Deja vu - the search for Weapons of Mass Destruction this time in Iran

Iran is about to commit a far greater offence than Saddam Hussein's conversion to the euro for Iraq's oil exports in 2000. The plan is not just to sell oil for euros, but also to create an exchange market for all interested parties, oil producers as well as those customers, to trade oil for euros. In mid-2003 Iran allowed for oil payments from certain EU customers to the euro, and in June 2004 announced that they were planning to begin, in March 2006, competing with the two existing exchanges - New York's NYMEX and London's IPE - with respect to international oil trades, where an euro-based international oil trading mechanism will be used.

The NYMEX and IPE (both owned by American companies) are the places where world oil prices are fixed (in US dollars). The macroeconomic implications of an Iranian oil bourse are significant. If Iranian initiative becomes a successful alternative for global oil trade, the first international exchange since 1945 where buyers and sellers of oil can conduct their oil transactions using a currency other than the US dollar, it would seriously challenge the monopoly currently enjoyed by the financial centres in both London (IPE) and New York (NYMEX). This alternative oil bourse may consolidate the euro (petroeuro) as an alternative oil transaction currency, which will significantly reduce the importance of the dollar (petrodollar) as the international reserve currency compared to the euro. With this initiative, Tehran also aims to establish a new oil 'marker' based on Iranian crude (denominated in euros), in open rivalry to the existing West Texas, Norway Brent and UAE Dubai markers (all of which are calculated in US dollars).

Iran is the second largest OPEC oil producer next to Saudi Arabia. It is fourth largest in the world, after Russia, Saudi Arabia and the US. Geographically, Iran is well located for this initiative: close proximity to major oil resources of the Middle East and the Caspian Sea regions and being not far from the major oil importers such as China, India and European Union countries. Economically, Iran's move to a euro-based system of oil transactions makes perfect sense: Iran sells 30 percent of its oil production to Europe and the rest mainly to India and China.

Iran argues that while 60 per cent of the global oil and 25 per cent natural gas need was covered by the Persian Gulf states, oil dealing in either New York or London would have no meaning. Some of the major oil-producing countries such as Venezuela and a few of the larger oil consuming countries, most notably China and India, have already announced their support for the Iranian bourse. The bourse may also lead to greater levels of foreign direct investment in Iran's oil sector. As a result, if the decline in the dollar against euro continues, more states will increase the percentage of euros vis-à-vis the dollar they hold in reserve, which would further benefit Iran as, according to a member of Iran's Parliament Development Commission, Mohammad Abasspour, more than half of the country's assets in the Forex Reserve Fund are now euros.

What is important for this initiative is that much demand for oil now comes from the East, most significantly from China. China has an excess of $850 billion in its foreign exchange reserves, which may soon increase to over $1 trillion. The real impact for global currency reserves will be felt when the immense foreign currency reserves of the People's Bank of China, the country's top foreign exchange lender, will one day be switched away from the dollars. Once the PBOC makes a decisive move, other central banks worldwide would follow the suit, magnifying the effects on the currency markets.

One hundred years ago, when 'the sun never set on the British flag', the British pound was the world's number-one currency. The pound achieved its ascendancy because Great Britain was the first modern industrialised country. The greater productivity of its industries enabled its products to displace those of the rest of the world in terms of price and quantity, and because elsewhere industrialised production was only beginning to take hold. The whole world was selling raw materials to Britain, and Britain - as the famous expression had it - was 'the workshop of the world'. Britain's military, particularly naval, strength, and its accumulation of colonial possessions fortified the supremacy of the pound and the position of London as the world's financial centre. However this did not last forever: the development and strength of industrial production in other countries began to undermine the supremacy of British economy, and its competitors began to overtake it in terms of dynamism and productivity, and the new conditions of world economy exposed by the First World War signaled the death knell for the British pound. As a result of Britain's soaring indebtedness during and after the First World War, the US dollar emerged first as an alternative currency and then the dominant currency.

Once the dollar took over the pound it was only a matter of time before the order of things shifted. It seems the fundamental forces, that will drive the downfall of the dollar hegemony, have been building for decades, but only now may the circumstances be right for their stark manifestation. All recent indicators point out the beginning of the end for the long-standing arrangement whereby the US dollar operates as the world's reserve currency. The question is who will take over America's position.

Bulent Gokay

Dr. Bulent Gokay is a Reader in International Relations, School of
Politics, International Relations and Philosophy, Keele University, United
Kingdom. He can be contacted by e-mail at b.gokay@intr.keele.ac.uk

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