Oil price decline: ECO solution for regional energy trade
By Dalga Khatinoglu
As crude oil prices are continuing to decline Managing Director of an Iranian Drilling Company active in the Caspian Sea region in an interview in Tehran pointed out that Iran has no role to play in OPEC, and has suggested that Iran should leave OPEC.
To respond to lower oil prices, a member of energy committee of the Iranian Parliament has revealed that 40 member of parliament have supported a plan by which the President Hassan Rouhani's government would be required to reduce Iran oil export by 25 percent during new Iranian year, which will start on March 21, 2015.
Mahmood Khaghani former director general at the Iranian ministry of petroleum believes these kinds of ideas are doomed to fail since the reasons for current oil market decline are not related to OPEC or Iran.
Khaghani referred to an article published by Tehran Times on Dec.31 in which Chris Cook a research fellow at the University College in London had said that the oil market has been 'financialized' and has therefore enabled Saudi Arabia and the US between them to 'peg' the price at a level comfortable for both.
Former director of the London-based International Petroleum Exchange, Cook says in this article that "as the price of oil and many other commodities such as gold are denominated against US dollar then since 2007/8 a colossal pyramid of US bank debt backed by real property collapsed. To stimulate US economy required a continuing transfusion of new dollars which until recently was provided by the US Federal Reserve in exchange for financial assets such as government bonds through a program of dollar creation and asset swaps which is known as Quantitative Easing (QE)".
According to Cook, these new dollars had to end up somewhere, and apart from conventional investments, new types of funds were created which enabled investors who feared inflation to invest as a protection against inflation in gold and other commodities and perhaps the most investments were made in crude oil.
Khaghani told Trend Jan. 8 that "the current situation in oil market had been seen in scenarios that were considered by US financial institutes that offered to lend billions of dollars to Saudi Arabia and other Persian Gulf states through a mechanism that Mr. Cook has referred to it as 'prepay' sale and re-purchase agreements enabling them to withstand and reverse what was known as Arab Spring".
As result, Khaghani believes as long as Iran and other energy producing and exporting countries economy depend on the dollar economy their governments well understand the fact that since 1973 when Saudi Arabia and then in 1975 OPEC agreed the oil price to be denominated with the US dollar, it is the dollar that makes decision for their economy.
"And with reference to the current situation Chris Cook has correctly analyzed that when the QE transfusion ended in the late 2014 the US financial bubble in crude oil prices collapsed".
Khaghani thinks Iran's parliament needs to reconsider its plan for making its government reduce its oil export. And, that Saudi Arabia and their US backers undoubtedly would welcome this becoming law. Instead he believes Iran should seriously consider a plan for separating Iran's economy from its dependence on the US dollar economy.
The current oil market situation in Khaghani's view should be considered as an opportunity by the Iranian parliament and not a threat. He says that, in case in Iran's next year budget those business entities, which have been for decades exempted from paying tax would be pushed to pay taxes on their huge revenues, the government budget deficit as result of lower oil income will be easily compensated.
Ali Al-Naimi, Saudi oil minister recently gave a major interview in relation to Saudi oil market strategy and emphasized the new Saudi strategy of maintaining market share even in the face of a decline in the oil price to $20/barrel.
Khaghani says that "Al-Naimi's knows well that since the US Fed stopped its QE policy in 2014 while US economy is still in trouble and all plans for reshaping the Middle East have also so far failed, we shall see the dollar exchange rate strengthening as dollars drain out of US creditor nations causing dollar shortages and therefore more decline in price of oil and other precious commodities".
Khaghani agrees with Cook's article, saying that the market price is in reality now set - based upon an easily manipulated crude oil benchmark price - by financial intermediaries who profit commercially from volatility, on behalf of governments who profit politically from the economic damage caused to producers by massive swings in oil prices.
To resolve the current situation, Khaghani believes that "a new window of opportunity has now been created for member states of Economic Cooperation Organization, four of which are also Caspian littoral states and in pursuance of ECO 3rd Energy/Petroleum Ministerial Meeting outcome on 6 March 2013 to introduce a new market paradigm to be led by producers and consumers acting directly and collaboratively".
Khaghani believes the Republic of Azerbaijan that currently holds the position of ECO Secretary General and Iran which hosts ECO Secretariat are capable of leading such an initiative.
The Economic Cooperation Organization is an intergovernmental regional organization established in 1985, currently composed of Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyzistan, Pakistan, Tajikistan, Turkey, Turkmenistan and Uzbekistan and has a total combined population of 400 million.
Edited by CN
Dalga Khatinoglu is an expert on Iran's energy sector, head of Trend Agency's Iran news service
Follow him on @dalgakhatinoglu