You are here

Iran will launch oil exchange next week, oil minister says

Section: Daily Dispatches

The Threat to a Fistful of Petrodollars

By Liam Halligan
The Telegraph, London
Sunday, April 23, 2006

http://www.telegraph.co.uk/money/main.jhtml?
xml=/money/2006/04/23/ccliam23.xml

From Russia, you might say, with love. This weekend, Alexei Kudrin,
Russia's finance minister, dropped a bombshell in Washington.

Attending the annual meetings of the World Bank and International
Monetary Fund, Kudrin caused his American hosts discomfort by openly
questioning the dollar's pre-eminence as the world's "absolute"
reserve currency.

The greenback's recent volatility and the yawning US trade
deficit, "are definitely causing concern with regard to its reserve
currency status," he said. "The international community can hardly
be satisfied with this instability."

Kudrin's intervention coincided with another meeting, also in
Washington, of finance ministers and central bankers from the Group
of Seven - which doesn't include Russia.

Top of the agenda: the effect of ever-rising oil prices on inflation
and interest rates.

G7 countries are worried the spiraling price of crude -- which
closed at $72.79 a barrel on Friday and which has now trebled in
three years -- could inflict real economic damage. The US Federal
Reserve, in particular, has been forced to take drastic action --
raising interest rates 15 times since June 2004 to keep inflation in
check.

Given that fragility, it is significant that Kudrin is now wondering
aloud if the long-standing dollar hegemony can last. For him to do
so is to highlight that America is vulnerable should that status be
lost. That's because Russia, with its awesome oil and gas reserves,
could kick-start a challenge to the dollar's supremacy.

Most nations stockpile their foreign exchange holdings in dollars.
The US currency accounts for more than two thirds of all central
bank reserves worldwide.

This reserve status means that the dollar is constantly in demand,
whatever the underlying strength of the US economy.

And now, with massive trade and budget deficits to finance, America
is increasingly reliant on that status. The unprecedented weight of
US liabilities means a threat to the dollar's dominance could result
in a currency collapse, plunging the world's largest economy into
recession.

That won't happen immediately. The dollar has sat astride the globe
for some time now -- in fact, for most of the last century. But this
statement from Russia -- a country of growing financial and
strategic significance -- still caused the dollar to slide. It also
fuelled speculation that central banks could increasingly diversify
their holdings away from dollars.

Kudrin's statement followed news that Sweden has cut its dollar
holdings, from 37 per cent of central bank reserves to 20 per cent,
with the euro's share rising to 50 per cent. Central banks in some
Gulf states have also lately mooted a shift into the euro. Such
sentiments helped push the dollar to a seven-month low against the
single currency last week.

But Russia's intervention will have raised eyebrows in Washington
because the backbone of the dollar's reserve currency status -- the
main guarantee that status continues -- is the fact that oil is
traded in dollars. And that is something the likes of Kudrin can
directly affect.

For historic reasons, the dollar remains the
world's "petrocurrency" -- the only currency for the settlement of
oil contracts on world markets. That makes the EU and Russia
dependent on it. But with central banks switching to euros, the
logical next step would be for fuel-exporting countries to start
quoting oil prices in euros too.

The EU is Russia's main trading partner. More than two thirds of
Russia's oil and gas is exported to the EU. That makes Russia a
strong candidate to become the first major oil exporter to start
trading in euros. Such a scenario, in recent years, has become
theoretically possible. But now, with these latest comments, Kudrin
has thrust that possibility into the open.

The G7 meeting was dominated, of course, by concern over Iran's
nuclear programme. The threat of military action against Iran,
itself a major crude exporter, is one reason oil prices are now
testing record highs.

It is worth noting that Tehran has ongoing plans to set up an oil
trading exchange to compete with New York's NYMEX and with London's
International Petroleum Exchange. In the light of Kudrin's comments,
it is significant that the Iranians want to run their oil bourse in
euros, not dollars.

Were the Iranians to establish a Middle-East based euro-only oil
exchange, the dollar's unique petrocurrency status could unravel.
That, in turn, would threaten its broader dominance -- which, given
America's groaning twin deficit, could seriously hurt the US economy.

Some cite this as the real reason the US wants to attack Iran: to
protect the dollar's unique position. I wouldn't go that far, but
the prospect of a non-dollar oil exchange in Tehran is certainly an
aggravating factor.

The opening of Iran's new oil exchange has recently been delayed.
But having spoken with numerous officials in Tehran, and western
consultants who've been working with the Iranians for several years,
I think it will go ahead. The exchange entity has already been
legally incorporated in Iran and a site purchased to house
administrative and regulatory staff.

The reality is that as long as most of Opec's oil -- read Saudi
Arabia -- is priced in dollars, the US currency will retain its
hegemony. But the opening of an oil bourse in Tehran, which now
looks likely, will signal at least tacit Saudi consent for euro-
based oil trading. The US knows this, which is why it is nervous
about the dollar's status being questioned.

From the G7's fringe, Kudrin has now touched this raw nerve. This
weekend's meetings have been dominated by questions of global
financial imbalance - in particular, America's huge deficits.

Kudrin's missive comes as central bankers, and currency dealers,
start to conclude the only way to resolve the massive US external
deficit is a somewhat weaker US currency. As the IMF itself warned
yesterday, a "substantial" dollar decline may be needed.

One way to bring that about would be for the euro to enter the
global oil trading system. This is unlikely to happen soon. It might
not happen at all. But the idea is now not only realistic but firmly
on the table in Washington. Perhaps not with love, but it was placed
there by the Russians.

-------------

Liam Halligan is economics correspondent at Channel 4 News.

----------------------------------------------------

To subscribe to GATA's dispatches, send an e-mail to:

gata-subscribe@yahoogroups.com

To unsubscribe, send an e-mail to:

gata-unsubscribe@yahoogroups.com

Caution: America Online prohibits delivery of GATA
dispatches to AOL e-mailboxes.

----------------------------------------------------

RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS

Free sites:

http://www.jsmineset.com

http://www.cbs.marketwatch.com

http://www.mineweb.com/

http://www.gold-eagle.com/

http://www.kitco.com/

http://www.usagold.com/

http://www.usagold.com/amk/usagoldmarketupdate.html

http://www.GoldSeek.com/

http://www.GoldReview.com/

http://www.capitalupdates.com/

http://www.DailyReckoning.com

http://www.goldenbar.com/

http://www.silver-investor.com

http://www.thebulliondesk.com/

http://www.sharelynx.com/

http://www.mininglife.com/

http://www.financialsense.com

http://www.goldensextant.com

http://www.goldismoney.info/index.html

http://www.howestreet.com

http://www.depression2.tv

http://www.moneyfiles.org/

http://www.howestreet.com

http://www.minersmanual.com/minernews.html

http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html

http://www.goldcolony.com

http://www.miningstocks.com

http://www.mineralstox.com

http://www.freemarketnews.com

http://www.321gold.com

http://www.SilverSeek.com

http://www.investmentrarities.com

http://www.kereport.com
(Korelin Business Report -- audio)

http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)

http://www.resourceinvestor.com

http://www.miningmx.com

http://www.prudentbear.com

http://www.dollarcollapse.com

http://www.kitcocasey.com

http://000999.forumactif.com/

http://www.golddrivers.com/

http://www.goldpennystocks.com/

http://www.oroyfinanzas.com/

Subscription sites:

http://www.lemetropolecafe.com/

http://www.goldinsider.com/

http://www.hsletter.com

http://www.interventionalanalysis.com

http://www.investmentindicators.com/

Eagle Ranch discussion site:

http://os2eagle.net/checksum.htm

Ted Butler silver commentary archive:

http://www.investmentrarities.com/

----------------------------------------------------

COIN AND PRECIOUS METALS DEALERS
WHO HAVE SUPPORTED GATA
AND BEEN RECOMMENDED
BY OUR MEMBERS

Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112
888-413-4653
http://www.blanchardonline.com

Centennial Precious Metals
Box 460009
Denver, Colorado 80246-0009
1-800-869-5115
http://www.USAGOLD.com
Michael Kosares, Proprietor
cpm@usagold.com

Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
http://www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
Gold@gwe.net

El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
http://www.eldoradogold.net
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203
harvey@eldoradogold.net

Gold & Silver Investments Ltd.
Mespil House
37 Adelaide Rd
Dublin 2
Ireland
+353 1 2315260/6
Fax: +353 1 2315202
http://www.goldinvestments.org
info@gold.ie

Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com

Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com

Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
http://www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
leecoins@aol.com

Lone Star Silver Exchange
1702 S. Highway 121
Suite 607-111
Lewisville, Texas 75067
214-632-8869
http://www.discountsilverclub.com

MRCS Canada
12303-118 Ave. NW
Edmonton, Alberta T5L 2K2
Canada
http://www.mrcscanada.com
Michael Riedel, Proprietor
1-877-TRY-MRCS
1-877-879-6727
mrcscanada@shaw.ca

Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel

Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
info@mocoin.com
314-965-9797
1-800-280-9797
http://www.mocoin.com

Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
Metalguys@aol.com
http://www.buysilvernow.com

Richard Nachbar Rare Coins
5820 Main St., Suite 601
Williamsville, N.Y. 14221-8232
877-622-4227
http://www.CoinExpert.com
nachbar@coinexpert.com

Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com

The Moneychanger
Box 178
Westpoint, Tennessee 38486
http://www.the-moneychanger.com
Franklin Sanders
1-888-218-9226, 931-766-6066

----------------------------------------------------

HOW TO HELP GATA

If you benefit from GATA's dispatches, please
consider making a financial contribution to
GATA. We welcome contributions as follows.

By check:

Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road
Manchester, CT 06043-7541
USA

By credit card (MasterCard, Visa, and
Discover) over the Internet:

http://www.gata.org/creditcard.html

By GoldMoney:

http://www.GoldMoney.com
Gold Anti-Trust Action Committee Inc.
Holding number 50-08-58-L

Donors of $200 or more will receive copies
of "The ABCs of Gold Investing" by Michael
Kosares, proprietor of Centennial Precious
Metals in Denver, Colorado, and "The Coming
Collapse of the Dollar" by James Turk and
John Rubino.

GATA is a civil rights and educational
organization under the U.S. Internal Revenue
Code and contributions to it are tax-deductible
in the United States.