DAMMAM, 3 August 2007 — Stakes on the global energy chessboard seem to be getting higher and higher. The Iranian announcement to ask its Japanese oil customers to pay in yen rather than in dollars is making ripples all around. Tehran has been asking some of its European customers to pay in euros for some time now.

With the US greenback sliding to a 12-year low against a basket of major global currencies and the dollar’s trade-weighted index dropping to its lowest point since 1992, from a financial viewpoint the move did not appear to be illogical; it is in Iranian financial interests. Yet eyebrows were raised in Washington, also not without reason. Indeed much more is at stake than what meets the eye.

Tehran’s action reminded some of the last few months of Iraq under Saddam Hussein. Prior to the invasion in 2003 Baghdad vowed to switch over to euros and the rest is history; Saddam had to pay a price and a heavy one.

Some analysts now see a link between the US invasion of Iraq and the currency in which Iraq oil trade was conducted then. The theory states the war was also about aborting a bid, experimented with by Iraq, to end the central role of the US dollar in oil trade. To some this was an almost no-go area. It could not have been allowed. A change from the dollar to the euro would have shaken the very foundations of the global, dollar-dominated economy.

Iran today has economic reasons for the move too. Since the start of the year, the price of oil has risen 28 percent priced in US dollars, 31 percent in yen and 23 percent in euros. And thus explaining the move, Hojjatollah Ghanimifard, director of international affairs at the National Iranian Oil Company (NIOC), told the press: “We’re losing our purchasing power if we stick with the dollar. As long as the dollar is weak, the best decision is for us to move away from it — and we will want as much revenue as possible in non-US dollar currencies.”

However, the fact remains that the NIOC’s choice of currency also reflects official Iranian policy to limit exposure to the dollar. This could also help shelter Iran in case of any seizure of its dollar-denominated assets.

But despite the Iranian pronouncements, not everyone appears to be following the suit. Indeed Libya and sometimes Syria have asked for payments in other currencies, but major oil producers in the Gulf, who receive 100 percent of their oil revenues in dollars, are reluctant.

There are practical issues too.

As the global oil markets are entrenched in dollars, anything that weakens the dollar will also hurt the region’s massive dollar-weighted investments. All the major benchmarks that producers use for oil contracts are set in dollars too, which also make it difficult to use any other currencies.

Saudi Arabia, the UAE and Kuwait between them pump roughly about 13.5 million barrels per day of oil, nearly 16 percent of the world’s supply. Yet for a host of reasons, it may not be practical for everyone to switch over, at least for the time being.

The US dollar today is the preferred currency of global trade. And oil is the world’s largest traded global commodity. Further, because of this dominance of the greenback in global trade, more than two-thirds of the global national foreign exchange reserves are today denominated in the US dollar. Non-US nationals and entities outside of the US hold about 40 percent of the dollars issued by the US today.

The dollar power is in part a reflection of US economic supremacy too. When the dollar was linked to the value of gold (until the early 1970s), the US used the status of its currency to finance the Vietnam War. It kept the currency presses running knowing that the rest of the world was willing to grab whatever it printed. Even the delinking of the dollar from the value of gold made no difference. Global appetite for dollars continues to finance the huge US budgetary deficit.

With OPEC deciding to conduct its oil sales in dollars, the US more than ever began to use the dollar’s status to do things that no other country could afford to. It consistently ran up huge current account deficits in its balance of payments — because there have always been Japanese surpluses, petrodollars and the funds of the corrupt which have been invested in US securities and other local financial assets. The rest of the world has been, in effect, financing domestic US savings. And the US can’t afford to let this advantage slip easily.

The US trade deficit for the month of May alone was $60 billion and its current account deficit is hovering around a trillion dollars — colossal by any standards. This means the US depends on a daily capital inflow, and I repeat daily, from the rest of the world of the order of $2 billion to finance its domestic consumption. The value of the dollar is therefore held up by large capital inflows.

What if the dollar ceases to be the currency of choice in the global economy or even if the euro becomes a serious contender? What if all the funds parked in the US money are pulled out? What if this flow of capital dries up? Interesting questions indeed whose answers have serious ramifications for the world’s only surviving superpower.

Iran has also been contemplating the establishment of euro-based oil bourse in Tehran too, though in recent months, not much has been heard of it. Many believed that was also part of the Iranian war strategy against Washington.

Tehran is involved in a high-stake intense battle of wits with the world’s sole superpower and in war, as in love, all’s fair!