollar. Iran’s central bank has also been reducing its foreign reserves denominated in U.S. dollars, further weakening the currency on the international market.

To understand what Iran’s shift away from the dollar means to you and me, we need to take a quick trip through the history books.

After the outbreak of World War Two, America became the armory to the world, selling billions and billions of dollars worth of weapons to the Allies, for which it demanded payment in gold.

By war’s end, the majority of the world’s gold reserves reverted from America’s European creditors of the 1930’s — and back to the United States.

The Bretton Woods Agreement in 1945 made the US dollar convertible to gold at the government level. This established the US dollar as the world’s reserve currency.

But the twin wars on poverty and in Vietnam drained the US economy, forcing the Fed to increase the money supply, most of which ended up as foreign reserve currency holdings.

The runaway inflation caused by the artificial increase in the money supply began to worry investors. By the 1970s, foreign governments began demanding payment for their dollars in gold.

On August 15, 1971, the US announced it was ’severing the link between the dollar and gold’ and defaulted on its payments.

In order to keep the dollar (and the global economy) from collapsing, the US had to find some economic replacement for the gold standard. In 1973, Washington cut an iron-clad deal with the Saudis.

The US would prop up the Saudi regime in exchange for a Saudi pledge to accept only US dollars in payment for oil sales. Eventually, the rest of OPEC followed suit.

The world had to buy oil. And since they could only buy them with US dollars, they needed to continue to hold US dollars in reserve.

In order to buy oil, the world’s net oil importers HAD to maintain a reserve supply of US currency, keeping it out of circulation, which kept the world from being flooded with dollars, which would, of course, devalue it.

Should OPEC drop the US dollar as its official currency, all those dollar reserve holdings would suddenly be released on the global market, and the US dollar would soon be worthless.

Tehran’s decision amounts to an act of economic warfare against the United States that, should it take hold among the rest of the OPEC states (including Venezuela) could bring the American economy to its knees.

So it should be of no surprise to anyone to learn that the United States has just dispatched a second American aircraft carrier group into the Persian Gulf.

This may well be — ahem — the straw that broke the camel’s back.

Assessment:

Washington can’t afford to admit that it is going to war over oil — even though there is probably no reason more historically justifiable.

Those historians who blame the United States for forcing Imperial Japan into World War II point to the US embargo of Japanese oil as the principle cause.

Since Japan had no natural resources of its own, war was Japan’s only option. And seen from Japan’s perspective in the 1930’s, one can hardly argue — but the Allies utterly rejected that argument in 1945.

There is something about going to war over oil that sticks in our craw; it seems so, ummm, mercenary and self-serving — Americans are better than that.

And we are better than that — right now. It is much easier to behave honorably when somebody takes your lawnmower than it is when you are about to lose your house.

Here we see the inherent truth in yet another old saying — “desperate times call for desperate measures.”

Iran has been steadily making Washington’s case FOR war for the White House. Noted Defense Secretary Robert Gates last week; “What the Iranians are doing is killing American servicemen and women inside Iraq.”

The Pentagon is not eager for war with Iran — US forces are stretched thin now, but are nowhere nearly exhausted.

Chairman of the Joint Chiefs of Staff Mike Mullen made that clear at a Pentagon press briefing last week, warning Tehran:

“I have reserve capability, in particular our Navy and our Air Force so it would be a mistake to think that we are out of combat capability.”

The US already has a broad and convincing case for war against the Iranian regime; its support for Hezbollah, al-Qaeda in Iraq and Hamas; its belligerency towards Israel, its harrassment of US-flagged ships in the Gulf — but it is the threat to the US oil economy that is the red flag.

One of the enduring images from the pre-Iraq invasion demonstrations were of sign-carrying American Useful Idiots chanting “No Blood for Oil.”

In January 2003, Americans were paying $1.78 a gallon. Now that it is approaching five dollars, “No Blood for Oil” means something altogether different — now that its our blood on the line.

That second carrier group isn’t steaming in the Persian Gulf for nothing.

Nothing short of our annihilation would thrill our radical Muslim enemies more than to see our economy collapse. That was the purpose of 9/11 according to some.

We should be using the oil available to us in our own country instead of depending on the Middle East and now Venezuela for it. We have the reserves and we can get it and still be safe environmentally. We are at least ten years behind on this and we need to make up for it.

Written by ~J~

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