international oil bourse-same article

This is very relevant to the current tensions between uSA and Iran imo. worth a read.
comments welcome.

By Stephen Clayson
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The International Oil Bourse (IOB) proposed by Iran was slated to have opened on the twentieth of March, a date which coincides with Norouz, the Iranian New Year. Instead, the Bourse’s opening has been postponed, supposedly due to technical glitches. But assuming that the venture does eventually get off the ground, it could have far reaching implications.

This is because the IOB is expected to establish for the first time a globally significant oil contract denominated in euros. The current big three oil contracts; West Texas Intermediate (WTI), Brent, and Dubai are all denominated in dollars. If trading volumes were high enough, then the Iranian contract could merit inclusion alongside this trio.

Who would trade on the Iranian exchange? It is unlikely that take up would be great amongst close allies of the U.S., but those with little affection for the U.S. and its policies could be expected to have no qualms about buying their oil in the new venue. Asian countries with a growing demand for oil, particularly China, would be likely adopters.

A previous plan by Russia to sponsor a euro denominated oil contract was stymied under the weight of U.S. diplomatic pressure, but Iran is likely to be less receptive to American overtures.

A military strike, or some sort of covert sabotage, could though be a different matter, and it is easy to wonder if it is an American spanner in the works that has delayed the IOB’s inauguration. Interestingly, this theory is beginning to move beyond the ranks of dedicated conspiracy theorists and into the mainstream, although at this stage it still has to be regarded as an outside possibility.

That said, an appraisal of the potential effects of the IOB on the patterns of the oil trade may cast the US led furore over Iran’s nuclear programme in a subtly different light, and again, not just for the conspirationally minded.

But why should the US be so vehemently opposed to the new exchange? The answer to this question is a complex one, but stems from the premium parity that is attached to the dollar as a result of its status as the currency of the world’s oil trade.

Of course, the dollar also derives a premium thanks to its position as the world’s main reserve currency and as the currency of trade in many other commodities, but the size of the world oil market makes the dollar’s role in the oil trade an especially significant underpinning of its overall premium.

Americans enjoy a materially higher standard of living as a direct result of this premium, thanks to the greater capacity to import that it bestows on them. Hence, the U.S. government is keen to maintain the premium for as long as it can.

Without wishing to digress from the oil theme of this article, interested readers should look in the direction of the ongoing dollar adjustment, of which the issue of the IOB is part and parcel, for the cause of the fireworks now on display in the gold market.

Why else might the IOB not have opened as planned on the twentieth of March? It is certainly possible that technical difficulties are responsible; after all, Iran has no experience of creating the systems necessary to sustain an international commodity exchange.

However, the appeal of ascribing the blame to less straightforward happenings understandably lingers on.

Perhaps the most believable alternative explanation is that since the election of the current Iranian president Mahmoud Ahmadinejad last year, there has reportedly been wrangling within the Iranian political establishment over the appointment of a new oil minister that all parties concerned find acceptable, and that this has somehow caused the delay in the opening of the IOB.

The start of trading in euros on the new exchange would tie in with Iran’s practice since 2003 of requiring payment for its exports of oil to Europe and Asia in euros, even though it still quotes prices in dollars. Iran is also one of the two prominent members of OPEC, alongside Venezuela, that have been lobbying the rest of the cartel for an organisation wide switch to trading in euros rather than dollars.

Iran and Venezuela are both noted for their animosity to the U.S., and the desire to switch to trade in euros is partly political, and partly economic in its motivation.

The political side is that such an assault on the global role of the dollar would constitute a real poke in the eye for the U.S., while the economic aspect turns on the widely recognised fact that the dollar is fundamentally overvalued at its current level, and hence it is inadvisable to hold large dollar balances because a crash in the currency’s parity could come at any time.

The successful take off of the IOB’s euro denominated oil contract could be just the impetus that OPEC needs to make the switch from dollars to euros, and could prompt a diverse range of trading organisations to follow suit. The advent of the IOB could even precipitate the dollar’s inevitable crash, although the fact that other, more significant factors are at work on the dollar as well makes this unlikely. Nevertheless, the mere possibility provides ample explanation for U.S. hostility.

Therefore, U.S. diplomatic pressure is likely to be a key factor influencing the extent of the IOB’s adoption as a trading platform and the related issue of what is to be OPEC’s favoured settlement currency. But amenability to U.S. persuasion is highly variable in today’s world, and countries such as China have shown themselves to be steadfastly immune.

In the end, the transfer of a substantial portion of the world’s oil transactions to euros can convincingly be painted as a natural rebalancing and as indicative of the sea changes that we are saying in nearly all aspects of the global economy, but it is hard to see the US interpreting it as such.

At this stage, considered forecasts of the market share that the IOB could conceivably acquire if it launches are impossible to come by, and there are so many opaque variables involved that to estimate is almost pointless. But that there are potentially serious consequences is beyond doubt.

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Stephen is a freelance financial journalist specialising in the investment opportunities offered by the global natural resources sector, along with the economic and political issues that affect these. Prior to this he was involved in wealth management for private clients