by Adam Crum
One of the challenges to a euro-based oil transaction trading system has been the lack of a euro-denominated oil pricing standard, or oil “marker” as it is called in the industry. The three current oil markers, West Texas Intermediate crude (WTI), Norway Brent crude and UAE Dubai crude, are all denominated in U.S. dollars.
I use the words “has been” because Iran switched its oil payments for its European Union (EU) and Asian Clearing Union (ACU) customers from dollars to euros in mid-2003. And it appears that a new oil marker based on Iranian crude and denominated in euros only has become a reality.
Is it deja vu?
Iraq’s oil export currency was changed to the euro by Saddam Hussein in September 2000 when he announced that Iraq would no longer accept dollars for oil being sold under the United Nations’ Oil-for-Food program. However, in June 2003, that country’s oil sales once again became denominated in U.S. dollars after the involvement of the U.S. military.
In actual fact, Iran has already committed a more egregious “offense.” If Iran’s oil bourse is successful, it would challenge the domination of both London’s International Petroleum Exchange (IPE) and the New York Mercantile Exchange (NYMEX), both of which are owned, incidentally, by U.S. corporations.
Tehran’s oil bourse constitutes a clear encroachment on the supremacy of the dollar in a critically important international market. Without some sort of U.S. intervention, the euro will quite possibly establish a solid foothold in worldwide oil trade.
The Euro has become the second world reserve currency?
Throughout 2003 and 2004 Russia and China, for example, significantly increased their central bank holdings of the euro and continued this trend in 2007. As recently as mid-November 2007, Cheng Sewei, vice-chairman of China’s parliament, announced that China will shift the country’s reserves out of dollar-denominated investments and into the euro and other strong currencies. This could be construed as a move anticipating that the euro has become a second world reserve currency.
Beijing central banker Xu Jian twisted the knife, saying, “the dollar is losing its status as the world currency. The U.S. dollar’s global currency status is shaky,” he said, “and the creditworthiness of dollar assets is falling.”
In July 2005, China re-valued the yuan/RNB; however, that was not nearly as significant as its decision to move towards a “basket of currencies” (including the yen, euro, and dollar), at the same time disassociating itself from a sole U.S. dollar peg. (The re-valuation immediately lowered China’s monthly bill for imported oil by 2%…and that was when oil was $45)
It is predicted that countries and companies unhappy holding huge amounts of overvalued U.S. dollars to finance their oil transactions will drive the success of the Iranian bourse. This could absolutely be true, if China is any indication.
Huge sums could begin shifting from the dollar to the euro, although exactly how much will now be difficult to calculate since the Federal Reserve no longer publishes data on the M3 money supply, the data that tracks how many U.S. dollars are held by foreigners.
Macroeconomic and geopolitical implications
of a successful Iranian bourse critical
In 2003, the United States-administered Coalition Provisional Authority (CPA) in Iraq canceled oil lease contracts from 1997-2002. These were contracts into which France, Russia, China and other nations had entered under Saddam Hussein’s regime. Since these contracts were worth a reported $1.1 trillion, the nullification engendered political tensions between the U.S and the European Union, Russia and China. This was also, you may remember, when Iraqi oil sales once again became denominated in U.S. dollars only, having previously been replaced by euros under Saddam Hussein.
Since Iran and China signed a substantial oil and gas trade agreement on October 28, 2004 valued between $70 billion and $100 billion dollars, should China’s oil investments be subject to a similar fate in Iran, the geopolitical implications would be serious.
Yet, China is just one example of the complex macroeconomic and political implications of a successful Iranian bourse if they did implement euro-settlement capability.
- The Iranian bourse could potentially remove the major technical obstacle for a petroeuro system in international oil trade, initiate petrodollar versus petroeuro currency hedging and introduce entirely new dynamics to the biggest market in the world.
- The Iranian bourse could create a significant shift in the flow of international commerce to the Middle East, while much of it is now linked to the United Kingdom’s Brent crude marker.
- The United Kingdom will find itself even more uncomfortably situated between United States financial interests and those of the European Union.
- The dollar’s international demand/liquidity value will most certainly fall further.
- Policy makers in the U.S. will face difficult choices: compromise, petrodollar vs petroeuro warfare or, in the extreme, military intervention.
The U.S. dollar…just another currency?
According to reports, the Saudis have shown an interest in the Iranian bourse since 9/11. Saudi Arabian investors have been increasing their investments in Iran over western markets. In fact, it is no surprise that many Middle Eastern countries would like to see the bourse successful for obvious reasons.
Although we do not know exactly how the Iranian oil bourse will affect the dollar, clearly a euro-denominated oil exchange could catch on, and it would seriously challenge the unique position of the U.S. dollar as the world’s sole reserve currency as well. A successful Iranian bourse will solidify the petroeuro as an alternative oil transaction currency, and thereby end the petrodollar’s domination in the oil and gas market.
On December 8, 2007 Iran stopped selling its oil for U.S. dollars. The Iranian ISNA news agency cited the country’s oil minister G. Nozari as saying, “In line with a policy of selling crude oil in currencies other than the U.S. dollar, the sale of our country’s oil in U.S. dollars has been completely eliminated.”
Should the dollar become just another currency, its value would drop even further under the weight of the huge U.S. deficits and debt. Although I am not among the “doomers” that say a collapse is imminent, I do believe it reasonable to expect that the dollar will remain weak.
I think is safe to say that the speculative impact these and other events have had a tremendous amount of positive impact on the value of gold and rare coins. Conventional wisdom says that to be truly diversified and safe, you must own gold in one of its various forms. Gold coins are a great value now (although quality coins will become more difficult to find). Now is an opportune time to trade up and add to a collection. Tens of thousands of new collectors and investors have emerged over the past seven years and many coins have been added to collections, which is good for the market since those coins will be off the market for years to come.
Numismatic rare gold coins have attained long-term wealth preserving status because they…
- Can’t be produced and, thus, devalued by governmental authorities;
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- Possess aesthetic and historic value.
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*The term “bourse” refers to a stock exchange for securities trading and is derived from the French stock exchange in Paris, the Federation Internationale des Bourses de Valeurs.