Iran Setting Up Oil Trade Exchange In Euros

Discussion in 'Commodity Futures' started by libertad, Nov 4, 2005.

  1. Iran oil bourse:a threat to the petrodollar?
    By Emilie Rutledge

    Thursday 03 November 2005, 13:10 Makka Time, 10:10 GMT

    High time for a single GCC currency
    Is Iraq war fuelling GCC's economic boom?

    Iran's decision to set up an oil and associated derivatives market next year has generated a great deal of interest.

    This is primarily because of Iran’s reported intention to invoice energy contracts in euros rather than dollars.

    The contention that this could unseat the dollar’s dominance as the de facto currency for oil transactions may be overstated but this has not stopped many commentators from linking America’s current political disquiet with Iran to the proposed Iranian Oil Bourse (IOB).

    The proposal to set up the IOB was first put forward in Iran’s Third Development Plan (2000-2005). Mohammad Javad Assemipour, who heads the project, has said that the exchange will strive to make Iran the main hub for oil deals in the region and that it should be operational by March 2006.

    Geographically Iran is ideally located as it is in close proximity to major oil importers such as China, Europe and India.

    It is unlikely, in the short term at least, that large numbers of energy traders will decamp and set up shop in Iran; a country which happens to be categorized as a member of the ‘axis of evil’ by the president of the world’s largest oil importing country; the United States.

    But over time Iran could take some business away from the two incumbent energy exchanges, the International Petroleum Exchange and the New York Mercantile Exchange whom both invoice sales solely in dollars.

    Economic Motives

    If successful the IOB will provide Iran with concrete economic benefits especially if it invoices at least some of its energy contracts in euros.

    Iran has around 126bn barrels of proven oil reserves about 10 percent of the world's total, and has the world’s second largest proven natural gas reserves.

    From an economic perspective, invoicing oil in euros would be logical for Iran as trade with the euro zone countries accounts for 45 percent of its total trade. More than a third of Iran’s oil exports are destined for Europe, while oil exports to the United States are non existent.

    The IOB could create a new euro denominated crude oil marker, which in turn would enable GCC nations to sell some of their oil for euros. The bourse should lead to greater levels of Foreign Direct Investment in Iran’s hydrocarbon sector and if it facilitates futures trading it will give regional investors an alternative to investing in their somewhat overvalued stock markets.

    Euro zone countries alone account for almost a third of Iran’s imports and currently Iran must exchange dollars earned from hydrocarbon exports into euros which involves exchange rate risk and transaction costs.

    The decline in the dollar against the euro since 2002 – some 26 percent to date – has substantially reduced Iran’s purchasing power against its main importing partner.

    If the decline continues more states will increase the percentage of euros vis-à-vis the dollar they hold in reserve and in turn this will increase calls both in Iran and the GCC to invoice at least some of their oil exports in euros. A move away from the dollar and a strengthening of the euro would further benefit Iran as according to a member of Iran’s Parliament Development Commission, Mohammad Abasspour, more than half of the country's assets in the Forex Reserve Fund are now euros.

    It is primarily the US which stands to lose out from any move away from the petrodollar status quo, it is the world’s largest importer of oil and a move away from invoicing oil in dollars to euros will undoubtedly have a negative effect on its economy.

    Fewer nations would be willing to hold the dollar in reserve which would cause a significant devaluation and result in the loss seigniorage revenues. In addition US energy related companies stand to lose out as they will be unable to participate in the bourse due to the longstanding American trade embargo on Iran.

    Political Considerations

    In the 1970s, not long after the collapse of the gold standard, the US agreed with Saudi Arabia that OPEC oil should be traded in dollars in effect replacing the gold standard with the oil standard.

    Since then consecutive US governments have been able to print dollar bills and Treasury Bonds in order to paper over huge current account and budgetary deficits, last year’s US current account deficit was $646bn.

    Needless to say the current petrodollar system greatly benefits the US; it enables it to effectively control the world oil-market as the dollar has become the fiat currency for international trade.

    In terms of its own oil imports, the US. can print dollar bills without exporting commodities or manufactured goods as these can be paid for by issuing yet more dollars and T-bills.

    George Perkovich, of the Washington based Carnegie Endowment for International Peace has argued that Iran’s decision to consider invoicing oil sales in euros is "part of a very intelligent strategy to go on the offense in every way possible and mobilize other actors against the US." This viewpoint however, ignores Iran’s economic motives, just because the decision, if eventually taken, displeases the US does not mean that the rationale is purely political.

    In light of such sentiments and the US’s current insistence that Iran be referred to the UN Security Council Iran must consider and weigh carefully the economic benefits against the potential political costs.

    Although a matter of conjecture, some observers consider Iran’s threat to the petrodollar system so great that it could provoke a US military attack on Iran, most likely under the cover of a preemptive attack on its nuclear facilities, much like the cover of WMD America used against Iraq.

    In November 2000, Iraq began selling its oil in euros, its ‘Oil For Food’ account at the UN was also transferred into euros and later it converted its US$10bn UN held reserve fund into euros.

    At the time of the switch many analysts were surprised and saw it as nothing more than a political statement, which in essence it may have been, but the euro has gained roughly 17 percent over the dollar between then and the 2003 US invasion of Iraq. Perhaps unsurprisingly, since the US led occupation of Iraq its oil sales are once again being invoiced in dollars.

    The best policy choice for Iran would be to proceed with the IOB as planned as the economic advantages of such a bourse are clear, but in order to mitigate against the potentially greater political ‘threat’ should provide customers with flexibility.

    It would make it much harder for America to object to the new bourse, overtly or covertly, if Iran allows customers to decide for themselves which currency to use when purchasing oil, such an approach would facilitate for euro purchases with out explicitly ruling out the dollar.
  2. I expect other countries / businesses all around the world to demand payment in non-dollars, probably euro. The USA has too much debt and I think we are heading toward a crisis. Might not get to the crisis point for many years though.

    I'm not convinced the euro is going to be around 20 years from now either. Europe is experiencing the same job flight that the USA is. The Germans do not have a solid government now, the Italian finance minister wants to have a two currency economy, the French and Dutch voted against european unification.

    Some major trends could follow from these events.
  3. Also, the article's line of "If the dollar's decline continues" doesn't appear to be the future - at least the relatively near one. What happens if the dollar doesn't decline, but it is the Euro that declines?

    The article doesn't go there, interestingly enough.
  4. Globalization may work in theory....but not in practice...

    We are beginning to see the results of globalization experiments ..and they have failed miserably...but yet the Bush Admin still pushes them....

    This is why political components are so dangerous...If you have bad leadership that does not fully understand the ramifications ...but yet forces bad policy decisions...This can set back decades of time...and cause catestrophic economic damage....needless to say the complete elimination of good will which takes a lot of time and trust...Once this goes from good to may never regain it no matter what you do....
  5. Ivanovich...

    The article mentions it would be the customer´s choice...either the dollar of the euro....The exchange would offer both options...

    The best policy choice for Iran would be to proceed with the IOB as planned as the economic advantages of such a bourse are clear, but in order to mitigate against the potentially greater political ‘threat’ should provide customers with flexibility.

    It would make it much harder for America to object to the new bourse, overtly or covertly, if Iran allows customers to decide for themselves which currency to use when purchasing oil, such an approach would facilitate for euro purchases with out explicitly ruling out the dollar.


    And yeah...I do not know how it is that the Euro can be so much stronger on a relative basis...but again the dollar has a lot of good will attached to it...

    I guess the answer is that if the US problems become prominent enough to eliminate much of its ¨good will¨value...then its entirely possible that it can sink...Anything is possible...

    $100 is not a lot of money...but it is to someone who does not have it when it is needed...

    Right now...a lot of the US´s good will is vaporizing into thin air because of the Bush Admin...

    Anything can happen....logical or not logical....
  6. oh come on. Considering that the new president in Iran is causing a massive flight of capital from the country and a near widespread economic disaster, I wouldn't be suprised if the inept iranian government decided to be paid in a currently depreciating currency. It would be par for the course.

    Perhaps they would prefer to be paid in Yen, so that they can finance the rest of the worlds Yen-Dollar carry trade?
  7. Babak


    As I've mentioned in another similar thread, the currency which a commodity is traded in is irrelevant. Only financially illiterates (like journalists) engage in this fallacy.

    The Tehran stock exchange topped shortly after Ahmadinejad was handed the top spot by Khamenei (he wasn't elected so I don't use that word) and has recently crashed through the psychologically important 10,000 level. There has been a huge acceleration in the flight of capital out of Iran and into ME financial centers like Dubai and elsewhere (Europe/NA).
  8. to paraphrase: "Iran will likely continue to accept dollars because the new president is an idiot."

    ??? That's your argument?

    Babak: it doesn't matter anyhow because anyone who thinks the currency they are paid in is relevant is a financial illiterate.

    ??? I guess I'm illiterate.

    So, this thread basically states that the Iranian president is an idiot and FireWalker is illiterate. Ok then.

    Let's see if we can introduce some facts...
    - we invaded Iraq
    - about a year ago we began the propaganda campaign to invade Iran (earlier if you count the axis of evil)

    what do they have in common?
    - they both have oil
    - they were both talking about trading in Euros

    Conclusion: either one of two things (or both):
    - the US's power structure is full of idiots
    - oil and the currency it's traded in is important

    I would say the likelihood that:
    - the US's power structure is comprised of complete idiots
    is lower than
    - the probability that drsteph and babak are clueless
  9. "oil and the currency it's traded in is important"

    Maybe just oil is important. Ever consider that?
  10. "Iran Setting Up Oil Trade Exchange In Euros"

    One might question,
    .......Is Iran setting up to be invaded by US? Don't they realize yet that free markets trade only in USD, and their oil belongs to us... one way or another?
    #10     Nov 4, 2005