Why Iran is the Next Target: Emerging Euro-denominated International Oil MarkerCurrent geopolitical tensions between the United States and Iran extend beyond the publicly stated concerns regarding Iran’s nuclear intentions, and likely include a proposed Iranian petroeuro system for oil trades. To date, one of the more difficult “technical obstacles” concerning a petroeuro oil transaction trading system is the lack of a euro-denominated oil pricing standard, or oil “marker” as it is referred to in the industry.
The three current oil “markers” are U.S. dollar denominated. However, since the spring of 2003 Iran has required payments in the euro currency for its European and Asian/ACU exports - although the oil pricing for trades are still denominated in the dollar.
Therefore a potentially significant news development was reported in June 2004 announcing Iran’s intentions to create an Iranian oil Bourse. (The word “Bourse” refers to a stock exchange for securities trading, and is derived from the French stock exchange in Paris, the Federation Internationale des Bourses de Valeurs.) This announcement portended competition would arise between the Iranian oil bourse and the U.S.-owned London’s International Petroleum Exchange (IPE), as well as the New York Mercantile Exchange (NYMEX). <1>
The macroeconomic implications of a successful Iranian Bourse are quite noteworthy. Considering that Iran has switched to the euro for its oil payments from E.U. and ACU customers, it would be logical to assume the proposed Iranian Bourse will usher in a fourth crude oil marker – denominated in the euro currency.
Such a development would remove the main “technical obstacle” for a broad-based petroeuro system for international oil trades.Acknowledging that many of the oil contracts for Iran and Saudi Arabia are linked to the United Kingdom’s Brent crude marker, the Iranian bourse could create a significant shift in the flow of international commerce into the Middle East. If Iran’s bourse becomes a successful alternative for oil trades, it would challenge the hegemony currently enjoyed by the financial centers in both London (IPE) and New York (NYMEX), a risk not overlooked in the following article:
“Iran is to launch an oil trading market for Middle East and Opec producers that could threaten the supremacy of London's International Petroleum Exchange.” “…He played down the dangers that the new exchange could eventually pose for the IPE or Nymex, saying he hoped they might be able to cooperate in some way.
Some industry experts have warned the Iranians and other OPEC producers that western exchanges are controlled by big financial and oil corporations, which have a vested interest in market volatility. The IPE, bought in 2001 by a consortium that includes BP, Goldman Sachs and Morgan Stanley, was unwilling to discuss the Iranian move yesterday.
"We would not have any comment to make on it at this stage," said an IPE spokeswoman.“ <2>
It is unclear at the time of writing (autumn of 2004) if this project will be successful, or could it prompt an overt U.S. military intervention - thereby signaling the second phase of petrodollar warfare in the Middle East. (Iraq being the first petrodollar war)
Regardless of the potential U.S. response, the emergence of an oil exchange market in the Middle East is not entirely surprising given the post-domestic peaking and decline of oil exports in the U.S. and U.K, in comparison to the remaining oil reserves in Iran, Iraq and Saudi Arabia. According to Mohammad Javad Asemipour, an advisor to Iran’s oil ministry and the individual responsible for this project, this new oil exchange is scheduled to begin oil trading in 2005.
“Asemipour said the platform should be trading crude, natural gas and petrochemicals by the start of the new Iranian year, which falls on March 21, 2005.
He said other members of the Organization of Petroleum Exporting Countries - Iran is the producer group's second-largest producer behind Saudi Arabia - as well as oil producers from the Caspian region would eventually participate in the exchange.” <3>
Furthermore, according to the following report, Saudi investors may be interested in participating in the Iranian oil exchange market, further illustrating why petrodollar recycling is unsustainable.
“Chris Cook, who previously worked for the IPE and now offers consultancy services to markets through Partnerships Consulting LLP in London, commented: "Post-9/11, there has also been an interest in the project from the Saudis, who weren't interested in participating before."
“Others familiar with Iran's economy said since 9/11, Saudi Arabian investors are opting to invest in Iran rather than traditional western markets as the kingdom's relations with the U.S. have weakened Iran's oil ministry has made no secret of its eagerness to attract much needed foreign investment in its energy sector and broaden its choice of oil buyers.
Along with several other members of OPEC, Iranian oil officials believe crude trading on the New York Mercantile Exchange and the IPE is controlled by the oil majors and big financial companies, who benefit from market volatility.” <4>
Imagine this scenario, beginning in late March 2005 international buyers will have a choice of buying a barrel of oil for
$50 US on the NYMEX and IPE or purchase a barrel of oil for
€40 euros via the Iranian Bourse...(assuming the euro maintains its current 20% appreciated value relative to the dollar - and assuming that ill-advised covert "interventions" are not undertaken...) This would introduce currency hedging and fundamentally new dynamics to the biggest market in the world - global oil and gas trades.
It appears the final three pivotal items that would create the OPEC transition to euros will be based on (1) if and when Norway's Brent crude is re-dominated in euros, (2) if and when the U.K. adopts the euro, and (3) whether or not Iran’s proposed Oil Bourse (exchange) is successful and utilizes the euro as its oil transaction currency standard. Regarding the U.K., Tony Blair has lobbied heavily for the U.K. to adopt the euro, and its adoption would seem imminent within this decade. If and when the U.K. adopts the euro currency, we are likely to see a concerted effort to quickly establish the euro as an international reserve currency. Given the U.K.’s uncomfortable juxtaposition between the financial interests of the U.S. and the E.U., the realization of this hypothesis would represent a monumental realignment of the transatlantic relationship.
The more immediate question? Will the neoconservatives attempt to intervene covertly in Iran before March 2005 in an effort to prevent the formation of a euro-denominated crude oil pricing mechanism? It will be interesting to see if John Kerry wins in November 2004 what his approach might be to this issue. Indeed, if this Iranian project is successful it will solidify the "petroeuro" as an alternative oil transaction currency, and end the dollar's monopoly status. Indeed, multilateral compromises on EU and OPEC's oil currency trades is far more preferrable to an overt "Operation Iranian Freedom" or another covert operation "Ajax" part II.
References:
<1> Macalister, Terry, ‘Iran takes on west's control of oil trading,’ UK Guardian, June 16, 2004
http://www.guardian.co.uk/business/story/0,3604,1239644,00.html<2> Macalister, Terry, ‘Iran takes on west's control of oil trading,’ ibid.
<3> “Iran Eyes Deal on Oil Bourse; IPE Chairman Visits Tehran,” Rigzone.com (July 8, 2004)
http://www.rigzone.com/news/article.asp?a_id=14588<4> “Iran Eyes Deal on Oil Bourse, IPE Chairman Visits Tehran” ibid
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