There appear to be a few misconceptions re the Iran Oil Bourse.

Firstly, the reason for its genesis was nothing to do with what currency oil is traded in and everything to do with the fact that producers and consumers were and are suffering at the hands of intermediary oil traders, particularly investment banks, and now hedge funds.

Although absolute levels of oil prices are based upon supply and demand, the level of volatility has been way too high due to systemic market manipulation resulting in massive hedging losses.

It's a phenomenon J K Galbraith called "the Bezzle" - where the losers do not know they are losing.... It means that the derivative tail has been wagging the oil market dog, and in fact oil markets are - courtesy of hedge funds - an accident waiting to happen, probably next Winter. Why? Because unlike the LTCM hedge fund debacle in financial markets, the Fed can't print oil to bail people out......

What reason do I have for saying this? Simply that the Iranian authorities accepted my arguments - as a former Director of the International Petroleum Exchange - some 4 years ago, and subsequently appointed my consortium to carry out a Feasibility study.

www.opencapital.net/papers/Iranexchange.pdf

In fact, it really does not matter what currency oil is sold in: that's merely a transactional issue.

What matters is what assets (or rather, liabilities) the proceeds are invested in. Where Mr Clark has a point.

Regards

Chris Cook

There appear to be a few misconceptions re the Iran Oil Bourse.

Firstly, the reason for its genesis was nothing to do with what currency oil is traded in and everything to do with the fact that producers and consumers were and are suffering at the hands of intermediary oil traders, particularly investment banks, and now hedge funds.

Although absolute levels of oil prices are based upon supply and demand, the level of volatility has been way too high due to systemic market manipulation resulting in massive hedging losses.

It's a phenomenon J K Galbraith called "the Bezzle" - where the losers do not know they are losing.... It means that the derivative tail has been wagging the oil market dog, and in fact oil markets are - courtesy of hedge funds - an accident waiting to happen, probably next Winter. Why? Because unlike the LTCM hedge fund debacle in financial markets, the Fed can't print oil to bail people out......

What reason do I have for saying this? Simply that the Iranian authorities accepted my arguments - as a former Director of the International Petroleum Exchange - some 4 years ago, and subsequently appointed my consortium to carry out a Feasibility study.

www.opencapital.net/papers/Iranexchange.pdf

In fact, it really does not matter what currency oil is sold in: that's merely a transactional issue.

What matters is what assets (or rather, liabilities) the proceeds are invested in. Where Mr Clark has a point.

Regards

Chris Cook

(as well as all the other stuff)

I don't see the big deal in the Euro. We sneeze and they still catch cold. Just look at how their economic activity lags ours. Take Germany out of the mix and what is left looks like a third world country.

Their public debt is not that pretty, if it is about public debt:

http://www.eubusiness.com/Finance/051214130216.mbwocr4z

If anything, their public debt isn't as widely held (in percentages of local) as ours is by central banks. But that can be eaten up real fast considering scale.

I say leave Iran alone. But who am I? Political statements must be made, I guess...

Best, Dan.

Mr. Cook,
Thank you for your post and insight into the origin of the IOB. However, I must respectfully disagree with the following comment:



This is not simply a transactional issue, which suggests a one-dimensional perspective. The petrocurrency issue is actually a multi-dimensional issue with several macroeconomic effects. I will mention 3 effects that must be considered regarding petrodollar recycling, etc.

1. First is the issue of currency risk. When OPEC uses a pricing band (i.e. $22-28 per barrel) in a single currency, the issuer/nation of that currency is immune to currency risk for their monthly "oil bill." In otherwords, for decades, US citizens were immune to fluctutaions of the dollar's valuation relative to other currencies on the FX markets. As long as oil is priced in dollars, and OPEC agreed to a price band, the US enjoyed the lack of currency risk for oil prices at the pump.

Note: A tangetial benefit is that without oil currency risk, the issuer/nation of a monopoly petrocurrency can enjoy very low taxes on their gasoline/petrol prices. This lack of risk is why the US can afford to have the lowest taxes on gasoline of the G7/G10 nations, while the rest of the industrialized world builds a "price cushion" via higher gasoline taxes. Otherwise, depending on what happened in the FX markets on any given day, the price of gas at the pump could/would be very very volatile. So, most gov'ts simply add a bunch of taxes to the price of oil, thereby mitigating societal discord...(remember what happened due to extreme currency risk in the EU circa Sept 2000? - see below for details). Of course these gasoline taxes also provide a steady source on income for the central gov't given the relatively inelasticity for oil demand/consumption..but I digress from the main issue here...

A stable oil bill is likely one of the reasons why the EU would prefer a euro-based oil transaction option. One interesting development during the US presidential campaign in the autumn of 2000 was a small spike in global oil prices. Indeed, the EU experienced a rather painful period 5 years ago when the euro was at its lowest point relative to the dollar.

Americans were mostly ignorant of the dramatic effects of higher gasoline (or petrol) prices in Europe. These high fuel prices in the autumn of 2000 occurred when the relatively new euro was at its historic low against the dollar (one euro was worth about 82 cents). The French, Germans, Spanish, Greeks, and related eurozone nations not only experienced an increase in fuel prices due to a dip in oil production, but they also felt the brutal effects of currency risk caused by the euro’s relatively low valuation.

The situation in Western Europe during September 2000 was in many ways reminiscent of the fuel crisis in the US of 1973–1974 and 1979. Indeed, the European economy nearly ground to a halt, and there were strong civil protests over the high gasoline/petrol prices. The crisis lasted only a few days but nearly led to violence. In France, fishermen blockaded ports on the English Channel because their fuel costs had doubled, even though their fuel was already tax free. Schools were closed, hospitals were put on red alert, and supermarkets started rationing bread. Transportation came to a near standstill in much of Western Europe. CBS News reported how events unfolded in Germany and elsewhere within the eurozone,



Protests also erupted in France where thousands of farmers drove their tractors into Paris as a sign of their displeasure at the rapid increase in fuel prices. This resulted in the deployment of French riot police. News reports of the economic fallout also included disruptions in the UK, Spain, and Greece.

Here are some pictures/articles of what oil currency risk looks like...


"Fuel protests continue across Europe" Sept 13, 2000
http://news.bbc.co.uk/1/hi/world/europe/921456.stm

"World Fuel Crisis" Sept 2000
http://news.bbc.co.uk/1/hi/in_depth/wor ... efault.stm

“French Fuel Dispute Escalates,” CNN News, September 7, 2000, http://edition.cnn.com/2000/WORLD/europ ... ance.fuel/.

"Pumps Run Dry Amid Fuel Protests," CNN News, September 4, 2000
http://edition.cnn.com/2000/WORLD/europ ... index.html

At the time, the euro was beginning its widespread use, and the EU’s currency risk for their imported oil was dramatic. European governments appear to have sought strategies to mitigate future economic crises stemming from oil currency risk. In June 2001, the EU asked OPEC and non-OPEC to begin preparations for oil to be paid in euros.



Responding to their desire for a petroeuro, an OPEC executive gave a rather important speech in 2002 that addressed this issue of currency risk...



2. Macroeconomic effects on the demand/liquidity value of monopoly Petrocurrency and subsequent ability of a central bank to expand credit/debt financing. I will simply refer to a couple of paragraph's of Dr. Spiro's excellent research on this issue. Again, this is not a one-dimensional transaction issue, but a huge macroeconomic issue, which the CIA is fully cognizant of...



See: David E. Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets, Cornell University Press, 1999, pp. 121-122.

Statements during 2002 by the former US ambassador to Saudi Arabia to member of the US Congress hint that some may question why they should be “so kind” to the US in pricing oil exclusively in the dollar.



It is doubtful that US Congress members at this committee meeting missed the subtle warning that was carefully articulated about petrodollars versus petroeuros...

3rd effect, and this is rather important, we should note that petrocurrency denotes world reserve currency status. Oil is the natrual resource that drives all industrailized economies. If the euro becomes entrenched as an alternative oil transaction currency, then the euro becomes a defacto 2nd world reserve currency on par with the dollar. This has geopolitical and macroecomic issues, which are briefly alluded to in these quotes...




....and one last note, I think the Iranians are also aware of these issues...

That is because the petrodollar system allows the US to hide its poverty. I think you really need to visit any major city and more then one in the US to see how third world America really is. Even the homes in the post-WWII suburbs are starting to look like run down.

The EU doesn't receive the same free ride the US does due to the petrodollar. So of course when the US sneezes the EU catches the flu. That is why the EU and others are planing to end the petrodollar system, in the hope that it will result in a more balanced world economy.

If the US didn't have the advantage of the petrodollar, do you think the government would be happy to export America's manufacturing base to China or elsewhere? do you think the US consumer would be able to support its insatiable credit habit?

You really need to look back at what you wrote and put it in the perspective of how the petrodollar makes all that possible and what will happen when the petrodollar comes to an end. It won't be the EU or the world catching a cold, it will be the US catching pneumonia.




Every country has debts. It is a countries ability to finance those debts that determines whether a country is economically weak or strong. The EU and others finance their economies from manufacturing and trade. The US finances its debts by recycling petrodollars.

When the euro becomes a petrocurrency, then the financing of US debts will either diminish substantially or completely. The EU will see an increase in it being able to finance its debts. Thus the US will suffer economic hardship and the EU will have funds to pay off its debts and of course incur more.

Once this happens, the rest of the world will see that the oil currency is important and the country(ies) that possess it are the ones that have stable economies.





It is the US who is doesn't want Iran left alone. They don't want Iran going to the euro because the US can't finance itself if Iran starts a move away from the petrodollar system. The EU wants the same backing the US is getting from the petrodollar for itself, so it is going to support Iran's move to the petroeuro.

The US not wanting to share the oil currency is the real problem behind antagonizing Iran.

Hi Anonymous,
Here is something I posted on another thread. Maybe we can take it from there...

Henry Liu on dollar hegemony

Best, Dan.

Actually I'm Euric. For some reason I wasn't signed in.

I have read some of Henry C.K. Liu's stuff before and it appears he speaks from both sides of his mouth. In this case, he seems to think that since the dollar is so wide spread it is not possible for the euro or any currency to upset this situation. Well, it often occurs that things that aren't suppose to happen usually do.



Nonsense! Who is saying the euro is going to replace the dollar? the euro isn't looking to replace the dollar nor is anybody out there trying to replace the dollar with the euro. Whoever is saying that doesn't know what they are talking about.

What is being said is that the euro and the dollar are going to "share" hegemony. Oil will not go completely to euros, just a share of it. world Central Banks are not going to dump all of their dollars, just some. They all want to re-balance so that they have a better mixture. OPEC originally wanted to have a basket of currencies, not one, to price oil in. The US insisted on the dollar only. Everyone now knows this was a bad decision and there is a movement to go back to the original plan. The euro will eventually be one of many currencies used to buy and sell not only oil but other commodities. The creation of the euro was designed as the first step to break the dollar hold. Once free of the dollar, the world can begin to set up a currency basket to buy and sell commodities, thus forcing national economies to compete fairly in the world markets.

It is the fiat nature of modern currencies that makes it possible to have a currency union without a political union. The value of the euro and dollar are not in the control of governments but by forces outside their nations. Since they don't back their currencies with gold the currency union will work. If it would be backed with gold, nations in the currency union would fight over how much gold from their treasuries they would have to contribute to the stability of the currency. Some may think others will use a currency union to steal gold from each other. Someone always feels cheated, so without a political union these these types of currency unions fall apart. Fiat currencies don't follow the same rules as currencies backed by something of value. Only old fashioned and out of date thinking would insist it is so.

As for the lira, there was some noise being made in early summer by members of the Italian northern League. This coincidentally occurred after the referendum rejections in late May and ended in early July at the time of the London bombings. I personally think the US was behind the Northern League anti-euro campaign and also the media reports of the possibility of a euro collapse during that time period. The Northern League wanted to not only reinstall the old lira, but to fixed its exchange rate to the US dollar. That in itself should tell you something at who is behind the attempts to collapse the euro. If the US could destroy the euro they would not have to invade or bomb Iran to prevent a IOB from using it. The anti-euro rhetoric at that time ended with the bombings in London. I believe the bombings were a warning to the US and UK financial interests to leave the euro alone.

To end the nostalgia for former currencies, the fixed exchange rate between the euro and the old currencies must be ended. The old currencies should be depreciated in value a given percentage per year until they are worthless. It is not possible for the old currencies to still have the same value they once did. If people saw that the old currencies are in fact worthless, the nostalgia will end.

Going back to the old currencies would create a multitude of problems. I'm sure it doesn't take a rocket scientist to figure out what they will be.

As for their not being enough euros in circulation, that is a very, very moot issue. This is the 21-st century, not the 18-th. There doesn't have to be oodles of paper currency in circulation. We are moving or at least suppose to be moving to a more cashless society. You will also note that there are not as many paper dollars in circulation to meet the needs of the world's business.

Much of the money in circulation is electronic. just numbers passed from one computer to another. I surprised Henry Liu doesn't know this and would make such an ignorant comment. the ECB doesn't need to print more euros, just authorize the use of the euro for oil or commodity transactions and create the money electronically as the US does with the dollar. Maybe they do need to increase the cash supply a percentage of what is electronically in circulation, and they did it during the past year. The Iranians wanted to open their bourse in March 2005 but were delayed by one year. This may be an agreement with the ECB not to open the bourse until the ECB can prepare the needed changes to its systems to accept the huge influx of euro transactions when oil sales would be denominated in euros. Software has to be adapted to such a change.

Printing or creating more euros would not affect inflation if it is done to meet the demand for more euros from outside the Eurozone. If it was done to increase the money supply without a real need such as to finance commodity sales, then inflation would result. But again, printing or creating more money that is accepted as a reserve currency would not affect inflation in the same manner if the currency was not accepted as a reserve currency. If Venezuela were to over print Bolivars, there would be inflation as Bolivars is not a reserve currency. A reserve currency as long as it has the faith of the Central Banks will always have value. Only when the faith is lost is the value lost too and inflation rises.





I don't feel like taking a lot of time to respond to this part, but all i can say if there is no threat to dollar hegemony by the euro, then the US should have no problem sharing its hegemony with the euro. If the US has a problem with sharing its hegemony then the euro is a threat.

Hi, I just recently (tonight) picked up on the Iranian Oil Bourse thing, I've spent 2 hours looking through hundreds of sites for a definite solid source on it, OPEC doesn't mention it, no real News site mentions it, trusted economic organisations don't mention it.

In theory, it exists, and is very possible, but I want to know for definite if the Iranians are infact doing it, now I know you all have your quotes from newspapers and novels, but if it is real there MUST be one source out there on the internet that DEFINITELY 100% proves it, is there not a named Iranian Government minister quote? or OPEC comment? or anything like that?

Don't get me wrong, I'm not denying its existence, but you have to understand, I don't leap onto somebody elses boat just because I dislike their enemies, I stand by my own judgement and belief. That and I am completely tired after waisting my night on this and would prefer the one solid source instead of considering all the arguements made here already.

http://iranianoilbrs.1wr.info/

Use the 'Click here to read more info'.

Best, Dan.

Here the latest article on the IOB in english, with statements by a member of Iran's Majis (parliament).

Preparatory measures taken to sell oil in euros

http://www.mehrnews.com/en/NewsDetail.a ... sID=260851

December 2, 2005

TEHRAN, Dec. 2 (MNA) - The Chairman of the Majlis Energy Commission, Kamal Daneshyar said here, on Friday, that preparatory measures have been taken to sell oil in euros instead of dollar, adding that such a measure is quite positive and should be taken as soon as possible.

Speaking to the Persian service of Iranian Students News Agency (ISNA), he went on to say that Iran should at the first phase sell its oil in both Dollar and Euro, and then gradually move toward Euro as the mere source.

As for the probable consequences of such a decision, Daneshyar said that when such a measure is taken, the United States would soon realize that it is not the one who can always inflict economic damages on the Islamic Republic and that Iran can also get even with it.

Daneshyar who also represents Mahshahr in the Majlis noted that prior to this the way was not paved for undertaking such a program, adding that fortunately the present government possesses the necessary management bravery to prepare the ground for taking such a measure.

OPEC doesn't mention 'Majlis' or 'Daneshyar' even once, similary, no professional website mentions them either.

Frankly I find this frustrating, if this is real there must be atleast one concrete source out there, its beginning to look like a lot of speculation to me.

http://www.financialsense.com/fsu/edito ... /0119.html

I haven't seen this posted here, and I think this thread is the most appropriate place, since it mentions Petrodollar Warfare specifically. There's a lot to this piece, but it does make the case that the volume to be traded on the Iranian Bourse in particular is insignificant in relation to FOREX volumes, and unlikely to make a difference. (The assumptions are odd to me, like assuming that only Iranian oil would be traded, but I'll defer to someone who knows more than me to evaluate the comparisons).

I hope that Mr. Clark or someone else who knows more than I do can respond with their thoughts.

I think William Clark once explained that selling oil on the euro-denominated Iranian Oil Bourse would effectively "lay down a marker", allowing buyers and sellers to establish a fair price, even if the majority of Euro-based trades would ultimately not go through the IOB.