The Islamic Challenge: Oil and the Dollar

Vera Butler, November 2004

The worsening conflict between the United States and the world of Islam threatens to spread from the Middle East to Central and Southern Asia. In Afghanistan and Iraq the United States and its 'Coalition of the Willing', including NATO detachments, face Taliban, Shia, and Sunni Muslim opposed to foreign invaders. In Israel, the Palestinian core population suffers genocide at the hands of a power crazed Israeli soldateska, without Security Council interference and with Washington looking on with 'benign indifference'.

With the re-election of George "W" Bush to the US presidency the coming four years will see a more unilateralist US foreign policy, inspired by fundamentalist ravings and misguided by neo conservative conspiracies. Nations that refuse bowing to America's 'diktat' are threatened with preventive warfare, read aggression. Specifically the Islamic Republic of Iran is the target of a concerted campaign challenging its nuclear power project. No such protests are directed against Israel's military nuclear capability at Dimona, and Ariel Sharon's threats of attacking Iranian nuclear installations.

America's military superiority cannot be challenged by the nations of the Middle East on an equal footing. Consequently the hegemon nation does not seek accommodation, but dominance. However, power is never absolute, and resistance to aggression continues unabated, even at the cost of horrendous sacrifices of human lives and with no end in sight.

Are there non-military solutions to the Middle Eastern impasse? The Islamic world, which includes some of the world=s leading oil suppliers, wields considerable influence over vital American economic interests :- oil and the dollar .

The Oil Weapon.

Islamic strategic thinking is influenced by a growing global dependence on Middle Eastern oil supplies. According to the International Energy Agency (IEA) world wide daily oil consumption will rise by some 50% over the next 25 years to 121 million barrels a day.

In its annual World Energy Outlook, the IEA estimates that by 2030 the oil cartel's Middle Eastern members will supply half of the world's demand for crude oil, price rises notwithstanding. The European Commission is blaming the jump in the cost of crude by more than 50% this year, on worsening dollar inflation and growing market uncertainty, due to political turmoil in the Middle East. Under conditions of globalisation no one nation can escape these consequences.

There are ominous signs that some oil suppliers might refuse trading oil for dollars. Rumours have it (never officially confirmed) that in 2000 Saddam Hussein announced his intent to sell Iraqi oil for euro, thereby de facto repudiating the US currency. Washington's retaliation was swift and lethal. Yet the declining purchasing power of the US dollar has also prompted others, notably Indonesia's oil and gas trading company Petramina, to demand payment in euro. in October 2003 Russia the world's second largest oil exporter but not an OPEC member hinted at a possible switch to the European currency.

Hence oil is again becoming an instrument of political pressure, as it was some 30 years ago at the outbreak of the Yom Kippur War on 6 October 1973, when Arab oil producers including Saudi Arabia) used the 'oil weapon' against the United States and the Netherlands for supporting Israel. At a conference in Kuwait on 17 October of that year it was decided to first cut oil supplies to 'unfriendly states' by 5%, and then progressively reduce supplies till point zero.

Then as now, oil producing nations were concerned about progressive US dollar inflation the currency in which oil was traded. To 'make good' for the dollar's loss of purchasing power at the time, oil extraction was reduced and the oil price sky rocketed to close to $US30 per barrel. This so called 'oil shock' was quickly blamed by US monetary authorities for the inflationary pressures of the 1970s, in a blatant attempt to hold OPEC nations responsible for worsening dollar inflation which had triggered the price rises in the first place. The conflict was temporarily defused, because the oil producers, straddled with massive quantities of the so-called Petrodollars, were given access to some of the most lucrative investment objects in the developed countries, including banks, leading industries, hotels, and choice real estate - a quid pro quo for continued trading in the US currency.

As uncontrolled and cumulative US deficits continued eroding the dollar's exchange rate against 'hard' currencies, by late 2003 oil and gas production cuts were again on OPEC's agenda.

At its meeting in Algiers on 10 February 2004, the OPEC cartel of 11 oil producers announced the intention of cutting 10% of its crude output by April, totalling 2.5 million barrels. Oil prices jumped to $US33.87 in New York and $30.04 in Europe.

U.S. counter action, announced over the media on 1st April, was to release oil storage holdings, to ensure that the public was not hit with substantial price hikes especially before the November 2004 elections. The measure proved inadequate to stem the approaching oil price tsunami : on 2nd August 2004 the oil price reached $US44.23, by the 20th August it stood at $US48.70, and on the 26th October the BBC reported that the oil price had jumped the 'psychological barrier' of $US50 to reach $US55.67.

On the 3rd October Western finance ministers met in Washington, to consider the oil price and a possible dollar devaluation. On the same day OPEC planners met in Jeddah to decide whether $US50 was a new benchmark or just an inflationary bubble. Pressures on the cartel to open their oil industries to foreign capital and expertise, were ignored.

Although the oil price fell to $US48 immediately after President George "W" Bush's re election on 2nd November 2004, his Administration=s huge budgetary deficits did not augur well for the future oil price level.

Jeffrey Sachs, director of the Earth Institute at Columbia University, accused US Vie President Richard Cheney of having committed a fatal error of judgment when he advocated the use of military power to secure US energy needs in the Middle East. The deployment of US troops was adding a fortune in finances and blood to the cost of Middle Eastern petrol to US consumers at the pumps.

Not surprisingly, Osama bin Laden gloated that he was sending the US broke, considering America's "astronomical" budgetary shortfall of $US377 bIn for 2003 the highest deficit since World War II, heralding massive dollar inflation.

Gold and the Islamic Dinar.

Alan Greenspan, Chairman of the US Federal Reserve, denied that his gamble on a weaker dollar fuelled inflation, considering foreign investment inflows back to the USA, chiefly into Treasury bonds. Greenspan totally disregarded European Union concerns abour the euro's rise, in 2003, by more than 20% against the US dollar. According to Jean Paul Trichet, President of the European Central Bank (ECB), the rise had been "brutal" and a sign of the dollar's "excessive volatility". Greenspan simply argued that he was stimulating global 'growth' and kept interest rates low. Yet the deceptive technique of >covering= US deficits by pumping massive quantities of semi valueless paper notes into global circulation, was eroding market confidence in the dollar. Quantity does not equal quality, as bankers well know.

Middle Eastern banks were said to be "awash with dollars", and the Gulf Economic Cooperation Council (GEC) reported that Saudi Arabia's dollar reserves alone in the first six months of 2004 were 30% higher than during the same period of 2003.

Under the post-war Gold Exchange Standard (1944 B 1971) the dollar had been backed by US gold reserves and was held to be >as good as gold=. However, massive deficits eroded the dollar=s value-base as a trade-and reserve currency.

Islamic countries are familiar with the incomparable stability of gold-related currencies. The gold dinar, held to be the currency of the Koran, had been in circulation for 1,400 years and was in use till 1924.

In October 2003 Malaysia hosted the 10th Organisation of the Islamic Conference (OIC) summit. The summit considered proposals for an Islamic currency to replace the US dollar, and the introduction of Islamic banking, based on financial management principles derived from the Sharia, the Islamic canon law.

Dr Mahathir Mohamad, the retiring Prime Minister of Malaysia, held discussions with Saudi Arabia, Bahrain, Libya, Morocco and Iran about a possible revival of a gold dinar. Concerned Western observers were asking :- could a new gold currency become an Islamic euro? -

Malaysia, and other countries of South East Asia, notably Indonesia, Thailand, The Philippines, and South Korea, had experienced the devastating currency crisis of 1997, when they found themselves at the mercy of foreign speculators, who manipulated their exchange rates to cause drastic falls and huge asset losses.

Speaking from bitter experience, Dr Mahathir castigated the "anarchy in the international financial regime" which benefited the rich and the powerful: "Paper currency or figures on computers have no intrinsic value. We must have a currency that has intrinsic value: a gold currency." Dato Paduka Sri Mir Khan, the chairman of Dinar & Dirham International, which promotes the gold dinar, stressed its dual role, both as an alternative trading currency and as an instrument for greater Muslim unity; alluring qualities in the current political climate.

Islamic Banking.

There was a time when Islamic banking was limited to trade finance and simple commercial transactions. However, over the past decade the industry has become more sophisticated, and has moved 'upmarket', including project financing.

The Malaysian government's Financial Sector Master Plan set an ambitious target to achieve a 20% market share of the total banking system by 2010. Bank Negara Malaysia (BNM) planned to liberalise its banking market in 2004, by issuing three new Islamic banking licences to qualified foreign players. By late 2003 Malaysia's Islamic banking infrastructure included two Islamic banks, thirty three conventional financial institutions offering Islamic financial products and services, and four Islamic insurance operators. In place were comprehensive Islamic banking laws, world class prudential regulation and supervision, accounting standards, anti money laundering measures, a large pool of funds, an Islamic interbank money market, an Islamic cheque clearing system, and consumer protection legislation. BNM has even introduced a "managernent code of ethics" for Islamic banks.

According to Amirshain Aziz, president and chief executive of Maybank, Malaysia's largest bank, growth over the past few years has been " phenomenal", and services are not limited to Muslims but has started developing a global perspective.

At the end of 2002 the mainstream Islamic banks had aggregate assets in excess of $US35 bIn, total equity of well over $US43 bin, and they generated net profits of $US730 MIn.

Other regional Islamic nations are following suit, albeit at different speeds. They include Indonesia, Singapore and Brunei, besides the Gulf States Bahrein, Kuwait, Abu Dhabi, Dubai. In Malaysia, 77% of users of Singapore's Islamic equity and investment funds are non Muslim Chinese. At the Fifth Meeting of ASEAN and European finance ministers, held in Bali in late 2003, Malaysia's finance minister Dr Jamaluddin Jarjis proposed the launching of the first regional Islamic bond.

Most major banks in the US and Europe are heavily involved in Islamic banking, and billions of dollars of so called short term funds which cannot be absorbed in the region, are parked with Merril Lynch, Goldman Sachs, Citigroup, and others. Bankers and financiers follow the old adage :- AIf you can=t beat them, join them!@

Divine Guidance.

Islamic banking is a faith based system of financial management that derives its guidance from Sharia, the Islamic canon law.

The core ethos in Islamic financial management is the proscription of usury or interest (riba). The underlying principle is that money alone cannot be used to make more money, and that lenders should share in the risks and profits of the enterprise. Proscribed are also deception or ignorance (gharar) in transactions, through non disclosure of the full relevant facts. Another principle is the proscription of gambling and speculation, and investment in a range of banned activities such as casinos, gambling, armaments, pornography, pork production, breweries, and interest based financial services.

Alien to a Western-style capitalist business mentality is the Islamic belief that money is neither for hoarding nor for speculation, but should promote business and productive activity. It is not considered to be a product, but a means of exchange.

It is noted that the proscription of usury is equally shared by the other two Abrahamic faith based traditions, Christianity and Judaism, according to their holy books, the Old Testament and the Torah. However, they have no bearing on modern business practices

By comparison, the Governor of the State Bank of Pakistan, Dr Ishrat Hussein, stressed that Aone of the most distinguishing features of Islamic banking is that it is dependent on a faith based system. As such it is obligatory on Islamic banks not to pursue activities which are detrimental to society and its moral values."

Another regulator, Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, has warned against a tendency to overreact. She attributes this to Aa lack of awareness, understanding and appreciation of what Islamic banking and finance is about. In fact, [they are] not only subject to the prudential requirements and legal frameworks applied to conventional banking, [but] also subject to divine law.@

This new approach promises huge opportunities and benefits for all. Dr Zeti has pointed out that "once integrated into the global financial system, Islamic banking will contribute towards achieving our shared aspirations for financial stability, to ensure balanced growth in the global economy.

Summary and Analysis

Islamic banking philosophy and practice is directly opposed to the policies implemented by US monetary aurthorities. To Greenspan the dollar is an object of speculation which favours those >in the know= to the detriment of the ignorant. Islamic bankers have to back up each transaction with a tangible asset, and its basic principle is participation.

The main features of the Islamic challenge are worth noting :-

Firstly, here is a potential and powerful threat to American economic interests - the repudiation of the dollar in the lucrative global oil trade.

Secondly, the salient features of Islamic ethics B such as the disclosure requirement - represent a fundamental reversal of established Western practices of mendacity and misrepresentations for purpose of profit maximization.

Thirdly, Islamic banking and financial principles offer a revolutionary new approach to the redistribution of wealth among exploited and poverty stricken peoples of the world. Here is an alternative to the savage lending conditions imposed by the International Monetary Fund (IMF) and the World Bank on weaker debtors.

What remains to be seen, however, is the impartiality of the Islamic system, i.e. the extent to which preferential treatment is granted to Islamic brethren in faith the ummah B or on commercial merit. Will money become an inducement to conversion, including acceptance of Sharia principles as set out by the Prophet in his Farewell (Last) Sermon?

The enormous wealth at the disposal of Islamic banking can offer a range of options on a >take-it-or-leave-it= basis. One of these is, no doubt, sympathetic consideration given to those who support Islamic aspirations for a just peace.

Postscript.

Not surprisingly, US concerns about Islamic competition are shrouded in arguments about money transfers to terrorist organisations and the abuse of charities. In 2003 Pakistan established a Financial Intelligence Bureau to analyse data on suspect transactions, and to liaise with national and international financial intelligence agencies. Likewise, Saudi Arabia is the latest Muslim country to introduce a tough new anti- money-laundering law, which was welcomed by the US State Department as "a positive step".

Dr Vera Butler, a Melbourne based political scientist, is Secretary of the International Studies Association. She studied at the University of Melbourne and at the German Universities of Freiburg/Br. And Turbingen..