Friday, May 04, 2007

Iranian Petrodollar Warfare

There are only limited options for Iran to keep its economy alive. Most import is to attract investors.

Chinese firms are extremely active in Iran and are keen to work on a long list of projects. They have already signed contracts worth over $100 billion with Iran. Russia is also entering the lucrative Iranian oil and gas market.

In a recent maneuver, Iran is now offering 17 tracts for exploration and development. On the occasion of a conference held in Vienna in February to present this bid round, the National Iranian Oil Company unveiled the amendments being introduced to buy-back deals. (In those deals foreign firms become Iran's contractors charged with developing oil and gas fields, and recoup their investment funds plus interest and profit from the proceeds in a five to seven year period.) The new contracts are said to have a term of 25 to 30 years, to be broken down into specified periods for exploration, appraisal, development and production.

Another option for Iran is to use its Oil Stabilization Fund, which was created to protect the budget from oil price fluctuations. In December 2006, for instance, Iran turned to this fund and granted $4 billion to Pars Oil & Gas Company. According to a Financial Times article the fund stood at no more than $9 billion at the end of 2006, which is not much.

One other option Iran could turn to is to increase the share of the non-oil sector and rely less on the hydrocarbon industry. To that aim, for example, the Iranian government budget for its 2007/2008 fiscal year (started on March 12, 2007) was drawn up on the basis of a lower oil price: $33.70 per barrel, compared to $44.1 per barrel in the previous year. This has reduced the share of oil revenues in budget revenues to 43 percent (from 58 percent last year).

Whether this is a real intention or a message to the Western governments is hard to judge. Iran's non-oil export increased to $16 billion, indicating an increase of 47.2 percent in the Iranian year 1385 (ending March 20, 2007) compared to the previous year. This is somehow misleading because it assumes that the petrochemical industry will be all right.

In summary the US-promoted global sanctions, if put in place by the UN, will only force Iran to go nuclear, both civilian and military.

Iran fights back by waging economic war against the US dollar

While Iran's nuclear ambitions have been getting all the attention, something far more threatening to US interests has stood behind the scenes -- in William Clark's words Iran's "petrodollar warfare." Clark claims that the US dollar can have a deeper impact on the US economy than a nuclear attack by Iran.

Note that after World War II, with the decline of Britain's global empire and the fall of the sterling as the world reserve currency, the US achieved global supremacy. Ever since US President Richard Nixon removed the gold standard in 1971, the dollar became a fiat currency and since then oil, along with the most important commodities, is priced and sold only in dollars worldwide. And so began petrodollars recycling, i.e., petrodollar surpluses being returned to the US.

The idea of selling oil in euros belongs to Saddam Hussein. "I do not want to use the currency of my enemy," was his motto. There have been until today only two countries who embraced that thought -- Iran and Venezuela. Guess who the US target is after Iran.

Pricing oil in euros, if followed by shifting central bank reserves holdings from dollars to euros, is one of the Federal Reserve's nightmares. Such a move would reduce the demand for the dollar, causing a free fall of its value. As a result of a big loss in the purchasing value of the dollar, the US economy would suffer immensely.

Iran has been planning officially to set up an international oil exchange denominated in the euro since at least 2003. The opening date has been postponed several times. The last announced opening date was March 2006, designed to quote oil prices in the euro. The bourse would also create a new crude oil marker, which in turn could compete with Brent and WTI.
The Iranian Central Bank's governor told reporters on the sidelines of an Islamic finance forum in Kuala Lumpur in March that currently less than 40 percent of Iran's oil is paid in dollars and Iran has already asked buyers to pay in other currencies. Apparently Iran's clients in Europe and some in Asia have accepted making payments in non-dollar currencies. The Iranian oil minister reiterated in March 2007 his country's ambition to sell oil in other currencies than the dollar. This means a diversion from previous plans, which focused on the euro only.

In fact, the success of petrodollar warfare entails four phases: settlement, invoicing, pricing of oil in non-dollar currency and moving foreign exchange reserves holdings from the dollar. Except for oil pricing, all others are somewhat on the way. In Iran less than 20 percent of foreign currency holdings are now in dollars. But the results will depend on how many allies (besides Venezuela) Iran will have on that front.

Concluding remarks

Despite the turbulence of its recent history and its shaky relations with the US, Iran's role as a provider of the world's energy needs is likely to grow, mainly due to its hydrocarbon reserves and location. However it is impossible to separate Iran's future development prospects from its politics.

The US-led political, financial and economic warfare through sanctions, if expanded by the UN involvement, will hurt not only Iran but also the global economy. However possible future effects of Iran's ambitious plan for selling and pricing oil in another currency than the dollar should not be undermined. If this policy finds important allies and is combined with reducing the dollar's weight in central bank reserve holdings by heavyweight countries, its effects may spread wider than expected.

Tensions over Iran are not going to disappear any time soon. But an effective, functioning, independent and just UN is urgently needed. It is interesting that although one of its members is invaded and the other is threatened, the Organization of the Petroleum Exporting Countries (OPEC) still keeps its silence. As the old saying goes, what makes nations allies is not friendship, but their common interests.

NOTE: This article of mine originally appeared at todayszaman

Tags: Iran, Oil and Gas



At 9:54 PM, Blogger David Wozney said...

A "Federal Reserve Note" is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold.


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