The Iranian Oil Bourse

Motivation for the current media attack on Iran?

All oil is traded using the American dollar and the American dollar only. This means that anyone wishing to purchase oil must do so using US dollars. . .

All oil is traded using the American dollar and the American dollar only

This means that anyone wishing to purchase oil must do so using US dollars. In addition, oil can only be traded officially through the New York Mercantile Exchange (NYMEX) and London’s International Petroleum Exchange (IPE) both of which are American owned. In light of these facts it is fair to assume that anyone wishing to trade regularly in oil must maintain a reserve of US dollars or petrodollars. The fact of the matter is that nearly every country in the world does indeed hold large reserves of US dollars for this purpose. As a result, the global demand for US dollars is relatively high compared to, for example, the euro. This demand is maintained by the US dollar/NYMEX/IPE monopoly.

The dollar is essentially a worthless currency

At present the United States bears the burden of a national debt in excess of $8 trillion and a trade deficit of $600 billion. The true value of the dollar lies in its unique position vis-à-vis NYMEX and IPE oil trading, take away this status and suddenly the dollar looks a lot less attractive. As such, perpetuating the dollar monopoly is critical to maintaining it as the world’s reserve currency, reserves that fund American debt.

If this monopoly were ever to be broken the demand for the dollar would most certainly drop. If oil could be traded using euros then countries would no longer need to hold such large reserves of dollars, in China’s case $400 billion, and some might take this opportunity to lower their dollar reserves and diversify using euros, thus protecting themselves against dollar depreciation. This could result in hundreds of billions of unneeded dollars being sold (dumped) on foreign exchange (FX) markets resulting in a potentially devastating depreciation of the US dollar.

Some may argue that countries maintain large dollar reserves primarily to facilitate intervention in the FX markets to protect the exchange rates of their own currency and not the just for the purpose of buying oil. This is a valid argument and is most certainly true, but why the dollar? The fact of the matter is that if your currency suddenly falls in value against the dollar then the price of oil will increase for you accordingly. As such - and given the importance of oil to the economies of all industrialised nations - it makes sense that these FX reserves are held in dollars.

Iran plans to launch an oil trading exchange in direct competition with NYMEX and IPE

Iran has pencilled in March 2006 for the launch of its own oil trading exchange or bourse. In December of 2005 Kamal Daneshyar - the Chairman of the Majili’s (Iranian parliament) Energy Commission - said that preparations were under way to sell oil in euros as well as dollars and then to phase out dollar trading completely. As outlined above, this could have serious consequences for the stability of the US dollar depending on the level of uptake of such a service.

There is a recent precedent for such a move

In November of 2000 another country did in fact stop accepting dollars in payment for its oil and switched the currency required to purchase its oil to the euro. By 2001 that country had converted $10 billion in reserves to euro, essentially abandoning the dollar. That country was Iraq and that country was subsequently invaded by the US and its allies.

Within two months of the invasion, Iraq’s reserves were converted back to dollars and Iraqi oil became tradable using dollars once again. Coincidentally (or maybe not), the United States’ latest period of recession started and finished within this two-and-a-half year timeframe.

Conclusions

With so much at stake it is only natural that the United States would seek to protect this monopoly, as Saddam Hussein found out to his detriment. As we all know, the most widely heralded pretext for the invasion of Iraq was the danger posed by Iraq’s (non-existent) weapons of mass destruction (WMD). A remarkably similar pretext is currently being deployed against Iran.

A cursory glance at recent mainstream media coverage of Iran will reveal a torrent of faithfully reproduced US and British government rhetoric concerning the imagined threat of Iran’s nuclear weapons program. Of course, a US led invasion of Iran seems highly unlikely given the US military’s commitments in Iraq and Afghanistan. However, the US and Britain have a history of subversion in Iran and successfully overthrew the parliamentary democracy of Prime Minister Mohammed Mossadegh in 1953 (Operation Ajax).

I believe it is reasonable to assume that Iran’s decision to launch a euro denominated oil exchange is, at least in part, a political decision - a proverbial two-fingers-up in the face of American economic dominance. Success in this endeavour is by no means guaranteed and relies entirely on demand for such a service within the constraints of existing economic structures and practices.

Would the US contemplate regime change in Iran – perhaps using Israel as a proxy force - to prevent a petroeuro future? I don’t know, but it will be interesting to see how the current propaganda war against Iran plays out and to what actions it leads and why.