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John Embry: Gold and silver on a tear
By The Associated Press
via the Globe and Mail, Toronto
Friday, May 5, 2006
http://www.theglobeandmail.com/servlet/story/RTGAM.20060505.wiraneuro
0505/BNStory/Business/home
TEHRAN, Iran -- Iran took a step on Friday toward establishing an
oil market denominated in euros, a plan analysts described as highly
unlikely to materialize but which in theory could have serious
consequences for the U.S. economy.
Iranian state-run television said the country's oil ministry granted
a license for the euro-denominated market, an idea first floated
back in 2004, though just who would trade on it remains unclear.
If the market were to succeed, or if Iran simply demanded payment
for its oil in euros, commodities experts said, it could lead
central bankers around the world to convert some dollar reserves
into euros, possibly causing a decline in the dollar's value.
Oil is currently denominated in dollars around the globe, whether
through direct sales between producers and consumers or in trades
made on markets in New York and London.
But if one day the world's largest oil producers allowed, or, worse,
demanded euros for their barrels, "it would be the financial
equivalent of a nuclear strike," said A.G. Edwards commodities
analyst Bill O'Grady.
"If OPEC decided they didn't want dollars anymore," he added, "it
would signal an end of American hegemony by signaling an end to the
dollar as the sole reserve currency status."
If the dollar lost its status as the world's reserve currency, that
would force the United States to fund its massive account deficit by
running a trade surplus, which would increase inflationary pressures.
O'Grady said there are practical reasons why the Iranian threat is
an empty one.
For starters, Iran is not a very attractive site for a market, given
the volatile nature of its politics, the U.S. sanctions against it
and the lack of a fair legal system. Moreover, there is no
indication that the European Union is interested in vying to become
the world's central bank, which requires a willingness to run large
currency deficits, he said. For the U.S., that has meant allowing
cheap imports to undermine the strength of some major industries,
including textiles, autos, and electronics manufacturing.
PFC Energy oil analyst Jamal Qureshi said the fears stirred up by a
hypothetical euro-denominated oil market in Iran or anywhere else
are overblown, not least because the oil trade is just a small
component of the overall global economy.
Iranian legislators earlier this year urged the government to set up
the market to reduce the United States' influence over the Islamic
republic's economy. They also criticized Oil Minister Sayed Kazem
Vaziri Hamaneh, saying he had delayed setting up the bourse.
First floated in 2004 when reformist president Mohammad Khatami was
in power, the idea of a euros-traded oil bourse gained new life
after the stridently nationalist Mahmoud Ahmadinejad was elected
president last summer.
Iran is the fourth-largest oil producing country in the world, the
second largest in the Organization of Petroleum Exporting countries,
and controls about 5 percent of the global oil supply, so it has a
measure of influence over international oil markets. Tehran also
partially controls the Persian Gulf's Strait of Hormuz through which
much of the world's oil supply must pass.
Iran has sought to wield its oil resources as a bargaining tool in
Tehran's ongoing standoff with the West over its nuclear program.
Oil prices jumped above $75 a barrel last month amid escalating
diplomatic tensions between Washington and Tehran. On Friday, crude
oil futures traded just above $70 a barrel.
Iran's deputy oil minister, M.H. Nejad Hosseinian, said Thursday he
doubted the U.N. Security Council would impose sanctions on Iran's
oil sector because such a move would drive oil prices higher.
Council members are considering imposing sanctions on Iran for
defying their request to halt all uranium enrichment-related
activities by late last month.
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