Only a few months ago, the idea of oil prices ever reaching $125 a barrel was the stuff of apocalyptic End of Civilization As We Know It nightmares. But today that means good news. For a week and a half ago, global oil prices spiked at $135 per barrel. The dollar even gained a little on the euro on world currency markets Monday, with the euro's value hovering just below $1.55.
But long-term geopolitical trends are generating an ominous financial tsunami against the U.S. currency: The euro is poised to replace the dollar as the main petroleum exchange currency in the world: If that happens, the results will be incalculable.
Russia, Venezuela and Iran are all already waging a petrol-currency war against the United States. All three major oil-exporting nations are already working all-out to conduct as much of their booming oil export business as they can in euros rather than dollars. Even more strikingly, tiny Kuwait, which was liberated from Iraq by U.S. armed forces and their allies in the 1991 Gulf War, is doing the same thing.
Venezuela and Iran are members of the Organization of Petroleum Exporting Countries. Russia is not, but Moscow is a happy hawk on keeping global energy prices sky high in general, though it is certainly ready and able to offer very favorable terms to nations that play ball with it. But Russia is the most important of the big three price and currency hawks among global oil producers. It is today the world's second-largest oil exporter after Saudi Arabia and the world's largest combined oil and gas exporter. Kuwait's rulers are strongly pro-American, very aware that their continued survival depends on U.S. military protection. Yet they are now dropping the dollar in favor of the euro, too.
U.S. policymakers, conservative and liberal alike, never dreamed they would face this situation today. The baby boom generation of gung-ho, in-your-face and go-it-alone Republicans who dominated the Bush administration were sure when they took office that OPEC was already dying and that toppling Saddam Hussein and bringing the oil reserves of Iraq on to the world market would hammer the final nail in the oil cartel's coffin. Iraq produces far less crude oil per year than the United States, yet Iraq's oil reserves may be the second-largest in the world and far more cheaply and easily available than Russia's, if peace and security could ever be restored to that unhappy country.
Democratic Party politicians and policymakers swooned for years at the feet of the Bill Clinton-Thomas Friedman myths of globalization creating a wired, united, rational world. They never expected today's realities either.
Before U.S. and allied forces invaded Iraq to topple Saddam in March 2003, global oil prices were fluctuating around $30 to $40 per barrel, and this seemed enormously high at the time. Back in 1999, before Crown Prince Abdullah bin Abdulaziz of Saudi Arabia and President Mahmoud Khatami of Iran made their historic agreement to try to limit oil production to boost global oil prices, they were at a rock bottom $10 per barrel. When the 2003 Iraq War started, senior Pentagon officials and advisers around Washington openly and confidently predicted that within six months global oil prices would be down to $10 per barrel again. Instead, they just spiked at $135 per barrel, and T. Boone Pickens has warned that $150 per barrel oil is imminent.
The huge shift in global finances to the oil-producing states that these unprecedented prices have already generated has made the conspiracy theories about the supposedly big and bad American oil companies more extinct than the creatures in Jurassic Park.
It is the sovereign wealth funds of the major oil producing nations and China, the world's greatest industrial exporters, that today dominate global finance.
They may lack confidence in the dollar for reasons of fierce ideological hostility, like Iran's President Mahmoud Ahmadinejad or Venezuela's President Hugo Chavez. Or they may want a weak and ailing dollar for reasons of realpolitik, like Russia's former president and current prime minister, Vladimir Putin. Or, most tellingly of all, they may very reluctantly have decided to dump the dollar, as the leaders of Kuwait are doing simply because it has become dangerously bad business to keep doing your business in a chronically weak U.S. currency. But whatever their reasons, when so many major oil producers dump the dollar and start doing their business in euros instead, the European Union's much-reviled currency suddenly becomes the only game in town.
America's free-market pundits and true believers of the Bush conservative hard right and the Clinton Third Way liberal soft-left alike for years have eagerly predicted ruin and doom for the euro because of the uncompetitive nature of many European economies, especially France's. But the soaring tide of petrocurrency dealings now flooding into the euro transforms all those calculations. Far from being chronically underpowered because the fiscal basics of several of its key contributing economies are weak, the euro looks set to soar on steroids at the dollar's expense.
Neither Sen. John McCain, R-Ariz., nor Sen. Barack Obama, D-Ill., the front-runners for the Republican and Democratic presidential nominations this year, has been eager to focus on these developments and what they mean for the United States. Nor have any of their main challengers and rivals. No American politician wants to talk about these things, or even think about them. But there will be no escaping them soon. It's a new world, baby.