Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse

Iran prepares to sell oil in euros

TEHRAN - 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, ... 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.
(2 December 2005)

Tick... tick... tick...
.

Israel Prepares Troops for Attack on Iran

ISRAEL�S armed forces have been ordered by Ariel Sharon, the prime minister, to be ready by the end of March for possible strikes on secret uranium enrichment sites in Iran, military sources have revealed.

Interesting timing isn't it?
.

Check, Please

Originally posted by Gools
Interesting timing isn't it?

There are no coincidences, and we can expect a clash soon.

However, on the global chessboard there are many other pieces in play besides the petrodollar rook, and there are many different hands hovering over all of them.

Only the players themselves know what they'll do next, and this has never been something we could really do anything about.

May as well enjoy the show.

Ha. This has got to be the greatest thread of all time.


I'm surprised there aren't more responses to this. This is huge breaking info. To understand the dynamics like this....only cause the internet is all I have to say. You sure wouldn't conclude this by watching CNN or Fox News.

The only thing being, how can we fight this war? The conclusion being, WW3 in my opinion. What is a World War but a war that one country can't fight alone. But what Euro country would support the U.S. in this fight against there own currency?

Just a strange bizarre twist of events I think. You would need a massive catalyst that pointed back to Iran somehow to support it.

Despite the hype surrounding this, especially in relation to the book put out by William Clark: Petrodollar Warfare : Oil, Iraq and the Future of the Dollar, there will be little to no petrodollar or petroeuro warfare because Iran is creating an Iranian Oil Bourse.

My reasoning, correct or incorrect, are along the same lines as this commenter:

What the Iranians are attempting to do is to play hardball with the United States and to suck up to the Europeans at the same time. They’re trying to develop an alternative pricing structure in euros. The problem is that the Iranians don’t have the ability to do it.

First, they don’t produce enough oil to make any difference. Second, the so-called bourse is meaningless because they don’t produce enough oil to even guarantee delivery of the underlying contracts outstanding.

They have no collateral agreement with either the NYMEX or Brent or London oil markets. Without corresponding securities agreements, which they are precluded from having under existing embargoes. It doesn’t give them the ability to make good on the contract outside of their own country. The people talking about this are people that don’t understand exchanges.

They say -- The Euro will be a challenge to the Dollar. We’re going to have $100/barrel oil.

But this is only headline value for the unwashed. In the last analysis, however, the formation of an Iranian oil bourse, as they’re calling it, is meaningless.

Petrodollar Warfare- With Updated Comments






seekerof

[edit on 17-12-2005 by Seekerof]

Originally posted by Samsonite
The only thing being, how can we fight this war? The conclusion being, WW3 in my opinion. What is a World War but a war that one country can't fight alone. But what Euro country would support the U.S. in this fight against there own currency?

Get some land, you will need it soon. Start counting your oil use, and your dependancy on externals.

I told people about this when Iraq wasn't a war yet , and I been telling people about it regarding iran , why do so few know , or is it they don't want to?.
I work in a place which makes a lot of weapons parts , we have been very busy.
If Iran does trade oil in euros , our economy will go down hard here in the US , other countries have been dumping USD for other currencies for months.
We are in for a wild ride soon I think.

The US dollar will not be particularly changed whether or not Iran sets up an oil exchange in Euros.

US dollar and Euros are very liquid and interchangable, and business is transacted today transparently.

It may make more of a difference if middle eastern producers like Saudis unpeg their own domestic currency from the US$.

Still, not such a big deal. The US$ will go up and down due to macroeconomic fluctuations and changes in interest rates. It will propably go down in 2006 versus the euro and yen, because Europe and Japan are raising interest rates, whereas the US Fed will likely stop raising its interest rates.

More specifically the Canadian dollar will likely change with the price of oil, as the US/CAD exchange has far more to do with oil than dollar/euro.

The oil exchange in euros is an entirely irrelevant red-herring of conspiratory nuts.

There are big problems with Iran. This isn't one of them.

The Weakest Link

While I consider all this interesting and worth following, the weak link in the theory is the notion that Iran can somehow undercut the world oil markets through its bourse by continuing to offer what amounts to lower prices for oil.

The problem with that thinking is one of classic supply and demand: as demand for Iranian oil goes up, prices will necessarily follow.

Meanwhile, a strengthened euro versus a weakened dollar benefits the U.S. export markets and weakens the positions of nations whose economies depend heavily on exports to the U.S. -- as well as euro-based economies in competition with U.S. exports in global markets.

This can have negative short-term impacts on the U.S. economy, but would quickly strengthen it as domestic production increased to take up the slack in imports.

There's much more to all of it, of course, but that's the point. The world economy is highly complex and diversified, and even the primacy of oil in world markets isn't unchallenged.

OPEC knows this, which is why they carefully manage production quotas to discourage shifts away from their products.

Iran does not have enough oil production capacity to outproduce the rest of the oil-exporting world.

Thus a change in Iranian oil policy may well cause some shifts and temporary market fluctuations, but it is highly unlikely to have the sort of "end of the world" consequences implied.

Also, it would be unwise to think these events will not be managed by the U.S. and its allies for their benefit, and would be ignorant to assume that military intervention is the only option available.

Far from it. Most of the wars being fought today have nothing to do with guns or bombs. Money is the weapon of choice, and is by far the most powerful weapon in the world.

We'll see how this particular battle plays out.

And um, pass the popcorn please.

Thanks for the link Seekerof. I was not aware of the book. I encourage members to read the extracts on that site. As for the opinions of the commenter you cited I have a couple of points to raise.

The problem is that the Iranians don’t have the ability to do it.

First, they don’t produce enough oil to make any difference. Second, the so-called bourse is meaningless because they don’t produce enough oil to even guarantee delivery of the underlying contracts outstanding.
...
The people talking about this are people that don’t understand exchanges.

Bovine feces!!

Oil is currently priced on the NYMEX [New York Mercantile Exchange] and IPE [London’s International Petroleum Exchange]. Both of these countries are net importers of oil! The argument that a country needs to produce the oil it sells on it's exchange does not hold water and shows a high level of ignorance on the part of this commenter accusing others of the same.

They have no collateral agreement with either the NYMEX or Brent or London oil markets. Without corresponding securities agreements, which they are precluded from having under existing embargoes. It doesn’t give them the ability to make good on the contract outside of their own country.

That's an interesting argument, but a red herring IMO. They only need to have agreements with enough producing countries to deliver the oil to the buyers. Iran and Venezuela are two major producers and both are members of OPEC so the supply side may be covered.

As for buyers, Europe buys more oil from OPEC than the US. It only makes sense for them to use their own currency and avoid daily fluctuations in exchange rates. edit: and remember Britain is not part of the Euro, so we are talking "Old Europe" here (I'm sure they've totally forgotten about that one eh?).

The availability of a Euro based bourse is enough for countries to diversify their foreign reserve holdings. That will automatically depress the value of the dollar and increase the value of the Euro (relative to each other at least).

But this is only headline value for the unwashed.

Yeah I'm really tired of the great masses talking about the Iranian Oil bourse everywhere I go.

In the last analysis, however, the formation of an Iranian oil bourse, as they’re calling it, is meaningless.

It's far from meaningless IMO. Ever wonder why the US can keep printing money, running deficits and carry an 8 trillion dollar debt? It's the petrodollar.

I'm not saying the world will come to an end, just that the establishment of this bourse will destabilize the petrodollar economy on which the US relies for it's financial health, and that may be enough to eventually cause a financial crisis of worldwide proportions. Time will tell.

It's planned implementation is also enough for Iran to be targeted by the powers that be. Assuming Europe can keep it together and that the bourse goes live, it may even cause a split in OPEC with Saudi Arabia siding with the US to keep oil trading in dollars and Iran and Venezuela siding with the Euro.

Interesting times ahead at the very least.
.


[edit on 12/18/2005 by Gools]

I doubt that pricing oil in euros in Iran will change the structure of the capital reserves. That comes from facts bigger than just the oil trade. Arbitrageurs will keep the price fairly similar to NYMEX or IPE prices after adjusting to EUR/USD futures. If they want to be taken seriously their hub for physical delivery must also be recognized and secure. That may not be so. Where does NYMEX and IPE settle oil?

Trade between the East and Europe is fairly balanced; between US and East there is an enormous imablance.

There are lots of US$ floating around because China and Japan keep accumulating them. They are the ones who really need US$ for oil. As such it will probably mean that they prefer to pay in uS$, but it really doesn't matter that much since euros and dollars are very very interchangable. On the world currency market the spread for big institutions is between 1 and 2 pips (points) in normal conditions. That is, 1.1971/1.1973 is a 2 point spread in euros to dollars. Transaction costs are very small for trade.

I just thought of something recently. With all the major world countries moving towards the Euro soon, and more being added over the next few decades, could it be safe to say that eventually...the United States will have to join in also?

Could the M3 data being pulled be the Feds way of saying we don't want the world to see us stockpiling the Euro.

Is it possible that a "terrorist" attack could be just the catalyst to push the U.S. currency system towards a more "global" or stable currency like the Euro?

This could just be the first in a series of things to come. First Iran, then all Opec countries switch to the Euro. This devalues the dollar some 25% leading to hyperinflation, and then the U.S. has two options to gain global positioning. War (WW3). Or..switching currencies. Possibly even fading the Euro gradually in.

In an attempt to be more global, the Fed starts printing Euros instead of say 1s. Then eventually Euro 5s. Then employers start giving the option to be paid in Euro's or Dollars...since the Dollar is devalued, everyone asks for Euros.

Just something to consider. This whole Iran thing could be just that catalyst towards a more universal currency.

Not only that, but just the act of the U.S. switching to the Euro alone would send a wave across the currency market devaluing outside currencies I think.

If major transactions and trade is done with the Euro it would be the equivalent of the Spanish Real (years ago). Where merchants would trade in everything else but then close out their banks with the real because of reliability or universal appeal.

This could inturn cause a wave across the currency market leading to Australia and Canada joining in. Then possibly even Japan and China.

Next thing you know, we have a 1 world currency and a true global market.

When you think about it, this is inevitably the best option. The other option would be for the U.S. to somehow tie in Iran's threats on Isreal as a reason to attack them and take control of the region.

So the options become:

1. WW3
2. Devalued Dollar/Hyperinflation/Recession/Depression
3. Changes In Monetary Policy (Universal Stability With The Euro)

The only problem then is, can a gradual move into the Euro truly happen? I would assume that just the mention of the Fed attempting to role out Euros would further crash the dollar.

I'm of course just speculating.

[edit on 18-12-2005 by Samsonite]

The US will never join with the Euro.

There are major technical problems. It only works in a single market with similar economic performance, because there has to be only one central bank setting basic interest rates.

The reality is that the US economy is sufficiently different in its cycles from the European economy, and so there could not be a single good interest rate. Trade among euro members is already strong and cross border business so big, it was natural that they all join into a single stronger currency and give up some control to the ECB.

The UK didn't join for the same reason as the US, it preferred independence in interest rates and its currency was sufficiently well recognized on its own.

At some point the Middle East oil producers may join their own common currency because they all have similar economic pressures. This has been proposed already, the 'gulf dinar' or something like that.

I re-read your comments. The US Federal Reserve can't print euros, either physically or virtually, without the ECB's approval. That's known as "counterfeiting". They don't have legal authority to do so.

By mutual agreement and of course laws the Fed and ECB wouldn't screw each other over doing something like that, as the ECB wouldn't print dollars themselves either.

From time to time, countries have "managed" currency regimes which means they have policies to prevent them from floating free, like China does explicitly to the yuan, thereby helping its exporters maintain a large trade surplus, and Japan does to a lesser degree with the yen. Other Asian economies then have to "keep up" and thereby also virtually peg to the dollar or yen/yuan, the dominant currencies.

It would not be unreasonable to think that 30 years from now, East Asia has a single currency which is in effect the Chinese Yuan.

Originally posted by mbkennel
Arbitrageurs will keep the price fairly similar to NYMEX or IPE prices after adjusting to EUR/USD futures. If they want to be taken seriously their hub for physical delivery must also be recognized and secure. That may not be so. Where does NYMEX and IPE settle oil?

I don't know how oil contracts are settled. I imagine it's just numbers flying around in cyberspace with ships told where to go for pick up and delivery.

You're right about the price of oil being the same. Having another store just means a bit of price competition, except if that store accepts a different currency, then you have another choice to make. Which currency?

I doubt that pricing oil in euros in Iran will change the structure of the capital reserves. That comes from facts bigger than just the oil trade.

Your absolutely right, it's geopolitical.

I foresee most of the anti-US Arab countries opting for the Iranian bourse, as well as Venezuela and other South American countries, and basically any other country the US has managed to piss-off with it's foreign policy in the last 60 years. It could even lead to a split in OPEC (hmmm... maybe that's the plan?).

Anyway, if all of those countries opt for the Iranian bourse they will need Euros to purchase the oil. How do you get more Euros? Sell all of your dollar assets like Venezuela has done (see above post). I doubt that China and Japan can absorb all of those dollars. That's a lot of dollars floating around with an increased demand for euros.

I'm not seeing the "don't worry everything will be the same" aspect here.
.

The daily volume of euro/us$ forex trading is enormous. It is the single most liquid and deep financial market on the planet.

There would be no need to have permanent US versus Euro holdings just because some Iranian oil exchange prices in euros (and in dollars).

They are interchangable. People in the US travel to Europe on business and vacation, and spend money there. Does this mean that they typically keep euros permanently at home? No, because changing is very easy.

People keep euros versus dollars based on which pays more interest and which looks like it will be going up more or less. They don't really keep them based on what specific products they will be buying. Interest rates, and bond market are more important.

London has an exchange for oil (IPE) and US (NYMEX). Did the London exchange's opening change the global demand for pounds sterling a major way?

Of course oil prices etc woudl have a major effect on say Iran's currency if free floating, but nobody is going to do international commerce in it.

Europeans whose domestic costs are in euros will procure oil in euros---like they do now, even if they trade on a dollar based exchange.

Originally posted by mbkennel
There are lots of US$ floating around because China and Japan keep accumulating them. They are the ones who really need US$ for oil.

They need but a fraction of the USD reserves they have for oil and other imports.
According to professor H. Solomon, head of the Pretoria University Center for International Political Studies, 40% of the USD in circulation currently belong to Chinese banks. Without China and others taking USD for their goods the American economy could not go on as it is. That is clearly not in their interest so they keep accepting USD as payment for their goods.

As such it will probably mean that they prefer to pay in uS$, but it really doesn't matter that much since euros and dollars are very very interchangable.

Well the Euro's would certainly love if the currencies really were interchangable as that means they could start massive deficit spending along US lines. The point of high oil prices and IMF/world bank loans only being payable( and given) in USD is to create artificial demand by using political and military muscle to create the framework. The Europeans want in but the US can not really afford the Euro's growth as a reserve currency.


Stellar

i believe the euro dollar will become the main trading dollar in the future.u.s dollar does not have the main stay in the markets.while the pound and saudi dollar sits back and lol....

Just one small thought to add:

An embargo, for...let's just say some reason becoming...uh, apparent within the next few months, would really hurt Iran's plans. Would be a much easier and cleaner option than military strikes...

China set to dump dollar reserves

WASHINGTON/SHANGHAI - China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds – a potential shift with significant implications for global financial and commodity markets.

Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves – currently accumulating at about $15bn (€12.4bn) a month – it could put heavy downward pressure on the greenback. MSNBC

China is likely to fully support the Euro bourse and protect it's Iranian energy supply.