The Internet is suddenly alive with chatter about an "Iranian Oil Bourse," supposedly scheduled to open for business in March 2006. Right now, the two leading oil exchanges in the world are the New York Mercantile Exchange and London's International Petroleum Exchange. In both exchanges, trades for oil are denominated in U.S. dollars. But in the proposed Iranian exchange, oil trading will be denominated in euros.
The switch from dollars to euros, suggest some observers, could be the straw that breaks the back of the U.S. dollar's global hegemony. According to this line of reasoning, the requirement that oil be purchased with greenbacks is the primary reason that the vast majority of the world's nations stockpile their foreign exchange reserves in dollars. But if it was just as easy to buy oil with euros, then the world might begin to abandon the dollar, leading to its abrupt devaluation. The results would be catastrophic for the U.S. economy.
From this perspective, the current pressure on Iran over its nuclear program is naught but a smokescreen. The Bush administration cannot allow this Bourse to become a reality, and will invade Iran in order to stop it. As proof of this theory, say its proponents, all one has to do is look at the invasion of Iraq. In 2000, Saddam Hussein started requiring that purchases of Iraqi oil be made in euros. But within weeks of the conquest, it was back to dollars. QED -- the invasion was motivated not by a desire to take over Iraq's oil fields, but because the U.S. wanted to keep the dollar in its rightful position.
There are a couple of problems with the theory that the emergence of an Iranian oil exchange will bring about the downfall of the American empire. One is that, although oil trades are currently denominated in dollars, that doesn't really present a huge obstacle to countries with euros burning a hole in their pocket. As a couple of critics have noted, it's not so hard to convert euros into dollars, and vice versa. The idea that an Iranian oil exchange would, on its own, kick off a global run on the dollar is a bit of a stretch.
But, as is always the case with any good conspiracy theory, there is a nugget of truth at the heart of the matter. The euro is a legitimate contender for the prize of being the world's leading currency, the first such real challenge to the dollar in many decades. Many economists are increasingly alarmed at the fact that the United States is sustaining its vast current account deficits solely on the strength of the desirability of its currency. Historically, there are plenty of good reasons for the popularity of the greenback -- the U.S. is, after all, the world's biggest economy, and has long been considered unlikely to default on its obligations.
But those obligations are growing to unprecedented heights. Meanwhile, the euro, after a very poor start, has steadily strengthened in comparative value. If nations start to diversify their foreign exchange holdings to weight them toward the euro, for whatever reason, that could initiate substantial selling pressure on the dollar. A successful launch of a euro-denominated Iranian oil exchange would be just one more point of pressure. But the chances that it could be the killer blow to overturn the current global economic status quo seem more the product of wishful thinking than cold reality.
UPDATE: A reader points to a Paul Krugman article written before the debut of the euro that casts more light on the euro vs. dollar debate.