Bourse! Bourse! Bourse! Bourse!
Posted by Prof. Goose on January 25, 2006 - 8:09pm
Topic: Economics/Finance
Tags: bourse, iran, iraq, kuwait, oil, oil bourse, oil prices, opec, saudi arabia [list all tags]
First, we have our colleague James Hamilton over at Econbrowser basically saying "No worries, money is all fluid," versus Kassimir Petrov who has serious concerns about the US economy if the Iranian bourse becomes reality. My thoughts under the fold...
My main question is really about the fungibility of oil and how it relates to this bourse, and then how that relates to the oil net-exporting nations realizing, as we approach or pass the peak, how much geopolitical power they actually have...especially against the nation that uses 25% of the world's petroleum resources. Isn't the bourse just another piece of the geopolitical puzzle that can be turned against the already-weakened US in the long-term? Why won't these net-exporting countries keep the resource at home, selectively sell to others, OR make the US pay a petroleum premium?
Yes, this would seem an unlikely occurrence short-term; ending fungibility would require an almost unrealistic cohesion among all oil net-exporting nations that is hard to see right now, especially since the profit motive is always popular, especially among leaders who do not have democratic responsibilities to their already poor peoples and therefore have no need to spread the wealth around. (Exceptions: Russia, Norway, Mexico, and Venezuela...and how many of them are post local-peak?).
However, in the long term (as cloudy as it often is) it also would appear that, geopolitically, fewer and fewer of those oil net-exporting nations, especially the big 'uns, are big fans of US foreign policy. There are others who would also like to have more resources of their own.
It would also seem that many of those net-exporting nations could, hypothetically, be united by a common religious schema (ex Venezuela, who might just like to be a part of the group for power's sake).
This is especially problematic if the regimes we are supporting/creating who have been friendly to us, but are also constituents of this religious schema aren't able to produce as much petroleum as we thought they would due to domestic problems (Iraq), are declining faster than we thought (insert favorite here), have been disingenuous about their reserves (Kuwait and SA, but who knows who else...), or have militant Wahabis who desire to overthrow and take over the oil supply (SA, UAE). (just read John Robb a couple of times to see the global guerrillas argument...)
Just thinking out loud.
Other places and pieces to think about:
http://www.theoildrum.com/story/2005/11/29/20245/881
http://www.theoildrum.com/story/2005/11/8/04355/9945#22
http://www.tcsdaily.com/article.aspx?id=012003A
http://shop.ceps.be/BookDetail.php?item_id=1166
So, those are my thoughts for the day. A little disjointed, but that's because I have to go teach now...so I had to rush this together. Thanks also to Will R for bringing this up in the TOD mailbox. I'll check back in tonight.
How in hell could a major oil producer like Iran all of a sudden be wielding potentially more power than they already have vis-a-vis exports to competitors like China? Because of the world supply & demand balance being so tight, the influence of any one big producer is large. That is understandable. But this bourse thing? What gives? I am only asking questions. I have no answers.
I'm glad PG posted this and look forward to some straightforward answers to the questions I've posed here.
Those trillions of forex $ trades are mostly just gambling, not transactions that ever directly escape into the real world. Since oil has been almost exclusively traded in $ it behoves countries, corporations, etc to have a supply of $ to buy the stuff that they know they will need. Holding a supply of $ effectively provides a hedge against currency fluctuations adversely affecting the cost of oil (it has been noticeable that the $ price of oil has been very insensitive to $ fluctuations versus other currencies the last 3 years).
The US$ has been the predominant holding in central banks' reserves these last 20 or 30 years, there were few alternatives. Some countries would hold smallish amounts in currencies of countries they did a lot of trade with but otherwise, apart from a bit of gold, the reserves were just about all US$. Now there are alternatives: the Euro is seen as credible and stable and much trade is done with Euroland, gold is becoming seen as another diversification since inflation concerns are rising. Additionally there is growing concern that US deficits are not sustainable over the medium to long term hence the $ is likely to decline.
So, the IOB, while not directly having a significant impact on the $ or US economy, is likely to have an effect. I see that as being twofold. First, it is a symptom of concern over the US$ as de facto global reserve currency, and of the US economy and its unsustainable deficits. Second, it is an opportunity / encouragement / excuse for a diversification from US$ reserves and US$ denominated assets.
That effect is likely to be slow. One does not wish to crash the $ while one has $ assets one wishes to convert, diversification will be a steady trickle - unless events force otherwise.
The big risk and question is how the US administration thinks. If it is determined to try to maintain the $ hegemony at all costs it may decide to intervene militarily in Iran. Personally I think that is insane and any who seriously argue for it (on those grounds) or do it, should be immediately deposed and put away for treatment. I don't honestly believe that GW is quite that insane.
Ultimately the US$ must decline, central banks will diversify away from the $. It is pointless attempting to fight that process, only worthwhile managing it the best one can (and it has been managed well so far). The best option for the US is to increase its energy efficiency, reduce its dependence on imported energy and develop its energy and transportation infrastructure appropriately. I see minimal signs of that from this US administration, though several states have started to make progress.
You bet it!
That's exactly what I think will happen.
Am I being naive in thinking that the usa must do well out of everyone having dollars to trade with?
and as the price of oil goes up then the more DOLLARS the rest of the world will spend, I was under the assumption that the US economy was supported by this, I guess the question is how much of a difference will the bourse make?
and will venezuela be trading on the iranian oil bourse? or is it more for local oil producers
I was thinking mabye the nuclear thing is good for Iran because they have chosen to use it as a bargaining chip, they can back down whenever they want, mabye the opening of the bourse in return for no nuclear??
oh its getting late, fuzzy thinking
thanks for posting this
First, about democratic responsibilities, Venezuela is lead by a very popular democratic leader (who even occasionally posts here:)), in elections that were internationally verified, using electronic voting that did print out receipts. True, he is not popular among the Venezuela middle class, but is very popular with the poor, where he is spreading some of the oil wealth.
Second, in the US, you have elections between two parties of millionaires, with results for the last two elections that have been seriously called into question (blackboxvoting.org). The results are a spread between the rich and poor that is second to none in the industrialized world. The oil wealth definitely does not get spread democratically.
Third, both Venezuela and Iran are the victims of US imperial meddling. Iran, in 1953 had its socialist leader deposed with the help of the States, and Venezeula has recently fought off a coup/assasination attempt after the US failed in succesfully backing a party in elections.
Bush has been a disaster for your country not for starting a war of aggression, torturing and running a series of gulags, all things which your government and quite a few others have done for a long time, but Bush's disaster has been in doing it so ineptly that now the whole world is quite aware of the US's imperialism.
But I was bemused this evening to hear Lou Dobbs of CNN refer to Chavez as a "strongman." Ordinarily, I like Lou Dobbs, but a strongman??? That's way out of line. Someone who was democratically elected is not a "strongman."
Castro in Cuba has been demonised by the USA for 50 years, yet he seems to have done a pretty good job compared with similar countries in Caribbean and central america, particularly considering the trade sanctions etc the USA have imposed. Chavez seems to be similar so the US demonises him.
The US supports regimes when it believes they are in its interest, seeks to undermine regimes that it thinks are not, it has been consistent in this. Democracy or what is good for the country has f*ck all to do with how the US behaves.
I despair over the US electoral system. It has served the US and the world ill. Any close election (within 10%) should be considered suspect now that unverifiable voting is used for near 70% of votes. If similar voting methods were imposed in UK we would riot, I am sure of that.
Yes, the US has meddled in Iran, and many other countries closer to home, in illicit ways, but so did the UK in its day. After all, it was UK who invented Iraq back in 1924. global powers tend to behave so.
I agree that Bush has been a disaster for opinion of the US abroad, most US citizens aren't really aware of how bad. Few have any concept of life outside the USA: their media ignore it, very few of them travel. I had visited more countries before I was 18 than GW Bush had when he became president.
He grinned slyly and said,
"Ah, United States of the World, eh mate?"
The US has apparently returned to the concept of colonial imperialism, just under a new guise, while at home we slide ever further to the right, toward the kind of creeping fascism (in Mussolini's sense of the word, the merging of corporate and State) George Orwell worried about.
http://www.chris-floyd.com/index.php?option=com_content&task=view&id=434&Itemid=1
http://www.huffingtonpost.com/gore-vidal/president-jonah_b_14439.html
http://tonto.eia.doe.gov/oog/info/twip/twip_distillate.html
This weeks inventories report via Forbes
I don't have a "conventional" reserve estimate for Norway, but based on the other countries, it is probably at least twice what Hubbert Linearization would show. In any case, the "conventional" combined recoverable reserve estimate for the top four exporters--Saudi Arabia; Russia; Norway and Iran---is probably on the order of 465 Gb. Hubbert Linearization shows their remaining combined recoverable reserves to be 169 Gb, and it shows them to be collectively 67% depleted.
BTW, it may be a fluke, but the EIA data show falling imports for the past few weeks. The release from emergency reserves last year may have obscured a developing shortage of net export capacity.
So how do they know what future prices will be? That is what the futures markets are for (one thing they are for, anyway). And what do they see, when they look there? Oil futures over a five year period are generally rising slower than the rate of interest. Therefore oil producers have an incentive to produce at maximum rates today.
If and when we see the oil futures markets showing substantial price increases as we move into the future, only then would I expect oil producers to start holding product off the market. That will be the signal that their oil will be worth more in the future.
The unique thing about the futures market (compared to other predictions) is that it almost doesn't matter if it is right or wrong. You can get the same effect as if it were 100% right. That is, you can lock in the predicted future price right now, today, and buy or sell the commodity years from now at exactly the price that was predicted. You like the idea of $65 oil in 2010? Fine, you can lock in that price, put in a claim (only 10% down!) on a contract and you'll be able to buy oil for $65 in 2010.
In this sense, futures markets give you, in effect, a money back guarantee. You are guaranteed to get the price the market promises. Now, you may not like the price once 2010 rolls around; if Steve Forbes is right and oil falls to $45 you won't be too happy to have to pay $65. But if you think that's a long shot, you would probably be very pleased to be able to insulate yourself from price increases by taking advantage of this guaranteed future price and getting a commitment to $65.
How many people predicting here will give you that same guarantee? Not many. But everyone in the futures markets is making exactly that commitment. This is what makes that institution so much better and more credible as a source of predictions than the pontifications of "experts" or the confident-sounding assertions of Internet chatters.
In any case, in nominal terms, oil prices have been trading at record high levels over the past few months. So, it looks like the markets are trying to tell us something.
"I have to wonder how long it will be before key exporting countries decide that it is not in their long term interest to continue producing at 100% of capacity."
With due respect, and I like your posts a lot, doesn't this assume that these nations will act in a long-term, rational way? I would bet they will produce flat out, even against their own long-term interests, due to immediate pressures for hard cash. Unfortunately, even many private companies behave this way. (Isn't the whole world behaving this way with regard to enviornmental issues such as peak oil and global warming?)
Iran has already said that they will not produce all-out. They don't want to do what Kuwait is doing, letting Big Oil back in to boost production with high tech. They'd rather produce lower but longer, thereby saving some of the petroleum for their children and grandchildren.
Iran has said they want the uranium strictly for peaceful purposes, not for nukes. How credible do you think they are?
But I also believe they genuinely want nuclear energy. They know they are facing depletion and rising domestic demand. They are well aware of peak oil, and have had trouble meeting their OPEC quota lately.
As for whether they will produce all-out...no need to take them at their word. Are they opening their oil fields to international oil companies, as Kuwait is? Are they scouring the world for more rigs like Saudi Arabia is? No. They're living with declining production. The pursuit of nuclear energy is part of that.
The commercial oil companies can't act in that way because they risk supply being hijacked by the country and takeover by other companies. The interaction between those oil companies and the countries they have reserves in may be complicating your perception.
http://english.aljazeera.net/NR/exeres/C1C0C9B3-DDA9-42E2-AE9C-B7CDBA08A6E9.htm
http://www.iranmania.com/News/ArticleView/Default.asp?ArchiveNews=Yes&NewsCode=28176&NewsKin d=BusinessEconomy
From Iran's point of view, why would Iran want a bourse?
I do set one criteria concerning the person who answers:
He or she should hold the same view as Professor Hamilton. In short, I am looking for a dispassionate assessment from Iran's point of view.
- To obtain revenues from trading transactions
- To avoid the impact of potential future economic sanctions
- To look and feel important
- Send a message to their own people and others that they have some control over what has been (and to my mind still is) a open global market for oil.
- Allah told them to.
The question is akin to why a rice trader would want to set up his own rice market. The farmer couldn't get higher prices or have more market power - but they may feel that setting up a table and having a bit of petty cash lying around is a low cost venture, why makes them look big so why not. Maybe Farmer Brown fancies himself FB Rice Exchange LLC. Maybe Iran wants to look and feel important. An exchange is just a play to sell stuff.I suggest Iran has similar motives.
I would also like to suggest one guideline for the discussion. Let's separate the issue of whether the US "empire" or currency regime will collapse from the IOB question. It is perfectly possible to accept in one but not the other. I have repeated that I do have concerns about the long term strength of the dollar, but think the IOB will play no role in this.
My impression is that many people are so eager to believe the former, that they can't rationally look at the latter.
Fair enough, but then you must also refrain from passages such as
My point, which was inferred and not directly argued, to my discredit, is that if you want to have an ubiased talk on the issue, then you must accept if you already have a bias, as the original post has. I have an anti-US empire bias, though I don't have one against americans in general, just the government. I do try to be up front about that. Prof Goose's appeared to be supporting a good clear rational discussion, yet contained a few statements that immediately coloured the argument.
As far as the Bourse goes, there were arguments/rumours that the first Gulf war was allowed to start because the Iraqi's were about to start their own oilebourse. I don't know if they are credible, but they are worth considering as adding to the equation of how influential an Iranian bourse might be.
A bigger question is how much difference this will make. Are the Iranians fulfilling long term contracts, where payment form is already fixed? If Iran's customes are all in the europe and asia, what currency do they pay in now, even if prices are derived from dollars? What other countries would jump in to use their bourse? What political pressures would other countries find themselves under if they do join in?
Of course, I ask these questions because most of what I've learned about the industry is from this site, and a few others, so I have to say I really don't know how all this works. I am, after all, just a biased musician.
Interesting, I was under the impression that it started because Saddam Hussein invaded Kuwait. But what the hell do I know, I've only read four or five books on the subject and watched the whole thing on TV.
But perhaps you were just watching the war on Fox?
I'm sure I could come up with a list of four or five books that have contrary opinions to yours on the war as well.
I do expect that we'll never really know what happened, and my theories are no more valid than yours, but I do hope that this kind of continued discussion will help us all be a bit more critical of all goverments motives and actions.
However, this does not make the US responsible for Iraq invading Kuwait. We told him to get out in no uncertain terms, but he didn't. Why? Because Saddam always played by his own rules. What Saddam would have done had Glaspie had more of a clue and acted differently is still up for debate.
Why is it that everytime someone disagrees with something somebody is saying here politically, they get accused of watching Fox News. It is getting a little annoying. I watch PBS and Nightline. I listen to the BBC. I read the New York Times, The Nation, and the New Republic. It should be obvious what kind of websites I spend my time on.
The real question is - where do you get your information?
They are not my "theories." It's called history.
However, while the US is not responsible for Iraq invading Kuwait, the question, and theory (only until proven, then its history) is, was Glaspie clueless or was Saddam being set up? Of course my argument is definitely weaker admitting that it was the 2000 invasion that was supposed to be in response to the Iraqi oil bourse, but I still don't think an ambassador could possibly be so clueless as to not recognize the possibility of war over vague comments.