[Peace-discuss] FW: IMPORTANT! Why Iranian Oil Bourse is Key

[stuart tarr]

In the interest of fully examining this important issue, or the broader 
issue of oil, debt and credit markets, and resource economics,  an 
alternative view (not necessarily endorsed by me) is presented:

Published on Sunday, February 26, 2006 by European Tribune
Let me kill off once and for all the Iranian oil bourse story

By Jerome a Paris
Crazy scenarios involving Iran's purported attempts to create an oil bourse 
to start selling oil in euros make the rounds regularly, and even get 
recommended with alacrity on DKos.

These things WILL NOT HAPPEN, and we have, as a supposedly reality-based 
community, to focus on real issues and not imaginary ones.

So let me explain why an Iranian oil bourse will not work for the 
foreseeable future. I hope that this diary can be used as a handy reference 
when this crops up again in the future.

Here are some basic facts about what a "bourse" is:

    * it's a place for sellers and buyers for a given product to meet. So, 
as a seller, you want a place where buyers come and, as a buyer, you want a 
place where sellers come. It's a meeting point.

      A meeting point is a form of conventional information, and one that is 
highly stable once established. People come to the market because they know 
that others will be there as well, and these are there for the same reason.

      Once players have agreed to come to one place, it is simpler to come 
to that place than to try and organise a new place, which everybody must 
agree to and which all occasional players need to be informed of. Just like 
DKos is now THE main meeting place for the progressives, the existing oil 
bourses have an massive advantage over any new one in that they already 
exist. London has remained the main trading place for a surprising number of 
commodities despite the British Empire being long gone and the US having 
replaced it as the largest economy - simply because the infrastructure was 
there, and the people with the competences to play there were still around.

      Windows is unassailable on desktops despite being obviously inferior 
in quality to some alternatives, simply because there is a real advantage 
for everybody to use a common standard, even if it imperfect. A bourse is a 
standard on where and how to trade.

      There is no compelling reason to move from London or New-York to Iran 
to trade oil. Iran only has 5% of world production and is in no position to 
impose anything. Network effects paly massively against a switch.
    * it's a place that allows a price to be set for the transaction. That 
means that you want many buyers if you're a seller, and many sellers, if you 
are a buyer. It provides liquidity.

      This is linked to the above point: liquidity exists when you have a 
deep market, i.e. many buyers and many sellers. That comes from having a 
place where everybody comes, and a place that everybody trusts because it 
works. "Don't fix it if it ain't broke" applies here. Again, this is a 
compelling argument against Iran. Iran can potentially act as a seller, but 
would will ensure that there are buyers on that particular market?

    * the other item related to price is that a bourse needs to provide a 
single price to act as a universal reference for everybody - a market 
standard, both in terms of the quality of the product, and the currency it 
is expressed in. This allows for historical data to be expressed 
consistently, and for market players to have useful references and 
background to do their trades.

      For oil, that currency is and has always been dollar, as a widely 
stable, universally accepted monetary unit. There is no market and no 
liquidity in any other currency. It is at least conceivable that the euro 
could be used as it is similarly stable and acceptable to all, but it has no 
history as an oil trading currency, and thus market players would naturally 
convert any price in euro into a price in dollars to see what it means (try 
switching from degrees Celsius to Farhenheit or from centimeters to inches 
to know why this matters). Again, there would need to be an overwhelming 
reason to force all market players to make the switch (and to do it all at 
the same time), which Iran does not provide.
    * a bourse is a place that provides security for the transactions. 
Buyers know that they will get their purchase delivered, and sellers know 
that they will get paid in a timely fashion. It provides clearing 
mechanisms.

      Do you expect other producers to rely on Iran to ensure timely payment 
of their sales? Do you intent to rely on Iran, an untested bourse, to be 
responsible for delivery by other parties?
    * it's a place that provides rules and enforcement of these rules for 
the proper functioning of the market, i.e all the above: who can 
participate, how prices are formed, how the clearing is organised, and how 
disputes are settled. It needs to be a neutral arbiter, uninvolved in the 
actual trading.

      Again, this plays against Iran, who is too small a player to impose 
rules to all, but too big to be seen as a neutral player by other sellers. 
And do you really want to take the risk that the religious authorities in 
the background or any other Iranian politician come and start meddling with 
the ongoing trades?
    * as rules will ultimately be set by public authorities overseeing the 
bourse, and disputes will ultimately be decided by courts of that place, it 
needs a consistent regulatory and legal framework.

      There's a reason why most commodity bourses are in Western countries. 
They provide the rule of law, a predictable set of rules, and a capacity to 
enforce these rules in an effective and market-neutral way. and they have a 
long track record of doing so. Iran? Not so much.
    * in today's world, a bourse is essentially a big IT operation, with 
systems able to provide complete market information to all participants in 
real times, treat operations as they are decided, and provide an unambiguous 
audit trail to all interested parties to a transaction.

      Again, that requires a lot of specialised competences on the ground: 
programmers, developpers, consultants to install them, the specialist 
hardware providers, etc... all people that need some (or a lot) of 
understanding of what's going on in the market. That's highly specialised 
knowledge, which is, naturally concentrated in the few places that carry 
bourses, i.e. a few large cities in the West. Iran will be hard pressed to 
attract such people to Tehran or thereabouts.
    * finally, the oil bourse is only a small part of the trading that goes 
on around oil. Most of what takes place are financial transactions: spot 
sales, forward sales, swaps, various hedging instruments, short term 
financing, long term financings. All these transactions rely on the 
underlying oil market, and significantly expand it. If you take out the oil 
market, or change its rules, standards, references, clearing mechanisms and 
enforcers, you kill the associated financial markets, which are vital to the 
world economy and underpin a large chunk of our industrial activity and 
energy needs.

      Do you really expect the financial markets to move to Tehran, which 
has neither the infrastructure, the competences, the legal framework or the 
stability to host them? Even a switch to the euro would need a massive 
reorganisation of the financial markets, which are exclusively geared to 
dollar transactions. This only amplifies the arguments made above about the 
sole oil market with respect to liquidity, standards and the like. And the 
legal and regulatory questions are even more important. Do you really want 
billions of euros of daily financial flows to be ultimately controlled by 
the Iranian Central Bank? It would basically take the outright destruction 
of the existing markets to provide any incentive to try to rebuild them 
differently, and Tehran would not be their first pick to do it...


:: ::
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 fantasies, 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.

Those who poste these stories or push them are badly undermining their 
credibility and engaging in silly scaremongering.

~~~~~~~~~~~~~~~ Editorial Notes ~~~~~~~~~~~~~~~~~~~

Jerome a Paris is an energy banker in Paris and has a regular column at 
Daily Kos.

The article is also posted at Daily Kos.

Recent Energy Bulletin articles on the bourse:
The Proposed Iranian Oil Bourse by Krassimir Petrov
Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse by 
William Clark
Norwegian Bourse Director wants oil bourse - priced in euros
Iran - Perception and Reality by Chris Cook
Trading oil in euros – does it matter? by Cóilín Nunan
Strange ideas about the Iranian oil bourse by James D. Hamilton

-BA
Article found at :
http://www.energybulletin.net/newswire.php?id=13192

Original article :
http://www.eurotrib.com/story/2006/2/24/7575/84230


>From: "Lisa Chason" <chason at shout.net>
>To: <peace-discuss at lists.chambana.net>
>Subject: [Peace-discuss] FW: IMPORTANT! Why Iranian Oil Bourse is Key
>Date: Mon, 27 Feb 2006 06:45:15 -0600
>
>I'm forwarding this very interesting piece
>
>-----Original Message-----
>Sent: Monday, February 27, 2006 2:09 AM
>Subject: IMPORTANT! Why Iranian Oil Bourse is Key
>