“The Iran War Is a Boon for the Petrodollar”

• “The Iran War Is a Boon for the Petrodollar”…
• It’s all about China…
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Dear reader,

“The Iran War Is a Boon for the Petrodollar.”

So reads a fresh headline in The Wall Street Journal.

Yet have we not been informed that the Iran conflict will bludgeon the United States dollar?

Indeed we have. For example, the crackerjacks at Deutsche Bank inform us that the Iran conflict may constitute a “perfect storm” against the dollar.

From whom:

• Damage to Gulf economies could encourage an unwind in their foreign asset savings held largely in dollars. In this context, reports that the passage for ships through the Strait of Hormuz may be granted in exchange for oil payments in yuan should be closely followed. The conflict could be remembered as a key catalyst for erosion in petrodollar dominance, and the beginnings of the petroyuan…
• The huge strategic importance of the Middle East to the dollar’s role as the world’s reserve currency should not be underestimated. The current conflict may be the perfect storm for the petrodollar…
• The legacy of this conflict for the dollar could be the ways in which it tests the foundations of the petrodollar regime. In the long-run, if… the Gulf draws more deeply on existing dollar savings, if the Gulf moves closer to Asia in its trade and investment relationships, and eventually prices less oil in dollars — there could be significant downstream effects to the dollar’s usage in global trade and savings.

Is Deutsche Bank Wrong? 

I confess it at once. I myself have clung to the theory of the storm-tossed dollar.

I have clung to the theory that the Iran conflict would accelerate the dollar’s demise.

Yet the Wall Street Journal article I cited above counsels dollar defeatists to have another guess.

Its author — a certain Diana Choyleva —  is founder and chief economist at Enodo Economics.

She has also authored the work, “Petrodollar to Digital Yuan: China, the Gulf and the 21st Century Path to De-Dollarization.”

And the dollar is a far sturdier vessel than many believe, she argues. It can withstand the heavy weather in which it presently wallows.

Here Ms. Choyleva levels her darts specifically at Deutsche Bank:

• A Deutsche Bank report making the rounds argues the Iran war represents a “perfect storm” for the petrodollar, the primary currency in which oil is bought and sold. The report says that U.S. military entanglement in the Gulf, the weaponization of the Strait of Hormuz, and reports that Tehran is granting passage in exchange for yuan-denominated payments add up to a historic blow to dollar dominance. The argument is superficially compelling. It is also exactly backward.

Not merely backward… but exactly backward?

Factors Favoring the Dollar

Please madam, do explain:

• Gulf states, led by Saudi Arabia, supported the U.S. campaign against Iran and have so far viewed American military performance favorably for the most part. Whatever one thinks of the conduct of the war, one thing is clear: When the security commitment was tested, it held. 

Then, advises Ms. Choyleva, look to the United States collaring of Venezuelan oil:

• Then look to the Western Hemisphere, where the removal of Nicolás Maduro and the reassertion of American influence over Venezuelan oil reserves is the other jaw of the same strategic vise. 
• If the U.S. came to control Western Hemisphere oil directly or by proxy, it would command reserves exceeding all of the Organization of the Petroleum Exporting Countries combined. 
• Washington is positioning itself and its sphere of influence as the oil order’s dominant supplier, with all the currency leverage that entails. The U.S. no longer needs Gulf oil for itself, thanks to the shale revolution. But it needs the world to keep paying for oil in dollars. These moves are how you defend that arrangement.

Iran: Potential Outcomes

Next we come to Iran itself:

• The strategic oil logic illuminates how the war is likely to end, and the options are starker than most commentators acknowledge. The more benign outcome is a Venezuela-style arrangement: a severely weakened Iranian state enters a de facto accommodation with the U.S., Washington gains influence over Iranian oil flows without the costs of occupation, and unimpeded dollar-denominated traffic through the Strait of Hormuz is restored. 

Just so. Yet what of a less benign outcome?:

• U.S. forces take and hold Kharg Island, Iran’s primary oil export terminal, and establish a permanent presence to police the Strait of Hormuz. This approach would be brutal in execution and expensive to sustain, but unambiguous in strategic effect. 
• Control the choke point through which a fifth of the world’s oil flows, and you control the conversation about what currency pays for it.

The Real Target: China 

Many believe the ultimate target of the Iran conflict is not Iran itself — but China. Ms. Choyleva evidently sorts into this camp:

• China will be watching all this with considerable frustration. Beijing spent years building the scaffolding for a petroyuan system at enormous diplomatic and financial cost. It was a real and growing challenge to dollar dominance. The Iran conflict has injected American strategic intent back into the equation.
• The petrodollar has two legs: the “petro” and the “dollar.” China was making progress on both. For now the U.S. is pushing back hard in the Gulf, in Caracas, and at the Strait of Hormuz. 

In conclusion:

• Those who conclude that the petrodollar is already in its death throes are reading the map upside down. The storm is real. The dollar is fighting back.

You Decide

Is the lady correct? Perhaps she is. Perhaps she is not.

I hazard, personally, that she is less correct than more correct. That is because I am less… optimistic… about the conflict’s outcome.

I do not believe the United States will assume the commanding strategic position the lady suggests.

Yet I let it pass. Why?

You have likely been bombarded with material claiming the Iran conflict will injure — perhaps fatally — the United States dollar.

And I determined that you should at least attain exposure to the opposing perspective.

What is Fox News’ slogan? “We report, you decide,” or some such?

Well friend, you decide.

Brian Maher

for Freedom Financial News