Where Will Oil Trade: New York? London? Tehran?

Jerome a Paris has written an unusually forceful article denouncing the many doom and gloom scenarios that predict that an Iranian Oil Bourse (IOB) will bring the US dollar to its knees and starve western nations of oil. An article with a similar conclusion was written by Iranian academic Bahman Aghai Diba for the Persian Journal. These pieces insist that Iran lacks the legal and financial infrastructure to host international trading in oil.

These writers are missing a key point. They are assuming that oil will continue to trade freely, albeit perhaps at a much higher price. They assume that liquidity and transparancy will endure in the oil markets. But there may come a time when geologically driven oil shortages dry up liquidity in the oil markets. There may come a time when politically driven resource competition creates shortages in the oil markets. Liquidity will disappear when sellers in New York and London cannot guarantee delivery. It stands to reason that commodity markets function best, with great liquidity, when there is a plentiful supply of goods to trade. If there is a shortage, much less of that commodity will end up on the auction block. This is especially true for strategically critical commodities such as oil.

It hardly needs to be repeated that China is the most powerful buyer of commodities, and it has the biggest checkbook. Russia and Iran are key suppliers. These three countries are now the big shots at the poker table. The big shots do not have any commitment to open markets. They prefer backroom deals, made for strategic advantage, rather than securing the best price. One reason oil producing nations like Iran and Russia would have for keeping oil markets closed would be to exclude buyers they don't like. For example Americans.

America can still acquire oil, but only to the extent that other nations agree to finance its debt. Or America can use its military to try to secure its oil supply by threat, invasion or occupation. The American military itself consumes vast amounts of oil. Reducing American oil supplies would increase other nations' security (the nations that feel threatened by us) more than any military upgrade they could achieve. Note that it is in neither Russia's nor China's interest to cut off American oil supplies, nor bankrupt the USA. What is in their interest is that we are no longer a military super power.

It seems logical that China, Iran, and Russia will choose to set up an oil trading bourse, in Iran or elsewhere, that trades in Euros, or perhaps gold. Access to their market will be by invitation only. Private speculators, rude Americans, and those who don't honor Islam will be among the many who will be shut out of the party. Security, dispute resolution, and payment and delivery issues will not be settled in courts of law, but by the blessing and decree of the KGB, or the Iranian Revolutionary Council, or some such body.

Whether or not the Iranian Oil Bourse gets off the ground, don't expect the USA and Britain to be able to control oil trading much longer. They simply don't have the oil to trade.