Iran, the Dollar and the Euro
Iran’s antics in its nuclear negotiations and its role in goading Hezbollah in the current Israeli-Lebanese conflict are hogging all the attention. However, other news from Iran has gotten less air time, but is quite interesting. The first is the near completion of an Iranian Oil Bourse (IOB) being built on the Iranian island of Kish in the Arabian Gulf, which aims to be the center of oil trading in the Middle East. Most significantly, this exchange will trade oil in euros, not dollars. Further, the Iranian president announced this morning, according to some news sources, that starting in July Iran would only accept payments for its oil in euros not in dollars. Both are largely political moves and we do not believe either will result in a large-scale devaluation of the dollar, as some have predicted. Still, it is an interesting notion to consider.
Certainly, the price of a euro-denominated barrel of oil has risen by less than that of a dollar-denominated barrel over the past three years. This divergence has been more stark this year, as a weakening in the dollar has helped buffer the euro zone and some other large consumers, like China, from the full extent of the price increase in the dollar-denominated price of oil. At such times, talk of a shift to euro-denominated oil always gains momentum. Recent evidence of central banks divesting their reserves in favor of the euro affirms the slow but steady march in this direction.
Still, the Iranian efforts will not change matters significantly. First, the Iranians will have to construct and operate this technically challenging exchange and then build up its credibility enough to attract buyers and sellers for euro-denominated oil contracts. For a country that can barely keep up its oil production, this seems a tall order. The threat of sanctions against Iran will also keep most important players in the global arena wary. Finally, Iran is not Saudi Arabia; while it has the second largest reserves of conventional oil, its production levels are still fairly small when taken on a global basis. Unless Saudi Arabia and the rest of the Gulf countries jump aboard the petro-euro train, it is difficult to see this effort posing too significant a threat.