Tuesday, August 01, 2006

The Iranian Oil Bourse - 201

ConfudeForeigner asked about the Iranian Oil Bourse, euros, and whether China and India will go along with it.

I think that whole issue is very relevant to events that are unfolding now. This question has been sidelined by recent events. In the US it was never an issue understood by the mainstream. A number of commentators have ridiculed its significance and used some really simplistic but false arguments to pooh-pooh the idea.

The argument is that through exchanges and various markets, how oil is priced, doesn’t matter, because you can exchange euros for dollars and dollars for euros. But that’s a left-handed answer. And an answer that only makes sense, because the question is misunderstood.

The question should be posed as, “Does it matter how oil debts are settled?” And this question changes the nature of the answer. Oil debts to the producing countries aren’t only priced in dollars; they must be ‘PAID’ in dollars.

To create these dollars, the US Treasury essentially creates them out of thin air through the magic of fiat currency. They are borrowed, gifted, created through Mobius style debt instruments, and make their way into international markets, where almost every nation uses them to buy oil. This makes the dollar the de-facto global currency.

What this has resulted in, is a massive US debt and huge dollar reserves in the Middle East. The oil producing Middle Eastern countries have accumulated mountains of wealth in dollars, for which they just can’t spend fast enough. It just keeps piling higher and higher. If they do spend it, it devalues. If they don’t spend it, it’s worthless.

And keep in mind that those dollars represent value in goods, owed by the US public. In theory, the US should be worth the value of the dollars in circulation. In practice, there are enough dollars to buy the planet more than eight times over. One recent statistic I’ve seen is that the foreign holdings of debt amount to over $400 thousand for each US citizen. We’re born in debt and thanks to liberal spenders in our government, our debts just increase every year, without our consent.

Iran has been seeing their mountains of dollars grow. They know that at some point, the dollar must collapse. In fact everyone knows this game can’t last forever. The first one out of the dollar gets the most value. The last one out gets shafted.

Saudi Arabia, the UAE, Qatar, Kuwait, China and others, are using various strategies to divest dollars. They are buying property and corporations in the US. They are shifting dollars to Euros at a rat of about 5%/year. The ME countries are doing so apparently with the White House blessing, as we’ve seen in recent deals to sell ports and other high profile pieces of real estate to Arab countries, backed stridently by the Bush family.

So Iran is looking for a way to be one of the first out. Our State Department and our White House wants them to get the shaft, in this deal. Their plan is to set up their own trading market and sell their oil in Iran, in euros, rather than use existing markets controlled by US and British interests. This would give added legitimacy to Arab banks, to Arab corporations and would preserve much more wealth for the Arab peoples.

Nations rich in dollars would have to trade dollars for Euros, and then deposit those euros in Iranian financial institutions in order to trade for Iranian oil.

Guess what happens to European financial institutions doing the dollar for Euro exchange? They get to see mountains of dollars pile up. They will be forced to absorb the risk of holding dollars. They will be forced to seek a balance, so the exchange rate will be adjusted. Over time, it will take an increasing quantity of dollars to buy a Euro. We’ll see a rapid devaluation of the dollar.

China is very interested in this arrangement. China is sitting on a mountain of dollars that is worthless. China can never spend it all. China will never get face value for their mountains of dollars. They know much of the money they hold is worthless. Currently, they are divesting them just as the Arabs are. They are buying US corporations, stripping their assets and then moving their operations back to China. They are buying US real estate. They are investing in oil fields all over the world. They are spending US dollars to take ownership of tangible assets as quickly as they can.

China doesn’t love the dollar. China currently sells goods in euros and dollars. China will simply follow the money. If oil is sold in Euros, then China will take her mountains of dollars and exchange them for Euros, leaving the European banks holding the worthless bills.

The trouble in the ME now, has sidelined Iran’s plans. One thing an international market needs is stability. If the US bombs Iran and then retreats, the US will still have destroyed confidence that Iran is a safe place to put assets. The US doesn’t need to conquer or keep Iran in order to buy time for the dollar; it simply needs to introduce uncertainty in the Middle East. With the current conflicts, the world is holding its breath and there’s no trust in Iranian security at the moment.

The US dollar will collapse. Right now the goal seems to be, to make sure that when the US slips into a new Great Depression, that the Arab Royal families are able to preserve their wealth. Few things are more important to the US Congress, Senate and White House right now.


At 12:48 PM, Anonymous Mike said...

Interesting theory, Weas. I, too, thought there was real significance to the Bourse, but even the most "Austrian Economist" among friends and experts poo-poo'd the importance of this, or at very least gave a terse, "I don't know."

I'll admit I'm still trying to get my arms around the various issues in play, and I kinda forgot about it after it was "aborted" last March.

Any links or cites you've seen recently; on either side?

At 1:07 PM, Blogger Weaseldog said...

For the most part, it seems to be a forgotten footnote.

It's one of those things though, that is bound to rear it's head again.

Venezeuala was supportive of the idea and has been selling some of their oil in euros as Iran has.

As long as the cheating is only a few percentage points, it doesn't seem to attract much attention.

At 2:51 PM, Blogger confusedforeigner said...

I'm not arguing either way, (if anything I think the oileuro is overstated in significance by some commentators) but it is interesting to note that Saddam changed oil sales to euros in 2000 I think.

It does have major significance for the biggest bankers eg Rothschilds, as you say, and this would be a direct and significant blow to Israeli viabilty.


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