THE disruption in oil supplies that started with Iran’s closure of the Hormuz Strait in response to US-Israeli bombings, is playing havoc with the world economy. Oil prices have shot up in terms of US dollars, and this in turn has been accompanied by a depreciation of other currencies, especially Asian currencies, vis-à-vis the dollar, causing even higher inflation in the periphery compared to the metropolitan capitalist centres. Since inflation cuts into the purchasing power in the hands of the people, the world economy is threatened with a recession, which again is likely to be even more severe in the peripheral economies. And because of the non-availability of oil, there is a scarcity of fertilizers, which is likely to impact food production, intensifying the distress of the people, especially the working people in the global South.

There is no end to this crisis in sight; and this is because there is no end in sight to the utterly illegal and immoral war that underlies this crisis and that has been unleashed by two “rogue states”, the US and Israel, against an independent and sovereign nation.

It may appear paradoxical that oil is so small a part of the world economy, in the light of this massive disruption of the world economy caused by a rise in oil prices: in fact the total value of crude oil output in the world is so paltry that it is less 3 percent of world GDP (it was actually 2.3 percent in 2023). Oil of course is more important than other raw materials; the value of every other raw material relative to world GDP is even more minuscule. This relatively minuscule share of raw materials in world output had prompted many writers to question the relevance of Marxist theories of imperialism that had put control over raw materials at the centre of their explanation of imperialism.

The answer to these critics that Harry Magdoff (The Age of Imperialism) had given was that, no matter how small the value of raw materials relative to GDP, there could be no manufacturing whatsoever, and hence no tertiary activities associated with manufacturing either, without raw materials; their criticality for the world economy therefore is not diminished one iota because of their low share in world GDP. Put differently, while the exchange value of the raw materials may have been pushed down greatly relative to final goods (which itself is reflective of the phenomenon of imperialism) the use-value of raw materials continues to be of overriding importance.

This understanding is borne out by present developments. Only about 20 percent of the world oil output (this includes not just crude oil but also oil products) passes through the Hormuz Strait, which means, as a rough approximation, about 0.6 percent of world GDP; the fact that a disruption in the passage of 0.6 percent of GDP can cause such a massive crisis in the world economy, only underscores- the critical role that oil continues to play in it.

This role arises because oil is a universal intermediary like none other. In fact, paradoxically, given this universal intermediary nature, the very low proportion of the value of crude oil in total world GDP can be a factor enhancing its disruptive role, making its inflationary impact even more pronounced. If oil accounts for less than 3 percent of world GDP, then one reason for it is likely to be the fact that the number of “layers” through which it must pass before it appears in the form of final products is greater. If the share of oil in world GDP had been 30 percent, then that would have meant that the world GDP consisted substantially of oil refining; that is, the number of “layers” through which oil passed before it came to the final buyers was less, compared to when oil accounts for less than 3 percent. Since at every “layer” there is mark-up pricing in a capitalist economy, the larger the number of “layers” the greater is the cascading effect of an initial rise in oil price and hence the greater is the final increase in the price-level.

A 10 percent increase in crude oil price in other words could cause less of an increase in final goods prices when crude oil passes through fewer “layers” than when it passes through many “layers” at each of which a mark-up is added to the unit prime cost. Hence for any universal intermediary whose use is indispensable, the less its share in total GDP, the greater are the number of “layers” through which it passes and hence the greater the possible inflationary impact of an initial increase.

It is precisely because the impact of an oil price increase in a modern economy can be so magnified by the “layers” through which oil must pass before it comes to the final buyer, that the maintenance of the price of oil in terms of the leading currency becomes so crucial for the stability of the capitalist financial system. Since money is a form in which wealth is held, it is important that the value of money in terms of commodities must be expected to remain reasonably stable. This was in fact the reason why the value of money was tied to gold for so long: since gold prices generally moved in tandem with commodity prices, to have stability in the value  of a currency in terms of gold was a means of ensuring its stability in terms of commodities in general.

The fact that there is no gold backing for any currency any more, not even for the dollar, which is the most commonly used reserve currency in the world today, has made many observers believe not only that all commodity links for all currencies have been given up, but also that such links are unnecessary; this however is erroneous.

The dollar, the world’s most common reserve currency, is tied to the most critical commodity, oil, not explicitly of course, but implicitly. This is not to say that the dollar price of oil is sought to be fixed at a certain level, but that all efforts are made to ensure that any rise in the current dollar price of oil does not give rise to expectations that it would keep rising for a long time. The stability of the dollar as a reserve currency, in other words, depends not just on no other currency being powerful enough to take its place, but also upon the fact that commodity prices, especially the price of the most important universal intermediary, oil, are not expected to rise permanently, or keep rising, in dollar terms. We may not have a Gold Standard today, but we have in effect an “Oil-Dollar Standard”.

The maintenance of such a Standard, which is essential for the financial stability of the system, requires, as far as possible, a stability in oil prices (so that there is no question of any expectations of a permanent rise in oil prices, or of rising oil prices). The need for the maintenance of such a Standard acquires particular urgency today for another reason.

The world at present is awash with dollars because of decades of US balance of payments deficits, which have been financed by printing dollars; and the world has been willing to accept these dollars in expectation of their value remaining stable. To maintain this stability, the oil-dollar link becomes even more crucial today than ever before; and imperialism seeks to maintain this link inter alia through exercising political control over the oil-producing countries.

The US obviously exercises such control over most of the Gulf states; its agenda was to make this control even more comprehensive by bringing Iran and Venezuela within its ambit. It appears to have succeeded in Venezuela and it was supremely confident that it could also bring Iran under its control through a “regime change”. After it had engineered, via Israel, the assassination of Ayatollah Ali Khamenei and other top Iranian leaders, it fully expected a “regime change” to follow that would give it control over Iran’s oil resources and hence even greater control over the world’s oil resources. Ironically however its very efforts to acquire greater control over the world’s oil resources to bolster the position of the dollar, have actually led to an undermining of that position.

It made a serious miscalculation with regard to Iran, because of which it is now caught in a situation where rising oil prices are threatening the stability of the dollar, threatening the world’s economy, and threatening the people of the world with such acute distress that their anger against the system could swell to a point where they even consider turning against it.