Fixing the rial

Since March, when I last posted (“Iranian oil empire?”) about the currency war in Iran, things have visibly and significantly cooled. But just because there are no pipeline explosions, naval exercises, or military threats doesn’t mean the situation hasn’t progressed. Let’s start where we left off, with an Iran inconvenienced by sanctions, but essentially unfettered in its oil production and export capabilities—especially in transactions with the BRICS.

Chris Cook, former director of the International Petroleum Exchange, suggests that the sanctions on Iran may not just be ineffective, but counterproductive; and that Iran is actually better off (as March 20th might have suggested) without a market for dollars. Anyone who can foster a good relationship with an off-market Iran will now have incentive to buy discounted crude (relative to global prices) for refining and resale at a profit.

Even more significant is the possible end result of a developing energy voucher system in Iran designed to decrease domestic demand and wasteful energy use.

Taken to its logical conclusion, where this policy leads is for Iran’s Central Bank simply to fix a new rial – with several zeroes removed – to a suitable unit of energy, and for energy prices to be set against this unit. This could be implemented in a similar way that a deficit-based abstract currency unit was fixed to participating European currencies at the launch of the euro.

The transition process would need to be properly and transparently managed by a monetary authority – probably the Central Bank – in close liaison with the oil and gas complex. The outcome of adopting an “energy standard” and an energy dividend in this way would be to rapidly reduce profligate use of energy at the same time as addressing the problem of inflation.

Instead of debasing Iran’s rial entirely, the U.S. may only be encouraging Iran to rethink its currency in new, energy-based terms. If this becomes reality, the Iranian rial would effectively become a hedge against volatile global crude oil prices and dollar-denominated market manipulation. Put simply: If each rial in your reserves guarantees a fixed amount of Iranian oil, free from market volatility, you’re going to buy more rials.

I don’t think that’s what Obama intended.

Iranian oil empire?

Is Iran, despite economic sanctions, still fashioning itself into the up-and-coming Middle Eastern oil empire? With a chokehold on the strategic Strait of Hormuz; oil smuggling avenues in Iraq worth $20 million a day; Russian, Chinese, and Indian support; and the upcoming cold shoulder to the petrodollar scheduled for March 20th, it certainly seems a possibility.

Now, with that in mind, take into account this carefully orchestrated duo of recent news events:

3/2/12: “Iranian Saudi pipeline explosion claim boosts price of crude”

Brent crude jumped $5.74 to $128.40 per barrel in New York on March 1 after a report on an Iranian state-run news channel that a pipeline had exploded in Saudi Arabia. This was the highest price since July 2008, but prices fell back slightly after Saudi officials denied the reports.

3/3/12: “Iran discovers giant oil field in south”

Iran has discovered one of its biggest oil fields with high quality crude in a southern province, the semi-official Mehr news agency quoted an official as saying on Saturday.

The first event demonstrates Iran’s acknowledgement of—and apparent disregard for—the fragility of the global oil market. While they are most certainly only “keeping up appearances” by haphazardly spreading such rumors, Iran wants everyone to know that, with EU default looming, it holds the cards to Mutually Assured (Economic) Destruction—no nukes needed.

The second event fills in the gap, as if to say: “Sanctions? What sanctions? For anyone who agrees not to trade in dollars (BRICS nations especially welcome), there’s a secure future in Iranian oil.”