TEHRAN - How many barrels has the Group of
Seven (G-7) leading industrialized nations? This
neatly sums up the way in which the institutions
of global governance are skewed towards the
centers of finance capital in developed nations
rather than the resource rich, but less developed,
countries upon which they depend.
Here in
Tehran, now entirely cut off from the global
financial system and with the rial falling like a
stone, that question has never been more relevant.
Dollar economics The combined
effect of the dollar economics of the G-7 and the
"oil curse" of producer nations is visible from
the hotel high in
north Tehran where I look
south over a sea of car-choked smog and unplanned
urban sprawl stretching to the mountains in the
far distance.
The first problem is the way
that the toxic combination of Western property
rights, rent-seeking and compounding debt
imperfectly grafts (in more ways than one) onto
Iran's government and business culture.
The second problem is that carbon fuels
are massively under-priced and implicitly
subsidized, and car-choked urban sprawl and
desperate levels of pollution are the results.
But now, some of the smartest people on
the planet have made possibly one of the dumbest,
and certainly one of the greatest, strategic
errors in history. The smart people at the US
State Department and Treasury have prevailed upon
the craven Belgian-based SWIFT bank messaging
system to entirely cut off Iran from the dollar
system.
So Iran has to look outside dollar
economics for solutions, and I am here to advocate
an approach that addresses both problems by
literally re-basing Iran's economy on the absolute
value of energy rather than a black hole of debt.
Problems and solutions It is
said that 21st-century problems cannot be resolved
with 20th-century solutions, but the irony is that
solutions are in fact to be found prior to 1700,
when the modern institutions of Western finance
capital - the joint stock company and modern
"credit intermediary" banks - were first created.
I am observing the re-emergence of two
elements: firstly, collaborative legal and
financial frameworks, using partnership-based
agreements, and secondly, the direct investment
through "unitisation" of flows of value from
productive assets.
When Enron opaquely
used "prepay" commodity transactions (where
commodities are sold for cash now with delivery
later) they not only defrauded investors and
creditors, but also rediscovered a technique which
has existed for thousands of years but was
supplanted by modern banking.
Prepays are
now in routine use, both openly - eg an oil deal
by Jupiter Energy in Kazakhstan, and a gas deal by
Chesapeake Energy in the US - and opaquely, which
is where the damage is done through what I term
"macro" market manipulation.
Macro
market manipulation Iran's oil sector
management have - like most of the oil market -
been entirely unaware that for the past seven
years or so the oil market has been completely
manipulated through the use of prepay contracts.
An oil price for the most part supported at
inflated levels has operated to Iran's benefit.
However, the booms and busts of successive
oil market bubbles have made it very difficult to
plan and invest for the long term, and of course
for Iran this is made worse through lack of access
to the financial markets.
I predicted that
the oil market price would fall as it recently has
although I admit that the Iran "risk premium"
sustained the oil bubble for far longer than I
thought. The market is now massively
over-supplied; the Saudis have hedged their
production at the expense of "muppet" investors,
and the price is now in a managed decline probably
to US$60 per barrel or less, at which point -
after an interval suiting the manipulators - it
will be pumped back up again.
The intended
outcome of what is essentially economic warfare
conducted by investment banks on behalf of the US
and Saudi Arabia is firstly to deliver politically
acceptable gasoline prices before the US election.
Secondly, the aim is to bring the economies of
nations such as Iran, Russia, and Venezuela to
their knees. This is calculated as being more
likely to lead to regime change than coercive
methods ever could.
Fortunately, the
smartest kids on the block do not realize that the
world has moved on.
Energy
economics Sauce for the goose is sauce for
the gander, and the same (Islamically sound)
technique of prepay contracts could be used by any
producer who can find a buyer more interested in
investing in rights over intrinsically valuable
energy than in intrinsically worthless dollars.
In my research at University College
London, I was intrigued to find that UK sovereigns
financed their expenditure for some 500 years
through the use of "prepay" instruments known as
"stock". These credit instruments were, like
prepay, issued at a discount and were returnable
in payment of taxes. In fact, the origin of the
phrase "rate of return" was literally the rate
over time at which stock could be returned to the
King's Exchequer in payment of taxes.
The
difference between energy economics and dollar
economics is that in energy economics, we proceed
from the outcome, such as heat, electricity, or
transport, and proceed to identify the least
energy cost in terms of fuel. Dollar economics, by
contrast, aims for the least dollar cost and the
maximum profit or rent for the holders of
privileged property rights.
It is
completely straightforward, trivial in fact, for
energy producers to issue stock returnable in
payment for energy, and if this is done it offers
a simple but radical monetary and fiscal solution
not only to Iran, but also to every other nation
suffering from dollar economics.
Energy
charter The purpose of the Energy Charter
Treaty of 1994, now signed or acceded to by 51
states, was to create an organization and a legal
and financial framework to facilitate "Western"
investment in energy using conventional finance
capital. Like the World Trade Organization and
World Intellectual Property Organization it is an
instrument of finance capital and dollar
economics.
That is in contrast to the
Energy Charter of the Economic Cooperation
Organization of 10 nations ranging from Turkey to
Pakistan and including Iran and much of Central
Asia, (ECO), a charter I proposed and was put
forward by Iran; it was to have been considered at
a meeting of the ECO Energy ministers this week,
and indeed that is why I am in Tehran.
Unfortunately, a series of mishaps led to the
postponement of that meeting, but had the
beneficial effect of enabling me to explain what
my proposal actually is, rather than what one or
two officials mistakenly believed it to be.
Unlike the Energy Charter Treaty, the ECO
Energy Charter is simply an agreement between
nations, aimed at energy cooperation. It comprises
a statement of principles, and a set of policies
of which the key one is the introduction of the
new tools of energy economics that I have
outlined. These consist firstly of an "Energy
Clearing Union" agreement and secondly the
creation, issue and exchange of energy stock
within that framework.
E is for energy
cooperation The idea is that those nations
engaging in energy cooperation through the use of
energy economics would come to form a
self-organizing "E" grouping that is complementary
to the existing G-7, G-8, G-20 and so on.
While the ECO nations may - if these often
fractious neighbors can agree - come to form the
E-10, in my view the most important regional
relationship remains that between Russia and Iran,
which no longer have a common border but now face
each other across the oil and gas rich Caspian
Sea.
Iran and Russia are hard pressed on
their own to resist the economic warfare directed
at them even through energy cooperation in the
Caspian. Iran is in a double bind in current
negotiations because any definitive agreement to
solve the current impasse would knock out one of
the elements holding the oil market price up.
Through using a Caspian gas price as a
Eurasian energy benchmark and by literally
monetizing gas, the problems of dollar economics
may be transcended and a new era in energy
cooperation could begin provided one or more major
consumer nations is included.
Rumors are
swirling around Tehran that the distrust between
Iran, the European Union and United States is such
that Iran is now asking China to guarantee any
agreement that may be reached with the P5+1 - the
five permanent members of the United Nations
Security Council plus Germany - at their next
meeting, to be held in Beijing.
If Iran
and Russia as major producers, and China as the
fastest growing consumer, were to link in an
"E-3", this could introduce a completely new
dimension to global energy politics.
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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