Don’t Bomb Iran

Iran - a threat to the petrodollar?
by Emilie Rutledge
Thursday 03 November 2005 10:01 AM GMT

Iran’s decision to set up an oil and associated derivatives market next=20
year has generated a great deal of interest.

This is primarily because of Iran’s reported intention to invoice energy=20
contracts in euros rather than dollars.

The contention that this could unseat the dollar’s dominance as the de=20
facto currency for oil transactions may be overstated, but this has not=20
stopped many commentators from linking America’s current political=20
disquiet with Iran to the proposed Iranian Oil Bourse (IOB).

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The proposal to set up the IOB was first put forward in Iran’s Third=20
Development Plan (2000-2005). Mohammad Javad Assemipour, who=20
heads the project, has said that the exchange will strive to make Iran=20
the main hub for oil deals in the region and that it should be operationa=
l=20
by March 2006.

Geographically Iran is ideally located as it is in close proximity to maj=
or=20
oil importers such as China, Europe and India.

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It is unlikely, in the short term at least, that large numbers of energy=20
traders will decamp and set up shop in Iran; a country which happens=20
to be categorised as a member of the “axis of evil” by the president of=20
the world’s largest oil-importing country; the United States.

But over time, Iran could take some business away from the two=20
incumbent energy exchanges, the International Petroleum Exchange=20
and the New York Mercantile Exchange who both invoice sales solely=20
in dollars.

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Economic motives

If successful, the IOB will provide Iran with concrete economic benefits=20
especially if it invoices at least some of its energy contracts in euros.

Iran has around 126 billion barrels of proven oil reserves about 10% of=20
the world’s total, and has the world’s second largest proven natural gas=20
reserves.

From an economic perspective, invoicing oil in euros would be logical=20
for Iran as trade with the euro zone countries accounts for 45% of its=20
total trade. More than a third of Iran’s oil exports are destined for=20
Europe, while oil exports to the United States are non existent.

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The IOB could create a new euro denominated crude oil marker, which=20
in turn would enable GCC nations to sell some of their oil for euros.=20
The bourse should lead to greater levels of foreign direct investment in=20
Iran’s hydrocarbon sector and if it facilitates futures trading it will g=
ive=20
regional investors an alternative to investing in their somewhat=20
overvalued stock markets.

=20

Euro zone countries alone account for almost a third of Iran’s imports=20
and currently Iran must exchange dollars earned from hydrocarbon=20
exports into euros which involves exchange rate risk and transaction=20
costs.

The decline in the dollar against the euro since 2002 - some 26% to=20
date - has substantially reduced Iran’s purchasing power against its=20
main importing partner.

If the decline continues, more states will increase the percentage of=20
euros vis-=E0-vis the dollar they hold in reserve and in turn this will=20
increase calls both in Iran and the GCC to invoice at least some of=20
their oil exports in euros.

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A move away from the dollar and a strengthening of the euro would=20
further benefit Iran as according to a member of Iran’s Parliament=20
Development Commission, Mohammad Abasspour, more than half of=20
the country’s assets in the Forex Reserve Fund are now euros.

=20

It is primarily the US which stands to lose out from any move away=20
from the petrodollar status quo, it is the world’s largest importer of oi=
l=20
and a move away from invoicing oil in dollars to euros will undoubtedly=20
have a negative effect on its economy.
Fewer nations would be willing to hold the dollar in reserve which=20
would cause a significant devaluation and result in the loss seigniorage=20
revenues. In addition, US energy-related companies stand to lose out=20
as they will be unable to participate in the bourse due to the=20
longstanding American trade embargo on Iran.

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Political considerations

In the 1970s, not long after the collapse of the gold standard, the US=20
agreed with Saudi Arabia that Opec oil should be traded in dollars in=20
effect replacing the gold standard with the oil standard.

Since then, consecutive US governments have been able to print=20
dollar bills and treasury bonds in order to paper over huge current=20
account and budgetary deficits, last year’s US current account deficit=20
was $646 billion.

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Needless to say, the current petrodollar system greatly benefits the US;=20
it enables it to effectively control the world oil market as the dollar h=
as=20
become the fiat currency for international trade.

In terms of its own oil imports, the US can print dollar bills without=20
exporting commodities or manufactured goods as these can be paid for=20
by issuing yet more dollars and T-bills.

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George Perkovich, of the Washington based Carnegie Endowment for=20
International Peace, has argued that Iran’s decision to consider=20
invoicing oil sales in euros is “part of a very intelligent strategy to g=
o on=20
the offense in every way possible and mobilise other actors against the=20
US.”

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This viewpoint however, ignores Iran’s economic motives, just because=20
the decision, if eventually taken, displeases the US does not mean that=20
the rationale is purely political.

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In light of such sentiments and the US’s current insistence that Iran be=20
referred to the UN Security Council Iran must consider and weigh=20
carefully the economic benefits against the potential political costs.

Although a matter of conjecture, some observers consider Iran’s threat=20
to the petrodollar system so great that it could provoke a US military=20
attack on Iran, most likely under the cover of a preemptive attack on its=
=20
nuclear facilities, much like the cover of WMD America used against=20
Iraq.

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In November 2000, Iraq began selling its oil in euros, its Oil For Food=20
account at the UN was also transferred into euros and later it converted=20
its $10 billion UN held reserve fund into euros. =20

At the time of the switch many analysts were surprised and saw it as=20
nothing more than a political statement, which in essence it may have=20
been, but the euro has gained roughly 17% over the dollar between=20
then and the 2003 US invasion of Iraq. Perhaps unsurprisingly, since=20
the US led occupation of Iraq its oil sales are once again being=20
invoiced in dollars.

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The best policy choice for Iran would be to proceed with the IOB as=20
planned as the economic advantages of such a bourse are clear, but in=20
order to mitigate against the potentially greater political “threat” shou=
ld=20
provide customers with flexibility.

It would make it much harder for America to object to the new bourse,=20
overtly or covertly, if Iran allows customers to decide for themselves=20
which currency to use when purchasing oil, such an approach would=20
facilitate for euro purchases without explicitly ruling out the dollar.

Emilie Rutledge is a British economist who is currently based at the=20
Gulf Research Center in Dubai.

The opinions expressed here are the author’s and do not necessarily=20
reflect the editorial position or have the endorsement of Aljazeera.

Aljazeera
By Emilie Rutledge

You can find this article at:
http://english.aljazeera.net/NR/exeres/C1C0C9B3-DDA9-42E2-AE9C-
B7CDBA08A6E9.htm=20