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Iran, Greece and an Energy Standard of exchange........

by ChrisCook Fri Nov 11th, 2011 at 02:10:54 PM EST

Reuters kicked it off this morning.....

Greece turns to Iranian oil as default fears deter trade

Then Zero Hedge took up the running

 Greek Lender of Last resort....Iran

A fascinating article by Reuters this morning really brings to bear the reality that Greece faces as lenders and trade creditors refuse to help (and why should they realistically) with energy needs.

The harsh reality that Iran (yes that nuclearized Iran) is the main provider of Greek oil needs surely puts into perspective what seemingly unlikely events can occur when a person, corporation, country, gets desperate.

Perhaps we should reflect the other way that while all the world's bankers and money-men refuse to lend Greece money, Iran has truly become the lender of last resort for Greek survival - as it strikes us that energy needs will/should trump a coupon payment any day.

Then we saw some typically creative comment from FT Alphaville

A Drachma-tic moment in Greek oil trading

Whatever the case, if Greece's other options for imports of crude are drying up, and given that European leaders have fanned the flames by not ruling out a Greek exit from the euro, isn't there a problem forming here? And won't it eventually start to impact other Greek commodity and trade deals too?

Of course, if the issue for other providers is really potential "drachma" exposure, then surely the sensible thing is to start developing a synthetic drachma derivative market sharpish.

Trade financiers could also start embedding drachma swap terms into current agreements (you know, just in case). What's more, if the agreements were further collateralised with Greek products -- say,  pledging one barrel of refined product for every two barrels of crude imported (in the event euro payments could not be made), this could even help to stabilise the exchange rate if and when Greece was to pull out of the euro.

This is of particular interest to me since I have just returned from a very productive week in Iran - my fifth visit - where I was a plenary speaker at the annual oil ministry think tank conference.

Here's my presentation, outlining the inevitable collapse in the financialised crude oil price and a Transition through Gas

I spoke immediately after the OPEC Secretary General, and the 'Gas OPEC' (GECF) Secretary General, Leonid Bokhanovsky but before the (woman) Iranian Vice President.

My colleague and co-conspirator, Sam Barden - a Dubai-based Australian broker/trader with ten years' experience in Russia - then outlined in detail the possible financing and funding options arising out of unitisation of natural gas, which he proceeded to write up in his regular RIA Novosti column

Sam's Exchange: Dollar politics vs energy economics

The next morning I had breakfast with Mr Bokhanovsky, and he invited me to submit a proposal for an extension to the GECF's existing (but rather limited) Gas Market Model, which I have now done.

After several days' meetings in Tehran with many and varied officials and senior managers, there's a fighting chance that at next week's GECF ministerial meeting...

First gas exporters summit to focus on gas prices, greater coordination

.....this Transition Through Gas proposal - which essentially aims to monetise gas, by reference to an energy standard of exchange - might just get a following wind for development, initially through the creation of a Caspian benchmark price.

The meme which really appeared to get traction was this.....

.....rather than oil priced against the dollar, and then gas priced against oil, why not price oil and dollars against gas?

If Greece is truly desperate they could pledge their submarines as collateral. :-)

Could Iran deliver oil and gas to Greece without going through the Persian Gulf and Red Sea? Would/could Turkey and/or Syria facilitate transit of Iranian product to Greece without crossing the Mediterranean? The political will reassert itself one way or another.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 12th, 2011 at 12:36:17 AM EST
Stopping them in the Persian Gulf or Red Sea would be an act of war (which may be what the U.S. wants). The current Syrian regime probably has enough enemies without getting another one (if the regime falls, that would be another matter). Turkey might actually like having Greece dependent on it. And if Iran is really stopped from exporting oil, the world price, and hence the price at the pump, may go up a lot - and there's an election in the U.S. coming up soon.
by gk (gk (gk quattro due due sette @gmail.com)) on Sat Nov 12th, 2011 at 01:46:13 AM EST
[ Parent ]
There is no likelihood of UN sanctions not least because the Chinese will not allow it, and the Russians will almost certainly not, short of a smoking nuclear gun.

But at the moment US unilateral sanctions are causing a lot of problems for Iran. No oil trader who wants to do business in the US will trade with Iran, which rules virtually all of them out, and Iran are very much feeling the squeeze.

What all this nuclear crap is about -and there is nothing new, this is pure hype - is about cranking up the sanctions.

Two principal options:

(a) isolating the Central Bank - which will require UN sanctions;

(b) EU sanctions - which is the interesting bit, since if Iran is prepared to supply oil on credit terms to other EU countries as well as Greece would hardly see the recipient in favour of sanctions.....

Of course, the key point for Iran is, how do they get paid? That's where the sort of barter deals suggested by Alphaville (actually, I aired it in conversation with Izabella Kaminska) may come in.

eg Iranian crude for Greek refined products; marine transport; future gas transit and so on........

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

by ChrisCook (cojockathotmaildotcom) on Sat Nov 12th, 2011 at 04:36:26 AM EST
[ Parent ]
I am evidently missing something here in that it just seems to me that in evading the new post-Bretton Woods Gold standard we are simply swapping gas for oil where previously we swapped oil for gold.

But it remains the same thing, just this time tilted in favour of Russia and Iran instead of the US and Saudi.

So, I can't see it's such a novel idea, which means I must be missing the point somewhere

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Mon Nov 14th, 2011 at 09:50:01 AM EST
Indeed you are missing something, but you are in excellent company, because the difference between:

(a) a unit of currency ('money's worth'); and

(b) a unit of measure for value (aka unit of account or numeraire) by which exchanges of value and currency are priced;

is not widely understood.

A 'value standard' unit of account/measure is an abstract unit akin to a standard unit of measure for weight (kilogramme) or a standard unit of measure for length (metre). You can no more have a shortage of units of account than you can have a shortage of kilogrammes or metres.

An energy standard unit would be an absolute unit of energy  in an amount(say the energy equivalent to 10 Kilo Watt Hours) which is relevant to peoples' everyday experience.

Let's call that hypothetical unit an ECO.

Units of energy currency, on the other hand, are legal rights over a fixed amount of energy production and  would be issued - transparently and under suitable supervision - by producers.

So we may see the evolution as 'energy currencies' of units redeemable in payment for natural gas or other carbon fuels; units redeemable in payment for electricity; units redeemable in payment for heat (eg from local CHP plants) and so on.

Note that these energy currency units would then - like everything else -be priced against the energy standard rather than against an abstract and literally worthless currency like the $.

The price of a unit of gas currency would reflect the fact that when burnt as fuel it may give rise to flows of both heat and electricity. So, very simplistically,  we might see a Unit of gas priced at (say) 3.0 ECOs reflecting a value of 2 ECO's worth of electricity and 1.0 ECO's worth of heat which derives from it.

But I think that introduction of an energy standard would be best achieved through taking an existing currency (where we already have value relationships in our heads) and fixing it relative to energy. The best candidate is the € - since it is completely and terminally fucked.

How this might work is that the € is fixed against energy - as above - and that the ECB manages the issue of € denominated currency units redeemable in payment for energy, by a Swiss custodian. (this takes EU politics out of it).

The ECB then supervises, as a Hong Kong style monetary authority, a massive - ie € hundreds of billions - energy unit issue to be used throughout the EU for investment in renewable energy and in energy savings (an EU Green Deal using energy loans, not € loans) on a cosmic scale. Also for the refinancing of the existing pools of conventional debt which have been created by banks such as those with which J works.

This unitisation of existing debt has a similar effect to securitisation: it enables banks to free up their balance sheet for further development finance. But the difference is that securitisation retains an interest-bearing debt liability, which unitisation turns the debt to a new form of equity.

Qualitative Easing, if you like.

The mechanism for transition to a low carbon economy is to apply a carbon levy to gas and carbon fuel use, and for EU members then to pay an energy dividend in energy units to all their citizens.

The outcome is essentially a new breed of carbon credits, but denominated in the intrinsic value of energy, rather than deficit-based $, € or £.

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

by ChrisCook (cojockathotmaildotcom) on Mon Nov 14th, 2011 at 10:35:58 AM EST
[ Parent ]
okay, I get that much, or at least I think I do.

however, one energy unit at source does not equate to that energy being available at point of use.

Oil must be refined and transported. Gas must be pumped.

However, both must first be extracted and this is perhaps an end point issue where the value of the energy resultant from the material is divorced from its value within an economy. Liquid fuels have more value than those which require a delivery infrastructure such as electrickery.

Also, the cost of electricity from renewable sources is, despite the best efforts of the fossil fail industry, decreasing at the point where traditional fuels are getting more expensive and more difficult to extract. This may not seem a problem to the gas economies of Iran and russia right now, but they'll be getting their fracking earthquakes eventually. So the ECO value is less a constant than dependent on what form the energy is.

so, if energy is gold, all we're producing is a set of floating currencies represented by different forms and production systems

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Mon Nov 14th, 2011 at 11:40:18 AM EST
[ Parent ]
The ECO value is an absolute, and so a constant. All forms of value, whether or not monetised into currency, will vary by reference to it.

The fungibility of an energy currency is related to the homogeneity and the liquidity of the flows of the underlying energy.

In my view, natural gas is uniquely well placed to be the basis of a global reserve currency within a suitable framework of trust or 'clearing union'.

This is because unlike crude oil and oil products, which could and would be priced against it, natural gas is pretty much homogeneous once processed at or near the well-head.

While it is true that non-renewable gas is a finite resource, valuing it correctly by raising the global price will help conserve it - and finance the creation of sources of renewable gas - while dis-intermediating the market (which is actually in the intermediaries' interests at a time of capital starvation) will remove the players with an interest in volatility and protecting rents from legacy assets at all costs.

Of course, energy suffers transmission losses, and that is why decentralisation, and massive investment in energy savings makes so much sense. The use of the 'energy loans' I advocate wipes the floor - when invested in energy saving 'nega watts' - with any interest-bearing debt in 'fiat' currency.

But I think we will see the use of 'heat currency' on a very local basis (eg to fund CHP projects) and electricity currency more widely, albeit limited by transmission losses.

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

by ChrisCook (cojockathotmaildotcom) on Mon Nov 14th, 2011 at 12:05:11 PM EST
[ Parent ]
One thing intrigued me in your presentation. You show a graph of oil versus gas prices in the UK over several quarters, yet the oil is priced in WTI rather than Brent. Yet, as it's about the UK, wouldn't Brent have been the more useful comparator ?

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Mon Nov 14th, 2011 at 09:51:50 AM EST
Indeed it would, but I didn't have access to that chart at the time. It would actually have shown an even greater gap, since it Brent/BFOE is being more shamelessly manipulated than WTI.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Nov 14th, 2011 at 10:38:15 AM EST
[ Parent ]
It would seem that there might be an available land route for a gas pipeline from Iran through Armenia to Georga where there could an LNG terminal if a pipeline through the Black Sea to Bulgaria proved impossible. Russia would oppose this naturally. Another possibility would be a pipeline through Turkey to the Mediterranean or across the Bosporus and directly to Greece. Or Iranian LNG could be shipped directly from the Gulf to Greece in addition to oil. The same type of arrangement could apply to Italy. This might offer a trade that did not have to be settled in either US$ or Euros except, perhaps by reference for pricing.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 14th, 2011 at 10:14:28 PM EST
If the U.S. really cares about boycotting Iran (as opposed to posturing for the elections) I doubt they will let Georgia get involved.
by gk (gk (gk quattro due due sette @gmail.com)) on Tue Nov 15th, 2011 at 02:37:34 AM EST
[ Parent ]
will not take kindly to any attempt to break their monopoly on gas transport to the west.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Tue Nov 15th, 2011 at 06:37:57 AM EST
[ Parent ]
If the U.S. really cares...

This translates to: "If the vector sum of lobby interests in the US opposes..." This could depend on the evolving business arrangements of multi-national oil companies, notably BP.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 15th, 2011 at 09:48:35 AM EST
[ Parent ]

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