February 28, 2006
Pre-stomped idiocy: Iran's Oil Bourse
The vast threat to the dollar of euro-denominated oil sales has been a sub-theme of some of the less reality-based discussion on the Left of the "true" causes of the Iraq war.
Now it's coming up again, but this time related to Iran's "oil bourse". John Pilger is apparently responsible for the latest round of hype:
Blair knows this. He also knows the real reasons for an attack and the part Britain is likely to play. Next month, Iran is scheduled to shift its petrodollars into a euro-based bourse. The effect on the value of the dollar will be significant, if not, in the long term, disastrous. At present the dollar is, on paper, a worthless currency bearing the burden of a national debt exceeding $8 trillion and a trade deficit of more than $600 billion. The cost of the Iraq adventure alone, according to the Nobel Prizewinning economist Joseph Stiglitz, could be $2 trillion. America's military empire, with its wars and 700-plus bases and limitless intrigues, is funded by creditors in Asia, principally China.
Fortunately, saner heads have already gotten to the question. I will refer all readers to Daily Kos contributor extraordinaire Jerome a Paris: Let me kill off once and for all the Iranian oil bourse story.
So, say that Iran decides to sell its oil in euros. Fine. Both the Iranians and their clients will determine the price for the transaction in dollars, on one of the established markets, and will trade these dollars for euros for the actual payment operation. It will give banks active on the forex markets a little bit of income, but will change nothing to how oil is traded.
If they open a bourse, who will come? The answer is, no one, unless it is nothing more than the new place to buy oil from them and the transaction, whether in euros or in any other currency, will be negotiated in dollars, using existing market standards expressed in dollars, because there is no way that anybody will be able to express and clear the transaction in any other way.
So please, let's stop the fantaisies, or the conspiracy theories about a switch to euros or a new bourse. If any transaction, whether by Saddam, the Iranians or anyone else is expressed in euros, it is purely cosmetic. The underlying market is in dollars, and will remain that way.
His full reasoning, and an explanation of how bourses operate, is behind the link.
Posted by tomscud at February 28, 2006 08:58 AM
Filed Under: Gulf
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Caught some of this going on at the start of the war. Kind of silly.
History shows that a reserve currency like the dollar craps out when it loses its reserve status, as a result of things like the deep indebtedness cited above, for instance. At that point the reserves held in that currency have to be sold gracefully, somehow. In 1968, an agreement was reached among members of the British Commonwealth still holding sterling as a reserve to sell it only by agreement among all. In 1999, the Washington Agreement was reached to sell off dead holdings of gold at an agreed-upon rate.
There is currently no good contender to the dollar as a reserve currency. No doubt something will come along someday, but Iran won't be the one deciding which currency gets to be next. That would be, well, absurd, given their insignificance in the global trading order. That decision will lie with those with true trading clout: the Eurozone, Japan, China. Shoot, Dubai has more of a chance of participating in this decision than Iran, if their efforts at diversifying work out.
Posted by: pantom at February 28, 2006 12:40 PM
Another point. A lot of these petro-euro stories hinge on the misconception that a weaker dollar is worse for America. A weaker dollar not only makes American exports more competitive, thus providing a much-needed economic stimulus, but it also makes all that dollar-denominated debt worth less, relative to other currencies. So if the dollar tanks, the US gets its debt slashed straight out and a nice little pick-me-up to get going again. Hardly the doom and gloom scenario that eejits like Pilger would like to portray.
Posted by: waterboy at February 28, 2006 02:47 PM