SPEAKING
FREELY Killing the dollar in
Iran By Toni Straka
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Could the proposed
Iranian oil bourse (IOB) become the catalyst for a
significant blow to the influential position the
US dollar enjoys? Manifold supply fears have
driven the price of crude oil to its recent high
of US$67.10 - only a notch below its highest price
in inflation-adjusted dollar terms. With the world
facing a daily bill of roughly $5.5 billion for
crude oil at current price levels, it becomes
apparent that sellers and purchasers of the black
gold are looking into all ways that could lead to
a financial improvement on their respective sides.
Non-US-dollar holders so far have been the
victim of additional transaction costs in the oil
trade. The necessary conversion of local
currencies into oil-buying greenbacks can be
considered a hidden tax, charged and enjoyed by
the international banking sector. The IOB, by
eliminating this transaction cost, will become
a
factor that could unsettle the dollar's dominant
position. While the worldwide bottleneck of
inadequate refining facilities and partly dramatic
declines in production - for example in the North
Sea - are two factors that cannot be eliminated in
the short term, there is one area left which could
result in smiling faces of oil producers as well
as most buyers.
Oil consumers are
entangled in a web of supply fears that span the
globe. In Venezuela, President Hugo Chavez
threatens to divert oil supplies from the US to
China, which faces severe gasoline and diesel
shortages these days. Attacks on Iraqi oil
installations have slowed exports there. Ecuador's
oil industry is still recovering from a strike,
while Nigerian oil companies are in the middle of
efforts to avoid a strike there.
Until
now, oil has been solely priced, traded and paid
for in the greenback on markets in both London and
New York. But monthly worldwide oil revenues of
over $110 billion (on a 20-trading-day basis) - a
third of which ends up with OPEC (Organization of
the Petroleum Exporting Countries) members - raise
the question of what happens to these cash
mountains. According to the most recent data from
the US Treasury Department, OPEC members have
parked only a skimpy $120 billion in direct dollar
holdings, which are almost equally split between
equities and American debt paper. This is a clear
indication that oil producers are investing their
windfalls elsewhere. The yield spread between US
and EU debt papers in favor of the EU is another
hint where the petrodollars might be heading.
Especially in the case of Iran, it does
not make sense to accept dollars only for its
much-desired commodity. Given that Iran is seen as
a hostile country by the current US administration
for its intention to build its own nuclear
reactors, one wonders whether the new IOB will not
try to attract buyers other than Americans. Iran
has recently announced that the new oil exchange
will start up its computers in March 2006.
The proposal to set up a petroleum bourse
was first voiced in Iran's development plan for
2000-2005. Last July, Heydar
Mostakhdemin-Hosseini, who heads the board of
directors of the Iranian Stock Exchange council,
said authorities had agreed in principle to the
establishment of the IOB, where petrochemicals,
crude oil and oil and gas products will be traded.
The oil exchange would strive to make Iran the
main hub for oil deals in the region and most
deals will be conducted via the Internet. Experts
from London's International Petroleum Exchange
(IPE) and the New York Mercantile Exchange (NYMEX)
have reportedly confirmed the feasibility of the
project.
The IOB can count on two sharp
arrows in its holster. It can - and probably will
- lure European buyers with oil prices quoted in
euros, saving them dollar transaction costs. And
it can strike barter deals with oil-hungry giants
like China and India who have a lot of products
and commodities to offer. One doubts whether
American hamburgers and legal services will be
considered adequate collateral for the world's
most after-sought resource.
Worse than
an Iranian nuclear attack? Weaned off the
almighty commodity, the US dollar can have a
deeper impact on the US economy than a direct
nuclear attack by Iran. The permanent demand for
dollar-denominated paper stems substantially from
the fact that until now almost all resources of
the world are quoted in it. While this led to the
eurodollar (US dollar-denominated deposits at
foreign banks or foreign branches of American
banks) market in the 1970s, the new terms of trade
could ring in the demise of the dollar as the
premier reserve currency.
With the world
economy depending so much on oil, the black gold
itself can be seen as a reserve currency that will
be handed out against only the best collateral in
the future. Last month, the Federal Reserve Bank
of San Francisco published a paper about the
progress of the diversification of central banks'
reserves around the world. It concluded that the
dollar's position is on the decline in many
countries. China, the new industrial giant, has
officially declared that it will diversify a part
of its forex holdings into oil by building a
strategic petroleum reserve. Construction of
storage tanks has begun this year and will take
several years until completion. China has not yet
said how many barrels of oil it wants to store.
The implications for the oil market can only be
guessed as China wants to use its future reserves
to smooth out spikes in oil price.
Iran
holds a strong hand as the No 2 producer of crude
behind Saudi Arabia, pumping 5% of the world's oil
demand. Politicians there will also keep in mind
that dollar deposits might become a burden in the
future, if the US steps up its current war of
words to the level of economic sanctions in the
attempt to halt construction of Iran's nuclear
power plants. Money in the bank does not help when
you have no access to it. Substituting Iran's
domestic oil demand partly with nuclear power will
place the country in a win-win situation. Cheaper
nuclear energy and increases in oil exports from
the current level of roughly 2.5 million barrels a
day will result in a profitable equation for Iran.
Only one major actor stands to lose from a
change in the current status quo: the US, which
with less than 5% of the global population,
consumes roughly one third of global oil
production. Oil in euros would benefit millions
more in the EU and its trading partners, though.
And it would loosen the grip the US has on OPEC
members. Thinking of the rapid growth of
hostilities between the US and Arab nations in
recent years, a renunciation of the dollar appears
to be more than just an Arab daydream.
As
this development poses a very real danger to the
superior status of the greenback and the interests
of the US, the "president of war" can be expected
to take a strong line against the winds blowing
from the Middle East. One may be reminded that
Saddam Hussein had entered into discreet talks
with the EU, proposing to sell his oil for euros.
That was in the year before the first oil war of
this century.
The IOB could help the euro
to become the interim primary reserve currency
before China and India rise to the first two slots
in the global economic ranking in the next few
decades. A decline of the dollar's position in oil
trading might also open the floodgates in other
commodity markets where the dollar is the medium
of exchange but where the US has only a minority
market share. A global economy driven by tough
efficiency demands in the light of thin profit
margins almost everywhere is a good primer for
accounting changes in other commodity markets as
well. This process could begin in resources like
steel and energy and spread to all other resources
that are marketed globally. The world outside the
US has a lot to gain from it.
Toni
Straka is a Vienna, Austria-based independent
financial analyst and portfolio manager, who
worked as a financial journalist for over 15 years
and now evaluates global market trends. He runs a
blog, The Prudent Investor,
where this piece first appeared.
(Copyright 2005 Toni Straka)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
