Wednesday, March 15, 2006

Patience in watching the development of geopolitical issues

I have made a lot of noise about the Iranian Oil Bourse, or Kish International Oil Bourse (KIOB), and I write this now to remind myself and others that despite my and others' intial alarm, the events that are now unfolding may not have immediate and dire consequences, but will most likely spur the beginning of a long road down for the dollar and an increasing role for the Euro as a world reserve currency.

In January of 2006, Iran had this to say about their upcoming oil exchange:

"At the meeting, Dr Asemipur, the executor of the oil exchange project, and Salehabadi, secretary-general of the country's stock exchange, spoke about the different stages and the progress of the oil exchange.... the structure has to be defined in a way in which it is not limited to Iran's 2.5m barrels of oil but should bring the oil of the regional countries into the exchange and to present up to a ceiling of 25m barrels."

Also on 17 January, Jam-e Jam newspaper quoted Kamal Daneshyar, the chairman of the Majlis Energy Committee, as saying:

"At meetings held with Oil Ministry officials, it was decided that the first phase of the oil exchange will become operational within three months. In the first phase, the oil exchange will operate on a short-term basis, but, in the second phase, the exchange will become international and its activities will become very extensive."

And from William R. Clark:

"It is true that the ECB has a staunch anti-inflationary bias, but international oil transactions do not result in inflation pressures if those euros are being used outside the eurozone for oil sales. That is precisely what the US does - it exports its inflation, but unlike the EU, the US runs huge trade deficits. To suggest that the euro money supply can not be raised therefore the Kish International oil bourse can not function sets up a false dilemma..."

The volume of sales on the KIOB will likely open quite small--and in the beginning no crude oil at all will be traded there--only oil derivatives. However, where the problem arises is when the volume of transactions rises towards the 25 mbpd ceiling that Dr Asemipur and Salehabadi have stated. The US dollar money supply is increased by about 20% annually. This means that the number of dollars in circulation doubles about every 3½ years... If/when even 10% of the world's oil transactions were conducted in Euros, the oil money that is bankrolling this massive inflation and US deficit spending will be reduced significantlyy, and the Federal Reserve's policy of massive currency inflation will no longer be feasible. And when that happens--well, that's going to present some problems...

And so it's no coincidence that the M3 Monetary Aggregate will cease to be published by the Fed... Investors would likely throw up all sorts of red flags if the money supply increases began to slow and eventually reverse themselves. I'm pretty sure that the last time that happened was the Great Depression...

So when on March 21st (one day after the Bourse opens) when the world doesn't fall apart, don't simply start to ignore this issue. It will take years to develop and many geopolitical events in the interim will be in some way connected... At the very worst--it could mean World War III with some very interesting alliances and enemies... At the very best--it could mean very hard times for the USA and the re-emergence of a bi-polar world power system. Any way you slice it, we're teetering on the edge of great change...


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