March 20-26, 2006 is the scheduled time for the Iranian Oil Bourse to go into effect (bourse is a French word meaning ‘exchange’). Presently, all oil is bought and sold using American dollars, making it a necessity for all oil-buying countries (or entities) to have American dollars on hand (foreign exchange reserves). Iran is planning on changing the way the world buys and sells its oil using its strength as the second largest OPEC oil producer behind Saudi Arabia. Countries (and entities) will need eurodollars instead of petrodollars (American money) for purchases of Iranian oil. Iran is not the first oil producer to shun American dollars as payment for oil.
From late 2000 to early 2003, Saddam Hussein’s Iraq dumped the American dollar in favor of the euro as payment for Iraqi oil under the UN’s infamous Oil-for-Food program. When the US invaded Iraq in 2003, Iraq was brought back to the American petrodollar. Today the U.S. is faced with the same scenario, but this time with Iran. Iran will be selling not only oil, but gas and petrochemicals as well. Many speculate that the Iranian Oil Bourse could be even more of a direct threat to the United States’ economic stability. Many more countries and foreign investors could potentially participate in the Iranian market.
Venezuela is an oil producer that currently is the fourth top supplier for the United States. “On Dec. 30, Venezuela’s central bank said it plans to approve the use of the euro to service demand from foreign companies as well as to further distance the country from its dollar dealings.” (1) It’s no secret that Venezuela’s President, Hugo Chavez, has problems with the United States. Chavez has recently accused the United States of backing his opposition in the oil-rich state of Zulia in Western Venezuela. (2) Asian and Middle Eastern investors are also eager to partner with Iran. “Iranian media said talks were held with foreign investors, and Iran gave the Asian Capital Partners and the Future Bank of Bahrain permission to invest 100 million euros each in the Iranian stock market.” (3) “Iran also authorized three private Lebanese investors to invest up to 50 million euros in the stock market.” (4) It would make sense for the European Union Nations to buy oil with their own money (the euro) than to use the US dollar to buy oil. On the outset, France and Germany would be the most likely to switch to the euro, with the other member nations sitting back to see what happens.
Oil-producing Middle Eastern countries would probably switch to the euro as well. Saudi Arabia’s King Abdullah was recently in China for oil talks. China is the number two consumer of oil in the world. The two countries have been strengthening ties since “establishing diplomatic relations in 1990”. “The main Saudi government oil company, a Chinese producer and Exxon Mobil Corp are partners in a $3.5 billion project to expand a refinery in southern China. Total trade between the two countries – much of it Saudi oil bought by China – grew by 59% in the first 11 months of 2005 to $14 billion. […] Zhang Bin of the Centre for Energy Strategy says King Abdullah’s decision to visit China on his first tour as king away from the Middle East may be designed to play down Saudi ties to Washington. ‘At the moment, the United States has a lot of problems in the Islamic world. Its relationship is not very good, so they may have wanted to avoid going there first,’ he said. After his talks in Beijing, Abdullah will move onto another Asian giant, India, which like China is seeking to secure access to oil supplies to fuel its own rapidly growing economy.” (5)
Some countries are shifting their foreign exchange reserves off of the American dollar. Russia is changing its holdings to the euro. “The inexorable rise in Russia’s gold and foreign currency reserves is being accompanied by a steady shift from the dollar to the euro that is likely to continue as Russia draws closer to Europe, Moscow analysts believe. […] ‘The increase in forex reserves (foreign exchange reserves) will almost certainly continue for as long as oil prices remain high,’ said Eric Kraus, an analyst with Sovlink consultants. The decline in the value of the dollar relative to the euro is encouraging the process, Kraus noted. […] Deputy Finance Minister Alexei Ulyukayev told Russian radio last month that the central bank had been amassing euros in its basket of currencies for several months and that the process was likely to continue in order to ensure diversification of holdings in a climate of currency instability. Ignatyev said Thursday that the proportion of euros in Russia’s currency reserves was now more than one quarter, compared with less than 10 percent at the start of 2002, and Putin’s chief economic advisor Andrei Illarionov said that the share of euros was set to grow further. For Kraus, ‘the shift into the euro is significant because it is likely to be a long-term shift, as Russia moves closer to Europe.’ The Russian population is making a similar shift, he noted. ‘Russia’s foreign trade is 38 percent denominated in euros, and this figure is certainly a first target for the central bank,’ Kraus said.” (6) Russia is shifting away from the dollar as its main currency of foreign exchange.
China is similarly shifting its exchanges. “After nearly a decade-long fixed exchange rate, it was announced Thursday that the Chinese yuan was to be severed from its seemingly steadfast link to the U.S. dollar. Instead, it is to be allowed to “float” against a yet to be named basket of currencies. These are said to include the yen, the euro, the dollar and a number of other Asian monetary units. Further, when the contents of the basket is set, the yuan will be managed and the basket kept within a 3% daily trading band. It remains to be seen how the various currencies in this basket will be weighted, and whether this is the first step in a series of similar yuan devaluations, or the last. The major negative effects of China’s announcement will be upon the United States and our dollar. First, by severing its tie to the dollar, it somewhat distances itself from its dependency upon our currency and will simultaneously increase the yuan’s reliance on the currencies of the ‘basket’ countries. Thus, the dollar’s status and desirability as the premiere global monetary unit will suffer. Next, as the yuan rises against the dollar it will act to export inflation to our nation.” (7) China is shifting away from the dollar as its main currency of foreign exchange.
What effect will this global currency shift have on the American economy?”. . . “American bond prices will likely weaken. This will result from the reduction of Chinese purchases of our Treasuries as their dollar inflow subsides. Our nation has been hemorrhaging dollars through our ongoing current account and trade deficits. During the past few years the Chinese have been the second largest dollar acquirer. They used many of these to purchase U.S. Treasuries and presently hold about one quarter of a trillion dollars of our debt. If the Chinese move away from the dollar in favor of other currencies, the support that they have given our bond market will dwindle. And, with it, U.S. bond prices can plummet causing our interest rates to soar. The U.S. housing market and economy rest on fragile ground. Any rise in our interest rates has the potential to knock the legs out from under them. This can cause home prices to fall precipitously which in turn can shock consumers into withdrawal, and damage our business sector.” (8)
While China and Russia are quietly exchanging their foreign currency dependencies, they are strengthening their political ties as well. Russia has taken a major role in finding a solution to the current Iranian nuclear enrichment crisis. On Feb. 9, 2006 it was reported in the China Daily that, “China said on Thursday it welcomes nuclear talks between Iran and Russia planned for next week to defuse a crisis over Tehran’s atomic programme. ‘We hope that this Russian invitation to Iran to hold talks on the 16th about participating in an international uranium enrichment centre will help break, or encourage a break, in the current stalemate over the Iranian nuclear issue,’ Foreign Ministry spokesman Kong Quan told a regular news conference.” (9) A break in the ‘stalemate’ might put off any UN Security Council sanctions against Iran. China’s support of the Russian effort comes as no surprise. China has signed a long-term $70 billion oil and gas deal with Iran as reported on October 31, 2004. (10) Iran is China’s biggest oil supplier.
We can see how the world players are re-aligning. An article in the China Daily on October 9, 2004 titled ‘Russia denies cutting oil exports to China’ states in part: “The statement came amid reports that Russian oil giant Yukos had suspended oil exports to China due to Yukos cash crunch and subsequent protests from Chinese oil companies. Yukos, Russia’s sole direct supplier to the Chinese market, stopped all rail deliveries to the state-run China National Petroleum Corp (CNPC) late September, saying it was unable to pay transport fees and other export costs. But it said it would continue deliveries to another Chinese oil company, Sinopec.” (11) Sinopec was the company that later in that same month (October 2004) signed the $70 billion Iranian oil deal.
What do Russia, China, and Iran know that we don’t. There are deals going on behind the scenes that are definitely not in the United State’s best interest. In fact, Russia and China, two members of the UN Security Council, are protecting their own interests when they are protecting Iran. France, another UN Security Council will likely continue to align itself more and more against the United States and the United Kingdom again.
There are perilous times ahead for America. Will America lead a coalition against Iran to stop its uranium enrichment program? What would be the price? The economic crisis that might arise as a result of the Iranian Oil Bourse, in our opinion, will not happen overnight. But all indications say we are in for a very rough road ahead. Are you ready?