Biweekly column by Sam Barden
If you look at a map of the Middle East, you will notice that Iran is totally surrounded by American military bases. Full spectrum dominance from the United States military industrial complex is alive and well in the region. Most countries could be excused for feeling a little paranoid, or indeed intimidated by being totally surrounded by the U.S. military. Iran, it seems, is not.
Iran holds the fourth largest oil reserves in the world and the second largest gas reserves. The two main oil trading bourse’s in the world are the New York Mercantile exchange (NYMEX) and the Intercontinental Exchange (ICE) in London. Oil is of course priced in dollars. However, Iran has established an oil exchange, known as the International Oil Bourse (IOB). It is located on Kish Island, just off the coast of Iran, and is designated as a free trade zone by the Iranian government. It was created by cooperation with Iranian ministries, the Iran Mercantile Exchange and other state and private institutions in 2005. The IOB is intended as an oil exchange for petroleum, petrochemicals and gas in various currencies other than the U.S. dollar, primarily the euro and Iranian rial and a basket of other major (non-U.S.) currencies. However, on July 13, 2011, Iran began trading on their new bourse. Ironically, they offered oil cargo in USD, and the price offered was higher than traders were willing to pay, so no trades took place. Not a great start for an exchange, but what is really going on here?
Iran is under trading sanctions, and has been since 1979. In 2010, the United States and Europe significantly tightened sanctions on Iran, making it almost impossible for anyone to do business with Iranian companies in banking, shipping, insurance, petrochemicals and other trade. However, not everyone takes notice of them, especially China. In fact, Iran supplies China with about one million barrels of oil per day presently and is estimated to account for at least 15% of China’s imports for 2011. China simply ignores the U.S. driven sanctions on Iran. Iran’s oil bourse could also be a way to ignore the sanctions. According to Iranian parliament member Fakhroddin Heydari, Iran’s oil exchange is a way to dodge U.S. sanctions: “It also strengthens Iran’s position in setting oil prices in regional markets. …The oil bourse helps us break the barriers of sanctions; therefore, enabling the world’s outstanding businessmen to enter into transactions without any problem.” And problems do exist. The other energy hungry nation, India, also buys oil from Iran.
Iran supplies India with about 400,000 barrels a day. Due to sanctions, Iran supplies the oil on credit, and the balance outstanding at present is about $7 billion. India and Iran are apparently going to settle through a Turkish banking arrangement. This will of course attract the ire of the United States and pressure from Israel, and is likely to be a short-lived solution to Iran and India’s trade balance situation. What it does however highlight is the need for an oil clearing union, and Iran’s oil bourse might just tip the balance of other OPEC members, or indeed Russia or Venezuela, to follow suit and sell and price their oil through their own free trade zone oil exchanges. There is clearly a demand. At a time when the U.S. dollar is as vulnerable as it has ever been, Iran is piling on the pressure with their oil exchange. The thing that will kill the U.S. dollar as the world’s reserve currency faster than the debt ceiling or a U.S. debt default is if oil producers and consumers trade oil in other currencies.
If the main oil consuming and producing nations in the world conspire to trade oil over an open exchange, similar to Iran’s Oil Bourse, and price the oil in currencies other than or as well as the U.S. dollar, then the world is likely to be economically more stable. The possibility of seeing commodity exchanges emerging in Russia, Venezuela, Hong Kong, the UAE, or India is high. These exchanges could trade oil and other commodities against national currencies, rather than only against the U.S. dollar. By trading commodities over an exchange, each country involved will be able to provide open liquidity pools. One of the key requisites to becoming a reserve currency is for that country to provide liquidity in their currency. For Russia, trading their oil in rubles would be a natural first step towards cementing the ruble as one of the key world currencies. Likewise, China is already encouraging its trading partners to trade in the Chinese yuan, also likely to be a key world currency.
Iran’s IOB is not new. The timing of its move to trading physical cargos of oil on July 13 seems a clear step towards putting pressure on the U.S. dollar, and to show others that an alternative to the status quo of oil trading is available. The main question is which country will be the next to use its own oil exchanges, and will the U.S. military be able to surround that country?
Current markets are anything but global or integrated. What if we had a paradigm shift in the way we think and transact when doing business with each other? Balanced global trade can only occur if we have transparent, accessible and efficient markets. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company. Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.
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In light of the present situation in the Middle East, Russia and Israel find themselves facing common challenges. Under these newly emerging situations, Russia sees its partnership with Israel as a potential asset in resolving acute regional issues. From a Russian perspective, the compatibility of Israeli and Russian interests could contribute to such a partnership.