Oil exchange in Iran is pipe dream

Azerbaijan, Baku, Feb. 2 / Trend T. Konyayeva /

The project of creating an oil exchange in Iran, in light of the international isolation of the country, has no significant economic basis, Northeastern University Professor Kamran Dadkhah said this week.

"Under present circumstances there is neither a need for an oil exchange in Iran nor will it have any effect on the international market for oil. Indeed, it is difficult to imagine that the project will get off the ground in any meaningful way," Dadkhah told Trend via e-mail.

Last week, Iranian President Mahmoud Ahmadinejad gave an order to establish the oil exchange as soon as possible.

According to the information, the oil exchange will be created on the Iranian island of Kish. Several meetings have been recently held to discuss the issue between the exchange and the country's Oil Ministry.

Secretary of the Oil Exchange Presidium Abbas Yaqubi said that primarily crude oil and oil products will be put up on sale on the exchange. The oil exchange will begin to work at full scale within three years.

One can surmise that Mr. Ahmadinejad has two objectives in establishing such an exchange. First, the Iranian government has been pretending that it is an important player on the international scene. The second goal would be to create another venue for the cronies inside and outside the government to reap profits off such trades, Dadkhah said.

Thus, the exchange has to have the credibility and the financial infrastructure to handle the transactions, the expert said.

The whole enterprise would be a sham and will not work, Dadkhah said.

Iran announced the opening of the oil exchange in March 2006 and has called the opportunity "to influence the establishment of fair prices for oil" as the main reason for the opening of the exchange.

Oil is traded only on the two exchanges now: in London (IPE) and New York (NYMEX). The calculations are carried out exclusively in dollars there.

Moreover, one should not forget about the international sanctions imposed against the Islamic republic of Iran, the expert said.

Many buyers would shun the exchange. The relationship between Iran and other oil producers in the region is not friendly. Thus, major oil producers such as Saudi Arabia, Kuwait, and others would not be participants in the exchange, Dadkhah said.

Among OPEC countries, Iran ranks third on the proved oil reserves (after Saudi Arabia and Venezuela) and second (after Saudi Arabia) on its production. According to BP, as of January 1, 2009, the proved reserves of oil in Iran amounted to $137.6 billion.

But despite this, at present, Iran experiences a number of economic problems due to the international sanctions imposed against Iran.

In June 2010 the U.N. Security Council adopted Resolution 1929, enacting new sanctions against Iran over its refusal to stop enriching uranium. Later, the U.S. Congress and foreign ministers of all EU countries approved the imposing of additional unilateral sanctions aimed mainly against the energy, banking and financial sectors of Iran.

The restrictions imposed by the European Union include the ban on the sale of equipment, technologies and services in Iran's energy sector. The oil processing industry is among these measures. New investments in Iran's energy sector as a whole were also banned. The production capacity of the country is decreasing. Iran cannot effectively increase production due to the lack of investments.

Several European banks refuse to open a credit line for Iranian citizens, so, they have to pay in cash. Moreover, the sale of certain goods to Iran was banned.

But more important, such an exchange will have neither the credibility nor the backing of financial institutions that NYMEX, for example, enjoys, the expert said.

In such a world, we could also imagine that Iran could establish a thriving oil exchange in Kish Island. But it would take a different government and decades to create such a world, the expert said.

We can, nevertheless, imagine another world where Iran was not a pariah among the nations - a world where it had friendly relations with oil producers in the Persian Gulf area and with nations around the world. We can imagine a world where Iran had an advanced financial system connected to the world financial markets. Note also that even if all the above conditions materialize and Iran creates a working exchange, oil prices would be determined in New York and London, Dadkhah said.

"Oil prices in Kish could not deviate from those in New York and London because of arbitrage. If the oil prices are higher in Kish than in London, then arbitrageurs would buy in London and sell in Kish. On the other hand, if prices in Kish are lower than in New York, then traders can buy in Kish and sell in New York. But, as mentioned before, at present establishing a viable oil exchange in Kish is a pipe dream," he said.

Former adviser to the Central Bank of Iran, Professor Bijan Bidabad agrees with the U.S expert. He said that the establishment of the oil exchange in Iran will lead to the fact that pricing on the Iranian oil market will be made in accordance with the pricing on the international commodity exchanges.

At present and in the foreseeable future, the international currency is and will remain the dollar, Dadkhah said.

"Even if an oil exchange is established in Kish Island, in order to satisfy international traders, it has to use the dollar for its transactions. No sane international trader would accept anything but the dollar," he said.

"Most likely it would be state-owned, or it would claim to be a private enterprise but under the ownership and management of government and semi-government entities such as the Islamic Revolutionary Guard Corps (IRGC). But at present, the establishment of a viable oil exchange in Iran is a pipe dream," he said.

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