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     Mar 17, 2006
US$: Forget Iran, the problem's at home
By John Berthelsen

Of all the things that could wreck the US dollar - and there are many - the projected Tehran oil bourse, which is tentatively scheduled to open on March 20 to trade Iran's crude and other petroleum products in euros rather than US dollars, is probably not among them.

The much greater threat to the US currency is the US current account deficit, which ballooned to 7% of gross domestic product



in the fourth quarter of 2005. The announcement drove the euro up to 1.202 against the US dollar as skittish traders renewed their concerns about the world's fiat currency.

The opening of the Tehran bourse has been described by a Bulgarian university professor named Krassimir Petrov as ''the ultimate nuclear weapon that can swiftly destroy the financial system underpinning the American empire". Both Petrov and William Clark, writing in a publication called the Energy Bulletin, have suggested that the decision by US President George W Bush to attack Iraq on March 20, 2003, was to thwart then-dictator Saddam Hussein's move to price his crude in euros rather than dollars. They and other writers have been warning that Iran's decision to open a euro-denominated oil bourse places the mullahs in the same danger of being attacked.

That appears to be an overstretch. First, there is the question of how much crude an Iranian oil bourse would handle. Iran is the world's fourth-largest producer of crude, pumping only about 5% of the world total, and is unlikely to add much to that, according to a Hong Kong-based energy research analyst for a major US investment bank in an interview with Asia Times Online. He prefers to remain unnamed.

The Iranian fields are mature and over the next decade their production will probably begin to fall, the Hong Kong-based energy analyst says. Other nations that are likely to trade on the Tehran bourse probably would include Venezuela, the world's 10th-largest producer, run by President Hugo Chavez, who is eager to tweak the US nose.

There appear to be few others at the moment. Saudi Arabia, for instance, has very nearly become a US client state, as has Kuwait. Mexico, Canada and Norway appear unlikely to fall in line in euro trade, Norway especially since neither it nor the United Kingdom uses the euro as its currency. Russian President Vladimir Putin briefly floated the idea of pricing Russian energy exports in euros in 2003, only to have the idea shot down decisively when Prime Minister Mikhail Kasyanov a few days later said: "This topic cannot even be discussed. There can be no administrative decisions here. The market decides oil is a commodity that is traded for dollars, and if it is sold for dollars, it means that suits the buyers and sellers."

According to an independent financial research analyst based in Shanghai also interviewed Asia Times Online, a decision by any other country than Iran or Venezuela to trade in euros in Tehran is going to be made on a commercial basis and not a political one. At this time, it is not a commercial decision that appears to make sense despite the fact that a number of Middle East nations, angered by the US decision to block a Dubai state-owned company from buying and operating six US seaports, said their central banks are considering switching their reserves from US dollars into euros.

According to a March 14 story in The Independent of London, the United Arab Emirates, which includes Dubai, said it was looking to move a tenth of its dollar reserves into euros, and the governor of the Saudi central bank condemned the US move blocking Dubai Ports World from taking over the US ports as ''discrimination''.

As an example of the dollar's imperviousness to reports of petro-switches, the UAE announcement had almost no effect on world currency markets, whose traders are skittish enough to respond to slight rumors of wheat blight in the Caucasus to shift in and out of currencies with lightning speed. The US dollar, which spent last week strengthening against the euro before the threats by the Middle Eastern central bankers, fell slightly against the European currency by a quarter of a percentage point to a one-week high of $1.1945 - before it retreated later.

Then there is the question of which crude importers will want to pay in petro-euros rather than petrodollars. Although use of the dollar as the world's fiat currency has been declining for about 30 years, some 70% of international currency reserves, which finance international trade, are in US dollars. Japan and China alone have built up nearly US$2 trillion in US Treasury bonds and other dollar holdings. China in particular has floated trial balloons about switching reserves out of the dollar, only to have the trial balloons decisively shot down by the People's Bank of China, the country's central bank.

Japan and China now face a quandary. They and their fellow international creditors are as much hostage to their debtor as the US is hostage to them. Any fall in the dollar that would be driven by a switch to petro-euros risks damaging their reserves.

The peril of driving down the US dollar, either intentionally or unintentionally, was illustrated on July 21, 2005, when the People's Bank of China discarded its strict peg of 8.28 yuan to US$1, valuing its currency against a basket of foreign currencies instead, and allowing the trading band for the yuan to widen slightly, by 2%, to 8.11:US$1. In hours, the yuan rose to its new level. At that time, China was holding US$600 billion in foreign reserves. The 2% move against the dollar cost China US$30 billion in dollar reserves.

China and Japan are now two of the world's largest importers of crude, although both are dwarfed by the United States, which produces only 7.61 million barrels of oil per day against consumption of more than 20 million barrels, according to the CIA World Factbook. 

Then there is the question of what the holders of euros are going to do with their money. With Britain and Norway, two major oil producers, excluded from the euro currency zone, the euro bond market is dwarfed by the dollar bond market, to the point where there is no place in Europe to invest prospective vast sums of petro-euros.

By and large, once crude transactions take place in euros, the euros are exchanged for dollars. In November 2000, when Saddam Hussein announced he would switch international transactions from a US dollar standard to euros, a United Nations study estimated that Iraq's initial shift in pricing cost the country at least $270 million in transaction and other costs. Saddam recouped that money when the euro rose 17% against the dollar on other factors.

This obviously leaves the world's holders of US Treasuries in a quandary. There is little doubt that they would love to diversify away from the US currency, not least because of the growing danger of a dollar collapse. But a possible dollar collapse is much more likely to stem from the unsustainability of the country's gigantic and growing trade and budgetary deficits and the irrational fiscal policies of the Bush administration.

(Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing .)


Why Iran's oil bourse can't break the buck (Mar 9, '06)

 
 


 

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