The internet can be a good source of information about issues that aren’t adequately covered by the mainstream media. It can also be a font of considerable kookiness.
Tyler Cowen as well as several Econbrowser readers have called attention to Iranian intentions of creating an exchange in which oil would be traded for euros rather than dollars. Krassimir Petrov’s excited account gives a flavor of what you can find out there:
one of the Federal Reserve’s nightmares may begin to unfold in the spring of 2006, when it appears that international buyers will have a choice of buying a barrel of oil for 60 dollars on the NYMEX and IPE– or purchase a barrel of oil for 45-50 euros via the Iranian Bourse. This assumes the euro maintains its current 20-25% appreciated value relative to the dollar– and assumes that some sort of US "intervention" is not launched against Iran. The upcoming 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 credit via U.S. Treasury bills, and the dollar’s demand/liquidity value will fall.
How exactly will that have any effect at all on the Federal Reserve or the demand for dollars? Petrov explains:
The economic essence of this [post Bretton Woods] arrangement was that the dollar was now backed by oil. As long as that was the case, the world had to accumulate increasing amounts of dollars, because they needed those dollars to buy oil. As long as the dollar was the only acceptable payment for oil, its dominance in the world was assured, and the American Empire could continue to tax the rest of the world. If, for any reason, the dollar lost its oil backing, the American Empire would cease to exist. Thus, Imperial survival dictated that oil be sold only for dollars.
Elias Akleh sees this oil bourse, rather than nuclear bombs, as the thing that Bush fears most about Iran, while Soj writing at Daily Kos finds a conspiratorial connection between all this and the Federal Reserve’s intention to discontinue publication of the monetary aggregate M3.
Where shall I begin? Well, for starters, you don’t need to acquire any U.S. assets in order to purchase a barrel of oil that is priced in dollars. You could pay with eurodollars, which are dollar-denominated accounts that could be issued by any bank anywhere in the world.
And even if the oil were purchased with dollars drawn on a U.S. bank, there is no reason at all that the seller needs to retain the proceeds in that form. Those selling oil could convert those dollars back to euros or Japanese yen or whatever their hearts desired, and likewise could convert euros obtained through sales on an Iranian bourse back into dollars, if they wished. What ultimately determines the demand for dollars is not the unit of account for the transaction, but rather the desired asset holdings of those who are accumulating the wealth.
You could buy gold right now in New York for dollars or in London for pounds. Which one is cheaper? Guess what– you’ll pay exactly the same price either place once you make the currency conversion at the current exchange rate. The same will surely hold for crude oil.
And the notion that the U.S. dollar is currently "backed by oil" is so nonsensical that it is difficult even to fathom what that phrase is intended to convey. When we say that under a gold standard, the dollar is backed by gold, I know exactly what that means– it means you can surrender dollars at any time to obtain a fixed amount of gold promised by the government. But if you surrender dollars on any given day in January 2006, how much oil are you going to get back? It varies literally by the minute, and the rate at which dollars get exchanged for oil has nothing to do with the promises made by any government and everything to do with market fluctuations in supply and demand.
Which is also my explanation for the prevalence of these theories on the internet– there is a demand for a deeply conspiratorial interpretation of world events, and always someone willing to supply such.