How often is it said that when you have
eliminated the impossible, whatever remains,
however improbable, must be the truth? Recent
events in Iran bring this axiom of Arthur Conan
Doyle's famous fictional detective, Sherlock
Holmes, very much to mind.
Sanctions Much has been written
in respect of the sanctions being applied to Iran,
in two areas: oil and finance. The oil sanctions
are, as similar sanctions have almost always been,
counterproductive, and to date have probably
served to increase Iran's net oil receipts.
This is because an "Iran risk premium" of
some US$20 to $30 per barrel has been a factor in
the oil market for some time, caused by refiners
and governments bidding up the price in order to
secure physical supplies. The bets placed on the
future oil price
on derivatives markets -
despite the popular misconception as to the role
of speculators shared even by US President Barack
Obama - have had no direct effect on the physical
market price.
But looking forward, we may
expect China, India and a few other buyers to pick
up Iran's crude oil at a steep discount, and to
sell or export their refined products very
profitably.
Financial sanctions, on the
other hand, have been instrumental in bringing
Iran to the negotiating tables in Istanbul and
Baghdad over its nuclear program, which some say -
and Tehran denies - is aimed at nuclear weapons
capability.
Dollar payments have been made
it impossible for Iranian banks generally and
Iran's Central Bank Markazi in particular - by
having them ejected from the SWIFT financial
messaging system.
In doing so, the US and
the EU may well have made a strategic error with
unintended consequences on a historic scale.
Inflation Retail prices of
staple goods and commodities in Iran have risen
fairly drastically as conventional trade has been
throttled, because payment channels have dried up
or have become extremely expensive. Some barter
transactions have taken place, and some
settlements have been made in gold for high value
transactions, while pallets of dollar bills have
been stacking up in Iranian bank vaults.
While current rates of inflation are bad
enough, the domestic policy response by President
Mahmud Ahmadinejad last week was to schedule a TV
appearance in which he was to announce a second
round of payments in rials to Iran's population.
The rationale for these payments was that they
were further compensation for fuel price increases
aimed at reducing Iran's massive energy subsidies
and cutting profligate consumption.
The
Supreme Leader's office, a Majlis (parliament) now
firmly aligned against the president; the
financial services sector, and other factions, all
united in condemnation of this initiative as being
likely to lead to hyperinflation. As a result, the
planned payments appear to have been suspended.
With all conventional options being
systematically made impossible, Iran is as a
result seriously examining the improbable.
Energy swaps For several years,
Iran has been routinely conducting "oil swaps"
whereby oil supplied by Turkmenistan to Iran's
northern refineries was exchanged for oil supplied
by Iran from terminals in the Persian Gulf at an
agreed price differential. Other swaps such as
natural gas and electricity have also been agreed
sporadically by Iran with other neighboring
countries.
The author of the Caspian oil
swap - a senior official who formerly headed
Iran's Caspian oil and gas production - has been
widely interviewed by the media in Tehran in
respect of an interesting proposal. This is for an
"energy dividend" of vouchers that are redeemable
in payment for gasoline, diesel, and even natural
gas or electricity.
The attraction of this
concept is that it changes incentives in a very
interesting way. If energy prices are increased to
global market levels, then rather than continuing
profligate use of energy - which the recent modest
energy price increases have failed to deter -
consumers can be expected to drastically reduce
demand. The reason is that if they do so, then
they will possess vouchers, which tend to hold
their value and are generally acceptable in
exchange within Iran. Moreover, if the Iranian oil
and gas complex were to accept the vouchers in
payment for natural gas, electricity, crude oil
and oil products they export, then these vouchers
could even come to be acceptable in exchange
internationally.
In other words, such
vouchers would essentially become energy currency,
both domestically and regionally.
An
energy standard Taken to its logical
conclusion, where this policy leads is for Iran's
Central Bank simply to fix a new rial - with
several zeroes removed - to a suitable unit of
energy, and for energy prices to be set against
this unit. This could be implemented in a similar
way that a deficit-based abstract currency unit
was fixed to participating European currencies at
the launch of the euro.
The transition
process would need to be properly and
transparently managed by a monetary authority -
probably the Central Bank - in close liaison with
the oil and gas complex. The outcome of adopting
an "energy standard" and an energy dividend in
this way would be to rapidly reduce profligate use
of energy at the same time as addressing the
problem of inflation.
The value of energy
- while very significant in Iran - is only one of
several sources of value. So while such an energy
currency could become widely acceptable as a
national and regional means of exchange, the
fiscal basis of Iran's economy would necessarily
shift to its other immense physical and human
resources.
So as sanctions make
conventional monetary solutions impossible, Iran
is seriously considering the improbable.
Chris Cook is a former director
of the International Petroleum Exchange. He is now
a strategic market consultant, entrepreneur and
commentator.
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