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Let me kill off once and for all the Iranian oil bourse story

by Jerome a Paris Fri Mar 10th, 2006 at 01:47:28 PM EST

Crazy scenarios involving Iran's purported attempts to create an oil bourse to start selling oil in euros make the rounds regularly, and even get recommended with alacrity on DKos.

These things WILL NOT HAPPEN, and we have, as a supposedly reality-based community, to focus on real issues and not imaginary ones.

So let me explain why an Iranian oil bourse will not work for the foreseeable future. I hope that this diary can be used as a handy reference when this crops up again in the future.

Bumped by Colman - this is topical now apparently


Here are some basic facts about what a "bourse" is:

  • it's a place for sellers and buyers for a given product to meet. So, as a seller, you want a place where buyers come and, as a buyer, you want a place where sellers come. It's a meeting point.

    A meeting point is a form of conventional information, and one that is highly stable once established. People come to the market because they know that others will be there as well, and these are there for the same reason. Once players have agreed to come to one place, it is simpler to come to that place than to try and organise a new place, which everybody must agree to and which all occasional players need to be informed of. Just like DKos is now THE main meeting place for the progressives, the existing oil bourses have an massive advantage over any new one in that they already exist. London has remained the main trading place for a surprising number of commodities despite the British Empire being long gone and the US having replaced it as the largest economy - simply because the infrasturcture was there, and the people with the competences to play there were still around. Windows is unassailable on desktops despite being obviously inferior in quality to some alternatives, simply because there is a real advantage for everybody to use a common standard, even if it imperfect. A bourse is a standard on where and how to trade.

    There is no compelling reason to move from London or New-York to Iran to trade oil. Iran only has 5% of world production and is in no position to impose anything. Network effects paly massively agaisnt a switch.

  • it's a place that allows a price to be set for the transaction. That means that you want many buyers if you're a seller, and many sellers, if you are a buyer. It provides liquidity.

    This is linked to the above point: liquidity exists when you have a deep market, i.e. many buyers and many sellers. That comes from having a place where everybody comes, and a place that everybody trusts because it works. "Don't fix it if it ain't broke" applies here. Again, this is a compelling argument against Iran. Iran can potentially act as a seller, but would will ensure that there are buyers on that particular market?

  • the other item related to price is that a bourse needs to provide a single price to act as a universal reference for everybody - a market standard, both in terms of the quality of the product, and the currency it is expressed in. This allows for historical data to be expressed consistently, and for market players to have useful references and background to do their trades.

    For oil, that currency is and has always been dollar, as a widely stable, universally accepted monetary unit. There is no market and no liquidity in any other currency. It is at least conceivable that the euro could be used as it is similarly stable and acceptable to all, but it has no history as an oil trading currency, and thus market players would naturally convert any price in euro into a price in dollars to see what it means (try switching from degrees Celsius to Farhenheit or from centimeters to inches to know why this matters). Again, there would need to be an overwhelming reason to force all market players to make the switch (and to do it all at the same time), which Iran does not provide.

  • a bourse is a place that provides security for the transactions. Buyers know that they will get their purchase delivered, and sellers know that they will get paid in a timely fashion. It provides clearing mechanisms.

    Do you expect other producers to rely on Iran to ensure timely payment of their sales? Do you intent to rely on Iran, an untested bourse, to be responsible for delivery by other parties?

  • it's a place that provides rules and enforcement of these rules for the proper functioning of the market, i.e all the above: who can participate, how prices are formed, how the clearing is organised, and how disputes are settled. It needs to be a neutral arbiter, uninvolved in the actual trading.

    Again, this plays against Iran, who is too small a player to impose rules to all, but too big to be seen as a neutral player by other sellers. And do you really want to take the risk that the religious authorities in the background or any other Iranian politician come and start meddling with the ongoing trades?

  • as rules will ultimately be set by public authorities overseeing the bourse, and disputes will ultimately be decided by courts of that place, it needs a consistent regulatory and legal framework.

    There's a reason why most commodity bourses are in Western countries. They provide the rule of law, a predictable set of rules, and a capacity to enforce these rules in an effective and market-neutral way. and they have a long track record of doing so. Iran? Not so much.

  • in today's world, a bourse is essentially a big IT operation, with systems able to provide complete market information to all participants in real times, treat operations as they are decided, and provide an unambiguous audit trail to all interested parties to a transaction.

    Again, that requires a lot of specialised competences on the ground: programmers, developpers, consultants to install them, the specialist hardware providers, etc... all people that need some (or a lot) of understanding of what's going on in the market. That's highly specialised knowledge, which is, naturally concentrated in the few places that carry bourses, i.e. a few large cities in the West. Iran will be hard pressed to attract such people to Tehran or thereabouts.

  • finally, the oil bourse is only a small part of the trading that goes on around oil. Most of what takes place are financial transactions: spot sales, forward sales, swaps, various hedging instruments, short term financing, long term financings. All these transactions rely on the underlying oil market, and significantly expand it. If you take out the oil market, or change its rules, standards, references, clearing mechanisms and enforcers, you kill the associated financial markets, which are vital to the world economy and underpin a large chunk of our industrial activity and energy needs.

    Do you really expect the financial markets to move to Tehran, which has neither the infrastructure, the competences, the legal framework or the stability to host them? Even a switch to the euro would need a massive reorganisation of the financial markets, which are exclusively geared to dollar transactions. This only amplifies the arguments made above about the sole oil market with respect to liquidity, standards and the like. And the legal and regulatory questions are even more important. Do you really want billions of euros of daily financial flows to be ultimately controlled by the Iranian Central Bank? It would basically take the outright destruction of the existing markets to provide any incentive to try to rebuild them differently, and Tehran would not be their first pick to do it...

:: ::

So, say that Iran decides to sell its oil in euros. Fine. Both the Iranians and their clients will determine the price for the transaction in dollars, on one of the established markets, and will trade these dollars for euros for the actual payment operation. It will give banks active on the forex markets a little bit of income, but will change nothing to how oil is traded.

If they open a bourse, who will come? The answer is, no one, unless it is nothing more than the new place to buy oil from them and the transaction, whether in euros or in any other currency, will be negotiated in dollars, using existing market standards expressed in dollars, because there is no way that anybody will be able to express and clear the transaction in any other way.

:: ::

So please, let's stop the fantaisies, or the conspiracy theories about a switch to euros or a new bourse. If any transaction, whether by Saddam, the Iranians or anyone else is expressed in euros, it is purely cosmetic. The underlying market is in dollars, and will remain that way.

Those who poste these stories or push them are badly undermining their credibility and engaging in silly scaremongering.

Display:
Thanks for this reality-drill.

The struggle of man against tyranny is the struggle of memory against forgetting.(Kundera)
by Elco B (elcob at scarlet dot be) on Fri Feb 24th, 2006 at 08:17:45 AM EST
Ok, so the bourses are not moving to Iran. Thanks for clairifying that.

The underlying market is in dollars, and will remain that way.

Is the currency likely to switch to euros (or another currency) in the (often predicted) case of sudden drop in value of the dollar?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Feb 24th, 2006 at 10:41:56 AM EST
Nah, in that case the dollar price just rises. Rapid inflation could screw up some of the IT systems ("of course oil will never cost more than $999") but no big deal otherwise.

That happened last year: part of the rise in oil prices was due to a drop in the value of the dollar.

by Colman (colman at eurotrib.com) on Fri Feb 24th, 2006 at 11:01:48 AM EST
[ Parent ]
Thank you for clearing that up at dKos, because Americans all seem to be in a panic about these sorts of issues.  But they never actually take the time to think about the big picture of what these situations would actually mean.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Feb 24th, 2006 at 11:36:24 AM EST
I doubt I have convinced many, sadly. The die hards are still at it, explaining to me that it's just a question of time and, guess what, that I am missing the big picture...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Feb 24th, 2006 at 12:19:02 PM EST
[ Parent ]
Or, to put it in Canadianspeak, "Having another one of your little psychodramas down there, eh?"

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Feb 24th, 2006 at 12:47:41 PM EST
[ Parent ]
It may also be worth hammering the "And if so, so what?" point: That while holding T-bills as a store of value matters greatly to the stability of the dollar, the use of dollars vs. euros as a unit of account or as a medium of exchange isn't of remotely comparable economic importance. The dKos panic-stories confuse these issues.

Words and ideas I offer here may be used freely and without attribution.
by technopolitical on Fri Feb 24th, 2006 at 03:36:18 PM EST
[ Parent ]
Pretty amusing really.  The same people that rail against intelligent design have no problem eating up this IOB/Peak oil disaster scenario stuff with a spoon.....
by HiD on Sat Feb 25th, 2006 at 01:25:07 AM EST
[ Parent ]
Thanks for this Jerome! I'm guilty as charged for spreading that meme, although thankfully I haven't done it in a while ;)

Pax

Night and day you can find me Flogging the Simian

by soj on Fri Feb 24th, 2006 at 11:46:49 AM EST
But you had lots of other interesting bits of information last time round - plus I got to post my comments near the top of the thread!

pax

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 24th, 2006 at 12:21:44 PM EST
[ Parent ]
What would happen if Russia Iran and Venezuela would decide to switch all their dollars inmediately to euros? How much this represent in front of Kuwait Canada and Saudi Arabia?

The problem is not the bourse, the problem is the exchange rate and buying up the US debt. Pill on the possibility of these three countries accepting "de facto" euros and we have  a situation that I would love to analyze to know if a sudden drop of the dollar in front of the euro is more possible.

I do not have the number so I do not know. But in any case, the problem is not euros  or dollars in a bourse.. the problem is what you do with the dollars you receive.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Feb 24th, 2006 at 12:04:46 PM EST
switching reserves to euros is a lot easier to do, and would have a much bigger impact, indeed.

But it's a separate question.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 24th, 2006 at 12:20:07 PM EST
[ Parent ]
This little scenario gets debated every now and then here in Asia.
by observer393 on Sun Mar 12th, 2006 at 05:20:34 AM EST
[ Parent ]
I am not sure that you are 'killing' this off Jerome.

Let me start with the architect and main advisor to the Iranian government, Chris Cook,  a former director of the International Petroleum Exchange. Though he agrees with the myth of the dollar/euro petrocurrency myth - he seems to have more faith in the creation and validity of an Iranian Oil and Natural Gas Bourse than yourself.

What ultimately determines the demand for dollars is not the unit of account for the transaction, but rather the desired asset holdings of those who are accumulating the wealth.

...I wrote to the then Governor of the Iranian Central Bank Dr Nourbakhsh.

In this letter I pointed out that the structure of global oil markets massively favours intermediary traders and particularly investment banks and that both consumers and producers such as Iran are adversely affected by this.

I recommended that Iran consider as a matter of urgency the creation of a Middle Eastern Energy exchange, and particularly a new Gulf benchmark oil price.

It is therefore with wry amusement that I have seen a myth being widely propagated on the Internet that the genesis of this "Iran Bourse" project is a wish to subvert the dollar by denominating oil pricing in Euro's.

As anyone familiar with OPEC will know, the denomination of oil sales in currencies other than the dollar is not a new subject, and as anyone familiar with Economics will tell you the denomination of oil sales is merely a transactional issue: what matters is in what assets (or, in the case of the US, liabilities ) these proceeds are then invested.

After a couple of years of apparent inaction my colleague and I were invited to put together a consortium to tender for a project to create such an exchange and after a presentation at the Central Bank in Tehran in May 2004, we were successful, as reported in the Guardian at the time. We subsequently learned that the delay had been due to initial opposition from the Saudi's and this opposition was withdrawn post 9/11 and Iraq.

President Ahmadi-Nejad is on record as saying that he favours transparency in the Iranian oil market. As anyone familiar with the City and Wall Street will know, transparency is the enemy of private profit, and it is this factor which was behind the delays in developing the Bourse project.

However, we remain hopeful that the strategy we recommended, which is based upon:
(a) gradual and organic introduction of pricing built upon the neutral function of transaction registration; and
(b) a simple (and Islamically sound) partnership-based "Clearing Union" synthesis of bilateral trading and a multilateral guarantee;

will in due course be taken forward.

http://www.opencapital.net/articles.htm

There appear to be a few misconceptions re the Iran Oil Bourse.

Firstly, the reason for its genesis was nothing to do with what currency oil is traded in and everything to do with the fact that producers and consumers were and are suffering at the hands of intermediary oil traders, particularly investment banks, and now hedge funds.

Although absolute levels of oil prices are based upon supply and demand, the level of volatility has been way too high due to systemic market manipulation resulting in massive hedging losses.

It's a phenomenon J K Galbraith called "the Bezzle" - where the losers do not know they are losing.... It means that the derivative tail has been wagging the oil market dog, and in fact oil markets are - courtesy of hedge funds - an accident waiting to happen, probably next Winter. Why? Because unlike the LTCM hedge fund debacle in financial markets, the Fed can't print oil to bail people out......

What reason do I have for saying this? Simply that the Iranian authorities accepted my arguments - as a former Director of the International Petroleum Exchange - some 4 years ago, and subsequently appointed my consortium to carry out a Feasibility study.

www.opencapital.net/papers/Iranexchange.pdf

In fact, it really does not matter what currency oil is sold in: that's merely a transactional issue.

What matters is what assets (or rather, liabilities) the proceeds are invested in. Where Mr Clark has a point.

Regards

Chris Cook

http://peakoil.com/post235825.html#235825

...Mohammad Asemipour, who was appointed adviser to the minister for the execution of the Petroleum Exchange Market in late 2003, explains why current conditions favour its development.

"The restructuring of our legal, fiscal and capital market systems has to take place simultaneously," he says. "Fluctuations in one market affect another.We have to extend our stock market geographically and we also have to diversify into other instruments," he adds.

Setting up an exchange in Iran will enable the country to manage the risk of volatile oil prices better, he stresses."We dictate the price of our oil by announcing it, but we don't control it - that's determined by what happens at the New York Mercantile Exchange and London's International Petroleum Exchange.

So we want to manage the risk.The establishment of an oil market is the most important market for us."

A source close to Iran's stock exchange who preferred not to be named agrees:"The ministry and the stock exchange all believe setting up a petroleum exchange will be fruitful for the economy," he says. "A feasibility study has concluded that the right structures for setting up such an exchange are present."

"Eventually we envisage a pan-Middle East exchange with Opec countries trading on it," the source says.
The exchange developers stress that the exchange will be independent - not run by an existing exchange or the Iranian government.

The ministry of petroleum initially invited other exchanges such as Nymex and the IPE to be involved, but project developers feared the initiative would lose its independence. Not necessarily wanting to conform to an existing model, the new exchange will "be a new model that will work within our new laws", Asemipour says.
One of its unique features will be its clearing operation, which is likely to operate under a clearing union method.

"This is a new partnership-based synthesis of bilateral trading between users combined with a collective guarantee," explains Chris Cook, a former director of the IPE who, as a member of the Wimpole consortium, provided strategic advice to Asemipour in a pre-feasibility study.

"Instead of a central counterparty, we will see a risk/treasury management partner responsible for setting guarantee limits, margining and managing a default fund/pool on behalf of the user group collectively.This is absolutely fascinating in its implications," he says.

http://www.opencapital.net/papers/Iranexchange.pdf

My feeling is, it could have some impact if it falls into the favour of China, India and Russia. Transparency is an added value.

Atlantic Free Press

by ghandi (expatforums@gmail.com) on Fri Feb 24th, 2006 at 05:06:39 PM EST
do keep in mind that Mr. Cook is selling the design of the system to the Iranians.....It's not like he's a neutral observer.  Can't envision him telling them NOT to set up a bourse.

Secondly this statment from Cook is braindead

Setting up an exchange in Iran will enable the country to manage the risk of volatile oil prices better,

The sovereign sellers, oil majors (BP excepted) and large scale buyers share one common trait.  They are gutless when it comes to pricing their sales/purchases.  It would be nice of Mr Cook to tell us just how he proposes to get the Iranians/Saudis/Emirates/Kuwaitis to sell fixed price well forward in time on an exchange when they won't do it now with physical bbls.

Their purchasing/sales managers never, ever want to do a fixed price trade.  Why you ask?  Number one reason, is you can be wrong and in such a transparent way that even your boss can figure it out.  Iran could eliminate price volatility tomorrow simply by posting a fixed price for lifting in the next 30 days and requiring their term buyers to lift rateably in each 30 day period.  But they are paranoid that they'd be low in some months.  So instead of taking responsibility for their trading, they sell on WTI - X or DTD Brent - X and whine about "traders and middlemen" taking advantage.....and about hedging losses when they do speculate and try to fix a price.

It's a bit unfair to the peons that actually make the trades as they are compensated with moderate, fixed salaries and get 100X the shit when the are wrong than kudos when they are right.  Much better to trade off of Platts or some other industry marker and go home at 5 PM.  Top management is  generally ignorant beyond words on how these markets work -firmly stuck in the 1950's.  One such putz ranted at my group that "we don't want to pay for our insurance (hedging).  Somehow we were to be the only players in the market that never lost.

All the sellers demand their people beat the market average (Platts/Argus Mean), while the buyers insist on Platts Mean minus.  And they wonder why the traders move the marker around like a yo yo...If they just got together and did half their business with fixed price deals, the middlemen would thin out fairly quickly.  Only the real derivative specialists and the black bag boys would have any valued added.

I made a speech to that effect to a bunker fuels conference once.  The traders in the audience were cringing and the shipping co. buyers were squirming in their seats.   But I was ready to retire,  tired of Wall Streeters being bashed and just wanted to see the reaction to some harsh truth. You could hear a pin drop.

I recommended that Iran consider as a matter of urgency the creation of a Middle Eastern Energy exchange, and particularly a new Gulf benchmark oil price.

Now this could work, EXCEPT the Iranians will lose their water when the spread to WTI gets out of their range of expectations.  These guys want a stable price and to have that price be HIGH relative to the buyer's alternatives at all times.  Small wonder they are often disappointed.

My feeling is, it could have some impact if it falls into the favour of China, India and Russia. Transparency is an added value.

How do you get more transparent than an open outcry or electronic system like Access.  Every trade is done openly and recorded for all to see...Iran could easily sell all their oil either fixed price or on monthly averages relative to NYMEX settles.  Its almost impossible to manipulate a market for a whole month, especially one the size of the NYMEX.

Now if the Iranians want to try to cull the mkt of speculators they should be careful what they wish for.  Without liquidity it's very hard to keep an exchange afloat.

by HiD on Sat Feb 25th, 2006 at 02:13:31 AM EST
[ Parent ]
Secondly this statment from Cook is braindead

Let's see what Chris has to say about that. I have emailed him on the subject of being labeled 'brain dead'. I am sure he will respond.

Atlantic Free Press

by ghandi (expatforums@gmail.com) on Sun Feb 26th, 2006 at 03:58:28 AM EST
[ Parent ]
Interesting thread. Maybe a couple more brain-dead comments on this from me since I don't think there would be a story unless I had suggested to the Iranians that they go for the concept.

Which I also said in spades to the Norwegians in early December last year (in a paper written at the request of one of their Consuls - General). They seem to have taken notice of this paper if recent press reports of comments by their outgoing exchange CEO are to be believed. They SHOULD take notice because they have been the biggest losers from the Brent complex for years.

But the last thing that is needed here is a new "Exchange": intermediary exchanges and clearing houses are obsolescent. What is needed is a global market network and "clearing union" which is not in the hands of intermediaries and which has pricing nodes (here I am an admirer of the London Bullion fix pricing methodology, possibly coupled with Baltic Exchange style broker panels)which are based upon the underlying market.

And there has to BE an underlying market before you can start trading derivatives, where my caustic friend had a point.

That is the sort of thing in our feasibility study and there was also a lot concerning the necessarily neutral legal and financial structure which such a market network should take. "For Profit" exchanges are a bit of a joke at the expense of the "customers" formerly known as "members".

Anyone interested can find much of the analysis on www.opencapital.net/markets.htm

The bottom line is that intermediaries are coining it at the expense of producers and consumers: J K Galbraith called such a situation (when losers don't knowthey are losing) a "Bezzle".

Which is spot on. A recent article in the FT quoted a Mr de Vitry of Barclays Capital as saying that intermediaries' profits from commodity markets are set to double in the next three years - from £13 billion!

Best Regards

Chris Cook

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Feb 26th, 2006 at 06:55:01 PM EST
sorry about that (a little anyway).  traders have never been known for great social skills.

Having been one of those "intermediaries <that> are coining it at the expense of producers and consumers", I can assure you that setting up new networks and methodologies with broker panels etc isn't the way to trim those profits.  You have to change the motivations and risk profile of the participants and their management.  They don't lack tools, they lack courage or a motivation to show any.

The producing nations are well aware that middlemen hurt them.  That's why the smarter ones essentially put traders under water to get access to the oil.  We regularly overpaid for term business from Venz/Algerian/Italian export refiners just to have a foothold in the market.   The end consumer is the real mark in the game most of the time.  And he/she will never have a voice sicne their usage is so small relatively.

As to middlemen coining it.  One of the main reasons for this is that there are so few middlemen of any size left.  The shakeout in the 90s left very few players.   The risks are therefore larger (hard to lay off your bets) but the rewards for providing the liquidity the  customers demand grow as well.  Or the other model of simply providing a flow service to hedge fund types (and trading off the info flow with the other hand) can be followed.

I rather doubt you'll find a way to design a system that can turn what the oil market needs into what the hedge fund players want as well as MS, JAron/GS, Rest of Wall Streeters can.  I bailed out over 10 years ago.  Even then the complexity of the models for the derivs the customers wanted (or could be sold) were such that few really understood the whole picture.  Complex derivs were where the profits were coming from, not so much matching bid/ask.  That and just calling the market well.

If you do read this, I'd be curious to know just how you feel the Norwegians were shafted by the Brent Complex system.  I focuses on products not crude, which may be why I am more skeptical of these bourses.  Products are a lot more complicated to handle in my experience.

by HiD on Mon Feb 27th, 2006 at 06:12:55 AM EST
[ Parent ]
Basically anyone hedging oil sales or purchases against Brent has been losing and big-time.

I had chapter and verse on particular games going on in respect of pricing against IPE's Brent settlement prices which were being manipulated, and blew the whistle on it.

Unfortunately I alleged "Systematic" manipulation not "Systemic". And, because no-one was doing it most of the time - but most were doing it some of the time, I got slagged off.

Everyone was coining it, particularly the Exchange itself which was no longer (as it was in my day) a "Mutual" but was now "For profit" with a great interest in the 10,000 contracts a day being bought and sold in these games.

The locals actually called it "grab a grand" because the big boys were quite happy to give away $50k on the settlement to them because they made ten times that on derivatives or physicals priced against it.

After it all died down of course, they quietly changed the rules....but I certainly could not be seen to be correct.

I believe that the relationship between one of the biggest oil majors and one of the biggest investment banks would not stand close examination and that they play (or used to until hedge funds took away their pricing power)a "Grand Old Duke of York" game. ie march the price up and down the hill - and compensate each other informally OTC or otherwise for any losses. Hedgers lose, because volatility is over-priced on their options or alternatively they lose more (or gain less) on their hedges than they should.

I believe that there is a way of restructuring the market which can work, but it requires new tools and a bit of lateral thinking. Which is what I have spent the last few years doing....

Best Regards

Chris Cook

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Feb 28th, 2006 at 04:35:02 PM EST
[ Parent ]
OK  -- I understand.  

IPE settles were indeed a joke.  (I used to sit at the elbows of a couple of the bigger players on Brent) But I wouldn't be sure they were always manipulated the same direction such that they would constantly hurt a 100% same side hedger.  If your analysis is in print somewhere I'd love to read it.

The locals actually called it "grab a grand" because the big boys were quite happy to give away $50k on the settlement to them because they made ten times that on derivatives or physicals priced against it.

very very accurate.  Also done extensively with Platts/Argus based derivatives.  I could tell you some interesting things but I'm not sure about the statue of limitations.

Again, all the "real" players have to do is fix their own prices a significant percentage of the time.  It's the abdication of pricing to a market settle or a journalist that shafts them (in my opinion).  There's no gun held to Statoil's head forcing them to price off of settles.  Just sell on an EFP and sell the futures rateably or when they feel lucky.  

It will be interesting to see if you can structure a more honest market.  The problems I see though are:

1)  Top brass fear corruption.  The like forcing their people to sell off of some marker system to avoid the ease of shaving a cent off a fixed price sale and have it re-appear in cash down the pub.  And the peons like it because they can pretend to be traders while arguing over the last cent or so relative to Brent, when in reality their job isn't that hard or stressful.

Top brass also fears accountability.  If their team can't match the settle, the stock holders have a legitimate right to ask "why not sack all of you and just term up the sales to XYZ trading house".

  1.  Oilco and consumer company traders are just not well trained or up to the task much of the time.  The ones that get it move to the Wall Streeters or traders.  It's hard to win in a game where your team is 3rd rate.

  2. Oilcos and consumer companies not are always that honest either.  For example, Oilcos have no qualms about shipping surplus materials out of their markets at a loss to prop up the price of the local mkt.  Consumers will try to keep high price purchases secret to avoid affecting their floating priced purchases.

I guess what I am saying is the markets have grown up to reflect the character and culture of the participants.  If you can't change that character, your new market will have the same problems in time.

As for direct collusion re marching prices up and down, I never saw that between majors and Wall Streeters (I worked for both).  But I'm 10 yrs+ gone and wouldn't doubt it much from one oil particular major or the  crude traders at one particular IBank back in my day.  The same players are still around today, just at different desks..  

I had Dutch trading house traders ask me out to lunch and suggest precisely that sort of tactic and carving up markets to keep aquisition costs down.  The voice brokers would hint that party A and party B were undoing their published deals in secret, but they liked the money too so you could never get them on record.  European markets were a real swamp.  There was no honest business with ENEL before 1995 and the revelations re Elf were no surprise.  IIRC, the German govt owned a piece of one of their sleazier trading houses.  When the regulator's political parties are part of the scam, it's hard to get an honest playing field.

The collusion on cutting brokerage commissions was real as well.  Some of those guys are lucky not to have seen the inside of courtrooms instead of just getting fired and participating in a manpower shuffle with higher salaries at the end of the day.

by HiD on Tue Feb 28th, 2006 at 06:03:12 PM EST
[ Parent ]
Agreed, a very interesting thread and decidedly out of my area of competence.  Jerome's pragmatic, historic and rational analysis is quite convincing, but I can't help wondering about various sorts of unexpected events producing results that are, a priori, highly unlikely.   The sky has been falling in the dollar market for some years without noticeable effect, yet prudence suggests that some of us may very well find ourselves immersed in an unexpected meteor shower.  It's also not obvious that the creation of an Iranian oil bourse and the possible wide-spread liquidation of dollar reserves are probabilistically independent phenomena.   Habit, inertia and infrastructure have non-trivial weights but so do folly, fear and megalomania.  

Hannah K. O'Luthon
by Hannah K OLuthon on Mon Feb 27th, 2006 at 06:17:40 AM EST
hear, hear.

jerome's explanation is linear, and there is a lot more psychology behind this, imo, in the dollar staying the de facto 'petro-currency', than in the dry accounting factor.

we are talking about a dollar that's stretched extremely thin by debt and profligate non-productive weaponisation, with a disproportionate amount of military bully-force swaggering behind the diplomacy.

superpowers tend not to let go of iconic symbols easily, and the dollar sure is that, and the petrodollar more so.

is it coincidence that saddam was going to change over before he got taken down?

by this diary's arguments, it would appear so.

or am i missing something?

i heard he would have saved a bunch of 'money' by switching.

if that's true,(please correct me someone if i'm wrong), why wouldn't iran set up a bourse in euros.

if they gain on ther balance sheet by saving money by trading in euros, where would the loss come from?

 am i out to lunch?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Mon Feb 27th, 2006 at 06:49:47 AM EST
[ Parent ]
yes, just coincidence.

no real profit made unless you assume Saddam held euros, then converted to dollars when the Euro went from 83 cts to 1.35 (and now 1.19) over a multi year period.  

Of course, holding euros has nothing to do with selling oil but rather how one holds any leftovers after expenses.  This "20% profit" line of argument assumes the cash was just hanging about and that Saddam was lining up to purchase something else in USD anyway.  For all I know, Saddam's purchases were all in Euros (since we were boycotting him) leaving no foreign exchange profit at all.

by HiD on Fri Mar 10th, 2006 at 08:07:24 PM EST
[ Parent ]
by Colman (colman at eurotrib.com) on Fri Mar 10th, 2006 at 01:50:45 PM EST
but this analysis is a collection of conspiracy theories marked by a poor understanding of how big money flows in the real world.

I've yet to see one of these theorists come up with the goods on one simple set of questions:

Exactly when and where will the IOB start up?
What will it trade?  How will it settle?  Where is an explanation of the rules of the road?

no rule book, no bourse.  simple as that.

Even if you dig through Chris Cook's info on his website, you find only vague handwaving.  Even that suggests the "bourse" will begin with petrochemicals (tiny market compared to crude oil).

try this article as another rebuttal:

http://www.atimes.com/atimes/Middle_East/HC10Ak01.html

As for Ron Paul -- he's a dyed in the wool libertatian (looneytarian?).  Comes from the same school of anti government borderline paranoids that are giving us the oil bourse = collapse theorists (gold bugs mostly).

by HiD on Fri Mar 10th, 2006 at 03:39:48 PM EST
[ Parent ]
by HiD on Fri Mar 10th, 2006 at 03:57:41 PM EST
[ Parent ]
So in a reality-based world there is no need for anyone to fear the Iranian Oil Bourse. But then the US administration does not live in a reality-based world...

On second though, the only thing they know is oil and propaganda. Unless of course, the real Cheney is dead and what we see today is the Cheneybot. :)

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sun Mar 12th, 2006 at 07:21:37 PM EST


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