The IOB is currently a hot topic, TOD are running an interesting thread on this already -
http://www.theoildrum.com/story/2006/1/25/19951/8290 - and we've been evolving this thread here for a while.
I still find the argument and counter-argument on this whole issue, whilst sometimes verhment, frustratingly absent of hard fact or even informd opinion (difficult tho that is with such subjects).
I'd like to summarise the position as I see it today and ask people if they have anything specific to support or counter the main bullets.
I'm going to use the following article as a reference, as I find it has more clarity than most others on this subject:
http://english.aljazeera.net/NR/exeres/ ... 08A6E9.htm
Some numbers:
Approx 85mbd of oil production
If we take a price of 65 dollars/barrel thats rougly 5.5bn dollars/day in crude trade - I know all the oil isn't wti-spot and grades vary in price, but lets use this figure as a working number.
Iran exports approx 4mbd of oil with roughly 1mbd - 2mbd of it coming to Europe, depending on who's numbers you use.
According to the OECD, europe imports approx 10mbd with "33% coming from the persian gulf" (how detailed of them...)
So if the IOB were to go ahead and on day-one all euro-zone oil buyers immediately switched to using this bourse and paying in euros, that would only move 130m dollars/day out of existing trades, roughly 47bn a year out of 2trn dollars/year in total trade. A drop in the ocean.
I think this is where many of the "IOB is a non event" people are coming from.
But to me, that's only an immediate term view.
Iran does a lot of bi-directional trade with europe and I can see it makes economic sense for iran not to need to keep exchanging dollar-euro all the time, with all that the shifting forex markets bring (and long term dollar decline vs the euro).
People have pointed out the various non-end-of-world reasons for the IOB, like the above euro-trade practicalities and thumbing their noses at the US, making themsleves a regional trading hub, stealing trade commissions from the IPE and Nymex etc. And I think these are all valid.
Also of note is that Iran cannot meaningfully trade with the US due to existing sanctions - so any dollars it gets don't fit into that "you can always buy US assets with them" petroldollar cycle.
Iran isn't nesseccarily JUST making the IOB in order to (as it might see it) purpetuate US economic collaspe - there are a number of possible benefits if it can make the bourse a success.
Before we look longer term, lets just summise how global currency markets works - currency exchange rates at set by myrid institutions based on collective free-market perceptions (for floating currencies at least...) of one currency's value against another - supply and demand, bless it!
Demand for a currency is based on 2 key factors:
1) Interest rates in the host country
2) Demand for goods or assets in the host country
If a country has high rates (or higher than in some others) you can borrow money, exchange it, put it in a bank in the high-rate country and turn a profit.
If you want goods etc that a country sells and they want payment in a currency, you have to exchange your money into that currency in order to pay for the goods (etc) that you want.
Shifts in demand for a given currency change it's relative exchange rate values.
(a reminder, don't forget this is just my opinion!)
A strategic shift in demand away from a currceny, esp one with a huge volume in circulation, "devalues" that currency - there is more available, people want it less, the exchange rates alter to reflect said currency's "cheapness".
There is no non-dollar oil bourse anywhere in the world, to my knowledge, if the IOB becomes established and over time grows to become reasonably respected (at least within the OPEC countries) and is instrumental in a slow but steady decline in demand for dollars, the US Fed would need to - if it wanted to reduce the dollar's slide - increase domestic interest rates (by how much I don't know) and I feel this could be damaging to the US internal economy, driven as it is by (credit fueled) asset bubbles and the high-spending (credit driven) consumer.
If higher US rates harm the housing market or stock market bubbles, this further reduces demand for those "assets" that would have still generated external demand for dollars - the US doesn't export all that much except financial services, paper bills in various forms and paper assets like shares. It still exports expensive world class weapons, but it rightly limits sales of these to friendly countries but the russians have no such quibbles and their kit is pretty good....
If all of europe's oil imports were paid in euros (obv this would need the likes of russia to accept them) that would add up to about 230bn dollar/year out of the 2trn annual trade, which is starting to look significant. Likely asia has little preference either way for a specific currency but China may have a political handle on it, and it's imports are another approx 10mbd, which would really start to make a difference if paid in euros, buts a big leap for this discussion to make right now...
What numbers are needed to impact dollar exchange rates? I don't know, the total forex trade is worth (some say) 2trn dollars/day - which sounds like it would need a LOT to make an difference, but we know how fickle markets can be, so I'm not so sure the real shifts need to be that great to alter market perceptions.
The net of all this is, in my view, the IOB...:
a) Won't destroy the world in a day
b) Will have limited short term impact
c) Would be well placed to start a trend away from dollar trading, to some extent
d) Long term, any reduction in demand for dollars is bad for the US
e) The US can't halt any dollar slide with nig interest rates kikes because that's too harsh domestically, potentially raising the dollar price for oil (but unchanged in euros), further increasing trade imbalances
f) Since the negative impacts on the US simply go away if we keep with the current status quo, this is an incentive to prevent the IOB starting/taking hold
g) The use of force might be the easist solution
h) This is a long term game - the IOB means next to nothing for the US on day-one (but makes sense for iran in any case) - it's the fear of any trend that reduces demand for dollars that's the long term US worry
Sorry for the million words, it's not a simple subject, now you can all pull it to pieces, esp Totally_baffled.... (cmon man I'm ready for ya!)
