Monday, February 27, 2006

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.


gsaun said...

It has appeared self-evident to me, for some time, that those whom have the oil will eventually come to a point where they will have to decide whther they want "stuff" (like food and manufactured goods) or pieces of paper with graghics of dead people on them.

Eventually, stuff will win out over pieces of paper (even if it means that holders of pieces of paper give them up as worthless or redeem them for US property as secured properties). The fact that we manufacture ever decreasing quantities of stuff and our food is ever more dependent upon oil, ought to be a no-brainer. Yet, it isn't and a good number of us are in for a terrible surprise no matter how much sunshine is blown up our skirts.

Peterbart said...

The point that you make is excellent and bears repeating. All is well and good so long as there is a liquid market in oil, but as shortages begin to break out, those who have the oil to sell will be able to negotiate whatever terms they see fit. It is not in anyone's interest to ignore the impending situation.

Duck, and cover.

W. Shedd said...

None of your comments, nor this posting - make any sense.

Oil only has value for the users, as an energy product or for manufacturing (plastics). As the producing nations can't possibly use all of the product - it makes sense for them to sell the product for money.

So, what sense does it make to create a closed market for selling some (relatively small percentage, when considering the nations we are discussing) of the worlds oil - and then shutting out your biggest customer, with the worlds largest and strongest economy (by far)?

Iran has relatively small oil reserves ... in fact, they are a net IMPORTER of petroleum products. Russian oil reserves are large, but they currently sell very little to the US - and with promises to sell most of their product to China and Europe, it is likely to remain a small seller to the US. China has very little domestic oil reserves, but they buy and sell oil on the markets, often making a profit by reselling oil to ... the US.

Given these facts, how would creating a closed market squeeze the US? The answer is .. it wouldn't. And as long as the US has wealth, people are going to want to sell products to us (especially oil).

As every year oil production increases, we have not yet reached the mid-point of the worlds oil reserves (ie Hubberts peak). Until approximately 40 years after reaching that peak, your speculation about the oil shortages are moot.