The Iranian Oil Bourse

limerick | anti-war / imperialism | opinion/analysis

Sunday February 12, 2006 01:46

by Martin Garcia Mortell

martin.mortell at gmail dot com

n/a/

087 7864850

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.

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Comments (5 of 5)

good stuff

by spider

Sun Feb 12, 2006 13:30

excellent article, thanks a lot. hope to see more from you.

Engineer and Economist

by Omran Feili - self empolyed

Sun Feb 12, 2006 17:26

omranfeili at aol dot com

Dear Sir/Madam

If Iran shift from accepting dollar for oil sell to Euro ,the shift will have harmfull economics consequance on US ,but only for a while ,and in the long run it may be the best thing happened To America .I will explain:
The increase in International trade had and continue to have a very seriouse negative impact on American working class. American workers achieve highest standard of liveing when American foriegn trade was les then 5% of its GNP. The higher foriegn trade became the lower standard of living for American worker became,by American workers I mean university educators , judges and cabinet members plus every one else that had to go to work five days week at least to prevent becoming homeless.
Shifting to Euro by petrolium producing country ,if it happens ,it will compale America to inact a true fisical displain at home, and more important to shun and avoid international Armed conflict abroad.Gradualy America becomes itself again :A land for workers and a peace, science and art promoting nation.
Some time best of favors are done by those who intended to hurt

If I to advice the Secretary of State Doctor Rice I will tell her to call Iranian counter part and tell him go ahead make my day

iran's government are religious fascists

by ok go

Sun Feb 12, 2006 18:22

amnesty international.com

URGENT ACTION

Iran: Possible incommunicado detention/ fear of torture and ill-treatment/ possible prisoners of conscience: Elham Afroutan (f)
PUBLIC AI Index: MDE 13/011/2006
10 February 2006

UA 34/06 Possible incommunicado detention/ fear of torture and
ill-treatment/ possible prisoners of conscience

IRAN Elham Afroutan (f), aged around 20, journalist and member of the
Writers' Association
And up to six other journalists

Elham Afroutan and up to six other journalists working for the provincial
weekly newspaper Tammadon-e Hormozgan (Hormozgan's Civilization) were arrested
on 29 January following the publication of a satirical article. They may be
prisoners of conscience, detained solely for exercising their right to freedom
of expression. The seven may be held incommunicado and are at risk of torture
and ill-treatment. If convicted, they may face the cruel, inhuman and degrading
punishment of flogging.

The article published by Tammadon-e Hormozgan compared the 1979 Islamic
Revolution in Iran and the advent of Ayatollah Khomeini to AIDS and gave the
current physical embodiment of the disease as President Ahmadinejad. Reports
suggest that the article was reproduced in the newspaper's health section
because of its title: "Open fight against AIDS".

The journalists were arrested in the city of Bandar Abbas, in the province of
Hormozgan, where the newspaper is based, as soon as the issue appeared on the
streets. Demonstrations were staged and ended with the newspaper's offices
being ransacked and torched. Ali Dirbaz, the editor of Tammadon-e Hormozgan and
the parliamentary representative for Bandar Abbas, was questioned by the Tehran
Prosecutor's Office and then freed on bail. On 30 January the Persian-language
Radio Farda, which broadcasts from outside Iran, reported him saying that he
was not aware of the article being published and that the author should be
executed for the article's numerous insults against the Islamic revolution and
state officials.

The Deputy for Press Affairs of the Ministry of Culture and Islamic Guidance
suspended Tammadon-e Hormozgan shortly after the arrests. The Ministry's
statement on the closure accuses the newspaper of violating Iran's press law
and refers the case to the relevant judicial bodies for prosecution.

Elham Afroutan and those detained with her are not known to have been formally
charged, nor to have had access to legal representation, their families or any
medical treatment. Under various articles of Iran's Penal Code which deal with
insults to Ayatollah Khomeini (the founder of the Islamic Republic), the Office
of the Supreme Leader or defamation of officials or individuals, the
journalists could be sentenced to varied amounts of time in prison. They could
receive up to 74 lashes as an alternative or in addition to a prison term.

BACKGROUND INFORMATION
Article 24 of the Islamic Republic's Constitution states that "Publications and
the press are free to present all matters except those that are detrimental to
the fundamental principles of Islam or the rights of the public." This
constitutional protection of press freedom, albeit limited, has been paid
little regard over the years by the Iranian authorities. Many writers and
journalists have had their right to freedom of expression severely restricted
and have been victims of grave human rights violations.

Article 19 of the ICCPR, to which Iran is a state party, states that everyone
has the right to freedom of expression. While international law recognises that
this right is not absolute and may be subject to certain restrictions, it
states that such restrictions should be only such as are provided by law and
are necessary and proportionate for certain specified purposes, such as
protection of the rights of others, national security or public order. While
the protection of the rights of others may include protection against
defamation, it is generally recognised that the scope of acceptable criticism
of politicians is wider than that of private individuals. Politicians knowingly
lay themselves open to public scrutiny and accordingly must be expected to
tolerate more criticism than private individuals, particularly in view of the
interests of open discussion of political issues. International law does not
permit freedom of expression to be restricted simply on the grounds that others
find a statement offensive. Amnesty International considers people imprisoned
for exercising their right to freedom of expression in line with international
law to be prisoners of conscience.

AI Index: MDE 13/011/2006 10 February 2006

europe

by jackjack - n/a

Mon Feb 13, 2006 01:46

I agree, that was a very interesting article. A question though, why would Europe want to perpetuate the dollar oil market if the stability, advantages and prestige - as listed by the author - associated with running the oil market would clearly benefit the eurozone countries, were the markets in euro?

Re: Europe

Mon Feb 13, 2006 11:48

I'm not sure that Europe does want to perpetuate the current monopoly but reasons for doing so might be:

- a weakened US dollar would almost certainly reduce consumer demand for imports into the US market, a market from which European exporters make a lot of money (Mercedes, BMW, BP etc.)

- Europe does very well for itself as things currently stand. It is extremely difficult to accurately predict the effects that the Bourse will have and maybe playing it safe by leaving things as they are is the wisest course of action.

- Euro trading would benefit Iran's trade ally China. China recently announced an economic plan to irradicate poverty within it's borders by 2050. Parts of this plan made reference to the goals of increasing car ownership by many millions and moving 1 billion people from rural areas to the cities to work in industry. As such China will be competing intensely with Europe for dwindling oil and gas supplies. Expect to see increased US and Chinese investment and intervention in West Africa over the next 10 years as they compete for control of Nigerian oil reserves - Nigeria being the 8th largest producer in the world.

The real answer to your question is that I don't know. The above are just some thoughts of mine. Please bear in mind that I have no background in economics and someone who does would probably blow my arguements out of the water.

I just find the whole thing fascinating and given the fact that the US didn't invade Iraq purely to 'spread democracy', I'm just interested in better understanding why the did.

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The Iranian Oil Bourse

Comments (5 of 5)