What is the importance and impact of the Iranian Oil Bourse if it actually gets up and running? In the Daily Pfennig this morning Chuck spelled out the potential for very dire consequences for the dollar and the potential for war to break out.
A weaker dollar makes sense as the Iranian Bourse (and the possible Norwegian bourse) would trade in Euros. I have been writing on the blog for a while that there is visibility for the dollar to lose its role as world reserve currency. I think it is most likely that the dollar would share the title with the euro for an extended period as opposed to the world just switching one day.
The idea of this causing war is where I am not seeing it. We don't buy oil from Iran, I believe they only provide 3.3% of the world's supply (please jump in and correct me).
I wish more people were talking about this.
Trouble for the dollar makes sense, war does not make sense but I would welcome any thoughts.
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10 comments:
First, the might be some (very) small impact on the dollar--obviously if everything were priced in euros instead of dollars it would make dollars less attractive to hold, but the share of Iranian oil in total world trade is pretty minor, so one wouldn't expect a big effect. Of course if other entities followed suit, the impact would increase.
There is a second (I think nuttier, but it is a weird world) school of thought that the US takes active measures to discourage pricing of oil in other currencies. In particular, it is noted that Iraq was planning on pricing its oil in euros shortly before the US decided to invade. This school thinks that the currrent saber-rattling with respect to Iran is at least partly related to their plans for the Oil Bourse.
I doubt this, but I have seen the thought expressed repeatedly (on the net, not in the major media, but the major media hasn't exactly been covering the Oil Bourse either.)
As I understand it, Iran has not yet reached a final decision regarding pricing of oil in their bourse. Perhaps euro pricing is what they mean when they say they will inflict "pain and suffering" on us if not allowed to pursue their nuclear ambitions?
My view is that euro pricing at this bourse would not result in an abrupt collapse of the dollar, but would require our interest rates to rise. Note that this is already happening. I think the bond market is discounting this new development.
Iran's oil export are around 5.5%. But, as Roger pointed out, we don't import from them, so cutting off exports would hurt everyone (including Iran) and not just the US.
But Iran's oil is currently being purchased in USD and changing to euros would be a way to target the US. The current system certainly benefits the USD since it forces countries to keep a reserve of USD for oil trade. European countries would prefer to buy oil in euros. And it would make sense for countries like Norway, Russia, and Iran to sell in euros. The raw numbers of these transactions are probably insignificant and not enough to ignite war. But the establishment of a euro system by Iran would certainly be viewed as another act of U.S. defiance, and I believe there is always an element of pride involved in preemptive attacks. The theory is certainly not "nutty".
There are a lot of good blog postings regarding the Iranian oil bourse situation. Gold bugs and dollar bears claim it's a disaster, equal amount of people say otherwise. A simple Google search under Iraq Oil Bourse brings up a ton of info / opinion (web and news search).
Interestingly, the Norwegian oil director wants their bourse priced in Euros as well.
My opinion - an Iraqi oil bourse priced in Euros isn't enough to crater the dollar. An Iraqi + a Norwegian bourse priced in Euros aren't enough to crater the dollar. Huge trade deficits, an overly accomodative Fed (ie Helicopter Ben) and rising interest rates globally, cumulatively, are enough to cause problems for the dollar.
Best summary of the IOB vs. dollar argument is given in a paper published back on Feb. 15:
http://www.gold-eagle.com/editorials_05/petrov011606.html
Also, a great speech by Ron Paul, a house member from Texas:
http://www.house.gov/paul/congrec/congrec2006/cr021506.htm
SInce the U.S. is not buying oil from Iran, then the idea that there would be some impact on the dollar is a bit obscure to me. Someone is buying the oil from Iran, and paying them in dollars. The Iranians are more than likely converting most of these dollars into something useful to them. i.e. euros or some other currency. The Iranians have about $90 billion in U.S. reserves right now and have had that level for some time. So, they certainly aren't accumulating dollars at any alarming rate that if they decided to dump all their dollars, there would be a run on the greenback. Although, it wasn't but a couple of month's ago, one of the large banks here in the States decided to no longer do business with Iran. It's likely that whatever dollars they accumulate from selling their oil, they are likely converting already.
The bigger question is, if you have Iran, and possibly Norway, switching, now you are seeing a trend. How many other countries will likely switch? This can cause some certain disruptions to our economic system, and the dollar. But, all of this is a long way off.
This makes more sense to me
http://www.econbrowser.com/archives/2006/01/strange_ideas_a.ht
I couldn't make the last link work, but it may have been something I did wrong. did anyone else have a problem?
Sharon,
add the letters ML to the end of the link as in HTML. It got cut off as it was pasted in
http://www.econbrowser.com/archives/2006/01/strange_ideas_a.html
I really like Chuck, and also get the Daily Pfenning, but he tends to promote anything that might hurt the dollar.....
Sometimes he does seem to be talking his book...
Hey we all have to make a living..
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