Petrodollar Warfare and the Iranian Oil Bourse: What's the Real Deal?
by William Clarke
There's been a lot of speculation and discussion about the effects of a possible Iranian oil bourse. William Clarke, author of Petrodollar Warfare: Oil, Iraq, and the Future of the Dollar answered some questions about the topic in a thread over at PeakOil.com. I've reproduced his answers below:
Question #1. How much longer do you think we have before this thing is up and running?
The news coming out of Iran is somewhat murky. They say it will be up and running by "mid-2006" but the same story also says it could be delayed for a year. So, who knows.
However, I should note the millions have been spent on the project. Recent reports from Jan 2006 & Feb 2006 show the amount of activity taking place on Kish Island where the oil bourse is located. For example, numerous European banks have recently set up branches on Kish Island - presumably to participate in the oil bourse once it starts:
http://62.193.31.6/enews.asp
Quote:
"Chairman & Managing Director of Kish Free Zone Org.:" Kish
can turn into the Trade Hub of the Region (Press release:
January 13, 2006)
Chairman & Managing Director of Kish Free Zone Organization
said: Considering the prerequisite infrastructure and enjoying
the free zone facilities, Kish Island is able to be turned into
the trade hub of the region.
According to Public Relations & Int'l Affairs of Kish Free Zone
Organization, Eng. Majeed Shayesteh stating the above
matter in the opening ceremony of the 4th International Free
& Special Economic Zones Exhibition, added: The
establishment of European Banks and Stock Exchange
operation in Kish, the activities done to turn Kish into an
electronic city, design for establishment of trade centers for
other commodities and oil bourse start-up in the future are
among measures that can turn this Free Zone into the trade
hub of the Persian Gulf region.
. . . and another news article dedicated to the bourse shows that various European oil and gas companies have set-up near the upcoming oil bourse: Total (France), Shell (Anglo-Dutch) and Agip ( Italy). In a seperate article I also noticed a firm on Kish Island called "Iran-China Kish Energy Industries" - so it appears that a lot of commercial activity in the oil & gas and banking sectors are happening in proximity to the Kish Financial Center where the oil bourse is to operate...
Quote:
Vice-president of Kish Free Zone Organization Declared:
Emphasis on Launching Oil Bourse in Kish Public Relations &
Int'l Affairs Kish Free Zone Organization (K.F.Z.O.) (Press
release: December 25, 2005)
Vice-president of Kish Free Zone Organization with an
emphasis on launching Kish Oil Bourse stated that the
execution of this plan would be very effective in order to
create stronger connections between our country with the
global economy.
According to Public Relations and International Affairs of Kish
Free Zone Organization, Eng. AbdoRahman Nadimi Boushehri
said: Kish Island enjoying the capability to do premium
economic, tourism and services activities can be considered
as an appropriate link for interacting domestic and
international economies.... and the required grounds for their
execution have been prepared.
He added: After establishment of Kish Stock Exchange and
start-up activities of branches of foreign banks in Kish,
establishment of Kish International Oil, Gas and Petrochemical
Bourse is of major importance and its start-up will lead to
vast transitions in the national economy arena and its
stronger linkage to the global economy.
Boushehri added establishment of this Bourse in Kish will
change Iran from a merely oil-producing country to a superior
one in the international oil transactions arena. Bousheri
reiterated that Kish Free Zone Organization because of its
strategic location in the Persian Gulf which contains over 60
percent of the world energy reserves can be considered as a
major base for active companies in the field of energy sector.
He added: Presently, most of the major international oil
companies in order to utilize the facilities of this Zone and its
proximity to the exploration and exploitation fields of gas and
oil have moved their offices to Kish Island and already a
considerable portion of logistic services for their activities in
South Pars (Assaluyeh) fields are taking place on Kish Island.
Vice-president of Kish Free Zone Organization expressed
hope that in the near future through establishment of Oil,
Gas and Petrochemical Bourse on Kish Island, this Zone would
become one of the major centers of oil related products
exchange.
Mr. Boushehri by mentioning the establishment of branches of
international banks on Kish Island stated: Now by start-up
activities of eihbank and Standard Chartered Branches, Kish
Free Zone possesses proper financing infrastructure to
perform international deals. He added: Undoubtedly with
development of banking services, we shall witness an
increase of investment in this Zone. Establishment of branch
offices of companies such as Total, Shell, Agip and hundreds
of other foreign and domestic firms pictures a bright future
for Kish Free Zone.
. . . so it appears that the groundwork is done but they may need more trained resources to make it happen. In November 2005 Iran's Oil Ministry Adviser Mohammad Javad Asemipur, who is in charge of the oil exchange project, stated the following:
Quote:
"We are ready to commission the oil exchange today. But, in
order for it to begin work, some requirements have to be
met, including the existence of experienced agents."
Asemipur said: "The Supreme Exchange Council has
authorized the establishment of the oil exchange and its
software is in line with international standards."
Question # 2. How bad is this going to hurt us?
The impact of the proposed IOB will likely be quite small at first given that volumes will be low. However, unbalanced markets sometimes act irrationally, but let's look at the macro picture: Iran has stated that the "ceiling" for oil trades via the IOB will be 25 m/d/b. That is about 29-30% of the entire global oil production...which suggests that Iran want to process almost one-third of the worlds oil trades (most of it right now is conducted by London's IPE and New York's NYMEX).
However, that is a long-term goal, and it would take years of steady trade to achieve that goal...but as long as the euro remains 20% more than the dollar - the desire of countries who trade with the EU, or who utlize the euro as their domestic currency (EU nations), the incentive will be strong....most notably from Russia.
The problem is that if 10% or so of the world's oil trade is condcuted in euros the US trade deficit will likely ballon to over $1 trillion dollars. This month's article in Business Week further confirms the correlation b/t high oil prices and high liquidity/demand value of the US dollar:
Quote:
The New Middle East Oil Boom - Business Week, March 13,
2006, by Stanley Reed (p. 36)
(Excerpt)
"Arab states are now major buyers of goods from Japan,
China, and the rest of Asia, where they sell the bulk of their
oil. So these petrodollars get recycled as Japanese yen or
Chinese yuan - which the Japanese and Chinese
governments convert into U.S. Treasuries. Indirectly, then,
oil money is bankrolling U.S. deficit spending. Paul Donovan, a
global economist for UBS Investment Bank in London,
estimates that petrodollars, mostly channeled through Asia
and Europe, are funding up to 45% of the U.S. current
account deficit."
So, assuming Donovan's calculations are correct, petrodollar flows are supporting about $1 billion dollars per day of the US current account deficit ($805B x .45 = $362B per year, or approx $1B per day). It is highly doubtful that China, Japan, S. Korea et al. will be able to step into the fray and keep proping up the US dollar given these countires are in the process of diversifying their currencies to "maximize performance"( ie. moving away from the weak dollar).
In otherwords, diminishing the demand for petrodollars via a petroeuro based system will have a very adverse effect on the US trade deficit, and the Fed Reserve will be forced to significantly increase the interest rates to attract foreign capital - but the US gov't; US corporations and US consumers are already over-leveraged/heavily indebted, so "Helicopter Ben" might try to inflate the US out of that situation. Indeed, today is the final day the Fed will report the M3 money supply statistic, and removal of that figure could facilitate a strategy to hide any such monetary strategy. In otherwords, it doesn't look good for America's massive twin deficits.
Well, the most interesting and surprising news story this week - on the very day the Iranian bourse was supposed to open - is the annoucement of an upcoming energy bourse in Qatar.
http://www.ameinfo.com/81262.html (March 21, 2006)
Quote:
Qatar creates Energy City and region's first energy trading
platform
This week Qatar took two bold initiatives confirming the
emirate's status as a regional hub for the energy sector:
creating both a visionary new Energy City Qatar and the
International Mercantile Exchange, the first dedicated energy
trading platform.
Quote:
Qatar was served as the US headquarters and one of the
main launching sites of the 2003 invasion of Iraq.
Furthermore, the United States Armed Forces Unified
Combatant Command unit for the Middle East theater, known
as CENTCOM (US Central Command), has its headquarters in
Qatar. Qatar also hosts a large United States Air Force base.
(I note that the above article completely omitted any reference to Iran's proposed oil bourse on Kish Island...which seems odd unless you know that Qatar is not exactly an ordinary Persian Gulf state...)
That tiny little oil-producing state (created in 1971) is mainly notable for two items: it is the home of Al Jazeera news, and it is dominated with a huge US military presence. Here's what the wikipedia.org states:
Qatar was served as the US headquarters and one of the
main launching sites of the 2003 invasion of Iraq.
Furthermore, the United States Armed Forces Unified
Combatant Command unit for the Middle East theater, known
as CENTCOM (US Central Command), has its headquarters in
Qatar. Qatar also hosts a large United States Air Force base.
In otherwords, Qatar is a small state that is essence a US protectorate (i.e. military colony) and currently servces as the US military headquarters in the Persian Gulf. You can be sure that Emir Hamad bin Khalifa Al-Thani who rules over Qatar will do the bidding of the US. Hence, any energy/oil bourse set up in Qatar will be dollar-denominated, not euros. Although purely speculative at this moment, could this be a very clever attempt by the US/UK to pre-empt the euro-based Iranian oil bourse on Kish Island? Again, it is too early to say, and it is unclear exactly what will be traded on - and when (no date was provided as to what when this energy bourse in Qatar is to begin trades). I imagine the Iranian bourse will open later this year, but I can't help but wonder about the internal Iranian politics over this high-profile item. Anyhow, this news story about Qatar was a complete surprise to me and it warrants further examination.
Question #3. Is there anything we can do to protect ourselves beyond what most on this board are already doing, e.g. stockpiling solar cells, silver rounds, shotguns, and Southern Comfort?
Well, I don't have much to add other than to say that in times of financial crisis, many banks and people tend to hoard precious metals as a "flight to safety." I'm not a gold bug, just stating a historical fact. There are also a few IRA's that consist of precious metal assets, just an fyi...
This year we are starting a community garden in my neighborhood (soil to be tilled this week). I'm intent on learning about localized food production for the long-term outlook. Something to think about.
