Should we fear the proposed Iranian oil bourse?

I have read that Iran will construct an "oil bourse" with oil priced in terms of Euros instead of dollars.  Here is one such account:

The Iranian government has finally developed the ultimate “nuclear” weapon that can swiftly destroy the financial system underpinning the American Empire. That weapon is the Iranian Oil Bourse slated to open in March 2006.

Here is a related worry.  I don’t know much about what Iran is planning (nor does a Google search yield much trustworthy information), but this fear is based on faulty economics.  As a first-order approximation, it doesn’t much matter whether Iran prices its oil in terms of dollars, Euros, or some other currency.  At the beginning of each day, investors (including the OPEC nations) are holding their preferred bundle of currency positions.  You might need to hold or receive Euros for a moment to make a transaction, but moving from the dollar to the Euro, or vice versa, can be done easily.

Two qualifiers: First, some investors will hold more Euros to begin with.  They don’t know their periodic demands for oil, and they don’t want to be bothered paying a bid-ask spread and calling a broker when the time comes to pay for oil.  But this is likely to be a small effect.  Major market players generally do not regard these conversion costs as a decisive investment factor.  Bid-ask spreads in the dollar-Euro market are small, and if the dollar fell by a large amount it would be worth buying dollars cheaply and bearing subsequent transactions costs of a later reconversion at a superior rate.

Second, the dollar’s status as reserve currency depends in part on perceptions.  If pricing oil in terms of Euros altered those perceptions, the value of the dollar could fall.  But most of all those perceptions depend on relative economic performance.  An Iranian "oil bourse" is likely to be. in psychological terms, a non-event, especially if Iran continues down its path as international pariah.  Note that Saddam’s efforts to price oil in terms of Euros did not end up as a big deal.

If you are going to fear Iran, worry about the nuclear weapons.

Thanks to Michael Katsevman for the pointer.


Comments for this post are closed