Iran oil bourse 'won't undermine US instruments'

Plans for a commodity exchange for oil trading in Iran won't undermine the dollar’s supremacy in the oil markets, its architect says...

Chris Cook, ex-chairman of the International Petroleum Exchange, says the very idea is "a gross exaggeration" in the following interview...

How is the Iran Oil Bourse (IOB) practically going to work? What pool are you planning to start out with?

We aim to start with creating a ‘Pool’ of an uncontroversial oil product like bitumen – basically the crap left at the bottom of the barrel after it’s been refined. This ‘pool’ will consist of a corporate vehicle which owns bitumen, or rights to bitumen, and which issues redeemable ‘units’ or ‘shares’ denominated not in cash, but in (say) tonnes of bitumen. Investors will be able to buy and sell these units, which – like gold – confer no income – but which do act as a ‘store of value’ or a ‘hedge against inflation’.

If bought by a bitumen user – e.g. a road builder – these units may then be exchanged or redeemed against the physical material instead of using cash. The seller (say an Iranian state company) receives an interest-free loan in exchange for selling bitumen into the Pool. In return, the seller must accept units in exchange for bitumen production if offered them instead of cash.

The architecture of the market in bitumen ‘units’ will probably consist of:

(a) a ‘peer to peer’ (OTC or ‘Over the Counter’) trading network, where buyers and sellers are connected bilaterally, probably with the assistance of ‘introducing brokers’; and

(b) a periodic multilateral auction.

The market model closest to ours would probably be that of the London Metal Exchange. [Of which Chris Cook is the ex chairman].

How exactly do you propose to curb volatility on the oil bourse?

Firstly, our ’Pool Units’ have no gearing, unlike futures and options. Secondly, speculators will not participate in the ‘physical’ transactions of selling (say) oil INTO the Pool or buying oil FROM the Pool. Speculators will be able to buy and sell PRE-EXISTING units in the Pool, but they will play no part in setting the ‘market price’.

Do you meet resistance from the markets?

I’m off the market radar screen at the moment. No-one takes the ‘Iranian Oil Bourse’ seriously, because of the delays, and all the nonsense on the Internet.

There’s also huge resistance in Iran from elements in the Oil Ministry to transparency in the existing crude oil market. They like it the way it is, which is why we [at Wimpole Consortium] got nowhere with crude oil in the past three years.

Why did you choose Iran?

My business colleague is Iranian, and when he heard about the systemic oil market manipulation by trading intermediaries – such as investment banks – about which I ‘blew the whistle’ in 2001, he suggested that I write to the Iranian Central Bank Governor – whom he knew - outlining the necessity for a Middle Eastern oil exchange which was not susceptible to speculator driven volatility and manipulation by middlemen. A couple of years later we were invited to draw up blueprints for the ‘IOB’ project.

Do you think the Fed’s decision to remove M3 from its list of regularly published numbers is linked to the Iranian Bourse? i.e. Do they fear the Bourse will wipe out the dollar, as is suggested so often.

Not in the slightest. China’s international dollar based trade dwarfs the petro dollar/euro trade flows.

Are the Iranians subjecting you to any rules that other markets won't have to abide by – i.e. how does Sharia law apply to the profit aspect here?

Sharia’h has no problem with profits provided risks are fairly shared. Any ‘deficit-based’ contract involving ‘gearing’ is essentially unIslamic, which rules out virtually any conventional derivatives contract, although some ingenious Sharia’h scholars have attempted to put lipstick on the pig. That is why we are proposing to the Iranians an ‘asset-based’ contract based upon ‘ownership’ of bitumen, crude oil or whatever, within some form of corporate ‘wrapper’. The increasingly popular ‘Exchange Traded Funds’ which are invested in commodities come quite close to what we plan.

What if you can't pull it off in the Euro, will the Iranians botch the project? What will you do then?

The currency of the IOB contracts was never a consideration. The big problem has always been resistance within the Iranian oil hierarchy against any more price transparency than currently exists. President Ahmadinejad, who is 100% behind the Oil Bourse project, has been banging his head against that intransigence throughout his term, although some commentators consider that there is currently a window of opportunity under the period of office of the present ‘Interim’ Oil Minister.

Have you been contacted by the US Treasury to steer clear of being involved in Iran? (The FT reports the US treasury pressured Deutsche Bank and around 40 other banks into closing up shop in Iran).

No, and I don't expect to be.

Is oil pricing an appropriate tool to curb back US influence, for instance by eliminating dollar based and US sourced 'political risks' from the markets?

In my view, the invasion of Iraq – like virtually all US foreign policy since the invention of the internal combustion engine - was about US energy security. Nothing else. Now, if it concerned only securing supply, with the Iraqi’s receiving a true market price for their crude oil, then I think the US would have already left Iraq, leaving behind a couple of Guantanamo style garrisons near the oil fields.

Unfortunately, the proposed Iraqi Oil Law –still not yet signed - aims to secure a privileged crude oil pricing regime massively in favour of certain oil corporations, the effect of which would be - over the life of Iraqi oil fields – profits beyond the dreams of avarice.

Do you subscribe to the theory Iraq was invaded (largely) because Saddam threatened to price oil in Euros?

I think my previous answers address this canard/ conspiracy theory, but to reiterate.

(a) Whether oil was priced in Dollars or Euro’s by Saddam was irrelevant – he could only have affected the dollar by failing to buy US Treasuries etc with the proceeds – and then only minimally, because the trade in oil is a fraction of total global trade flows. Look at the Chinese $ reserve balances now well in excess of $1 trillion.

(b) Iraq was invaded because they have oil – lots of it, and the US uses oil – lots of it.

Bretton Woods, if it hadn’t happened years back, would it have happened? And how does this figure vis-a-vis to the petro dollar - is there an inevitability to these things?

The architecture unsuccessfully proposed by John Maynard Keynes at Bretton Woods was an ‘International Clearing Union’ and a unit of exchange or ‘Value Unit’ he called the ‘Bancor’. Instead of which we got the World Bank, IMF, Bank of International Settlements and all the rest and a monetary system based upon debt, which is now in its death throes.

The ‘Irresistible Force’ of the Economic Growth mandated by a deficit-based Money Supply is finally running up against the ‘Immovable Object’ of finite resources generally and ‘Peak’ levels of Crude Oil supply in particular. In my view Keynes’ solution was pretty much the correct one, and is achievable in practice, if pursued from the ‘Bottom up’ via a linked network of national and regional clearing unions, as opposed to the impracticable global institutions he advocated.

Central Banks are simply unnecessary - Hong Kong does not have one - although in Hong Kong a ‘Monetary Authority’ is needed to monitor credit creation by banks.

Banks - as credit intermediaries - are also obsolete - look how peer to peer initiatives such as zopa.com and prosper.com are beginning to disintermediate banks.

Don’t derivatives marketers create similar instruments non stop?

That is what they are trying to do with carbon credits and emission trading and the rest. And it's complete bollocks. As the man said: ‘If you want to keep a donkey healthy you don't regulate what comes out of it, you regulate what goes in’. No ‘deficit-based’ solution such as carbon credits can work: it's that simple, and a mathematical impossibility. In that context, the asset-based solution (at the head of the donkey!) is carbon taxes collected at the clearing level.

Do you think US consumers will pay the price for their government’s massive debt in terms of market logic any time soon. And if this doesn't happen, will ultimately another scenario be the end of our natural resources that will close the door? Is the door going to be closed?

We are seeing the end of the current unsustainable system. There is no cure this time within a deficit-based paradigm. There has to be a new Bretton Woods, and a new global settlement.

Why is it is so important to tie people to a market so they invest their profits in oil based assets rather than T-Bills. Is the sole problem that T-bills are a debt?

You must distinguish between the RIGHTS to production, and the ownership of the production itself, eg between ownership of an oil well (productive asset) and that of the oil it produces. Units of energy (like gold) have a value in exchange, but no income. Units of ownership of a productive asset have BOTH a value in exchange and an income. T-Bills are not ‘value’ but a ‘claim over value’ in the form of a stream of IOU's issued by the US government via the Fed as an intermediary.

If so, how about foreigners holding US equities instead? Isn’t that fair - the US surely is putting itself at risk from having its currency traded everywhere.

If you read Professor Michael Hudson' s book Re: ‘Superimperialism’ about the rise of dollar hegemony, you will see that the US have had the best side of the deal since 1971. As the man said (I forget who) : ‘It's OUR currency but THEIR problem’.

What are the options to mask the deficit and why is the US loath to give investors more control over its assets?

There are no options other than a ‘Debt/Equity’ swap. National accounting -based upon a ‘National Debt’ - is quite literally insane. There is no ‘Equity’ on a national balance sheet: and worse than that we show the mortgage but not the house!

The solution IMHO is of a ‘national equity’ based upon the ‘land partnerships’ (quasi REIT's) I advocate, and a taxation system which is based upon the principle that those who have exclusive private use of a ‘commons’ - such as land, knowledge or non-renewable energy - should compensate those they exclude. This would essentially give rise to every individual having the right to a ‘basic income’ being the ‘dividend’ from his inalienable ‘equity share’ in national equity.

Is there an established correlation between T bill investments of foreigners and the oil markets. Any indicators that happen to illustrate this?

I doubt it, since oil is only a small fraction of the dollar trade flows. It is certainly the case that whereas the windfalls made by the oil producers in the 70's oil ‘shock’ were invested in the US, these days an increasing amount is going elsewhere.

What do you make of the theory that the US Fed decided last year to quit publishing the M3 numbers because it doesn’t want the world to know how weak it really is?

I don't think the figures fulfilled any useful purpose, frankly. I guess it may remove one additional source of embarrassment, but they have plenty of those to be going on with. It only takes an understanding of the mathematics of compound interest to know that the US economy - like every other deficit-based economy - is unsustainable in the long term.

Do you see the LLC in the UK as something that competes with the supremacy of the ordinary financial system?

The LLP/LLC essentially renders the Limited Company obsolete. It is a superior form, emerging not because I say so - I'm merely looking out for them, and commenting - but because they WORK. The partnership-based enterprise model essentially OUT COMPETES the existing system because there need be no returns to pure ‘rentiers’. (people who make money out of money).

The Cooperative movement calls this the ‘cooperative advantage’. Those businesses which do NOT use the model will be at a disadvantage to those that DO: classic ‘emergence’: financial Darwinism. Ethical is - in fact - Optimal. LLP's/LLC's create new mechanisms for investment in productive assets, and for the streams of production (eg property rentals, and renewable energy) in due course to become accepted by individuals in exchange for their goods and services. ie forms of currency.

Why is the oil price so high?

Increasing demand from China, India and the Far East and pretty flat production means that the market price is going nowhere but up, in the medium and long term.

In the short term, there are two key factors driving oil prices higher.

Firstly, Oil is not priced in Dollars: Dollars are priced in Oil. That is to say that we are seeing the increase in the oil price calculated in Euro’s which is much less than the increase in price calculated in dollars. The $ is ‘anti-Value’ - ie a claim over Value, issued by Banks, and based upon nothing much at all - whereas Oil is ‘Value’ or ‘Money's Worth’. This is because the $ is in secular decline against virtually all other currencies, and in particular, against commodities with a value in exchange.

Secondly, winter is coming, many hedge funds have been ‘burned’ in the credit markets, and are looking elsewhere for action, and we may well see a massive speculative bubble in crude oil this winter.