War : Iran : euro-based oil market


Richard Moore

    Iran's decision to set up an oil and associated
    derivatives market next year has generated a great deal of
     ...This is primarily because of Iran' s reported intention to
    invoice energy contracts in euros rather than dollars.

This article downplays the potential consequences of this
Iranian initiative. Once such a system is set up, there is 
possibility that Venezuela, and perhaps Russia, would
join in. The threat to the petrodollar system, and hence
to the U.S economy -- whose deficits are made possible
by that system -- is considerable.

Washington, and the banking establishment, are well
aware of this. U.S. charges that Iran poses a nuclear
threat are just as phony as the WMD charges against
Iraq. The euro issue is probably the reason for these
phony charges.




Iran oil bourse:a threat to the petrodollar? 
by Emilie Rutledge 
Thursday 03 November 2005 10:01 AM GMT 

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

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 categorised 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
who 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 126 billion barrels of proven oil reserves
about 10% 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% 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% 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 $646 billion.

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

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 mobilise 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

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 $10 billion 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% 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 without explicitly ruling out the dollar.

Emilie Rutledge is a British economist who is currently
based at the Gulf Research Center in Dubai.

The opinions expressed here are the author's and do not
necessarily reflect the editorial position or have the
endorsement of Aljazeera.

By Emilie Rutledge 



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