Iran plans to open its own oil exchange. The objectives of setting up the Iranian Oil Bourse (IOB)--proposed during the Third Five-Year National Development Plan (2000-5)--are to make Iran the Middle East’s oil trade center, reduce transaction risks and costs, stabilize prices and increase flexibility of customers in deciding which currency to use for purchasing oil.
According to the Persian daily Sobh-e Eqtesad, the bourse will trade for oil mainly in euros instead of the US dollar, which has long been the dominant currency in the international oil trade. The debate over the financial impact of trading oil in euros rather than dollars is a complicated one, as experts hold divergent views regarding its impact on the American economy.

Domestic Agenda
The IOB has been on Iran’s domestic agenda for a long time and different dates have been informally announced for its opening, all which have been quietly disavowed as the deadline neared. For instance, March 21, 2006, the first day of the current Iranian calendar year, was the most recent rumored date.
The effectiveness of IOB will depend on whether the big international oil trading companies decide to undertake deals in euros or not. However, the adverse financial impact on the US economy remains more than idle speculation.
Mohammad Javad Assemipour, former director of the IOB program and an economic expert, maintained that the bourse will turn Iran into a major oil exchange hub.
“Iran’s oil transactions with the regional countries and some East Asian states will take place in euros instead of US dollars,“ he said.
Assemipour even paid a visit to the International Petroleum Exchange in London and held talks with major traders.
The International Petroleum Exchange, based in London, is one of the world’s largest energy exchanges, which also handles futures contracts and options on oil, natural gas and electricity.
The official subsequently submitted a 500-page report to the economy minister in order to justify the plan and obtain the authorization from the Bourse Council.

Challenges
Many believed that the plan to open the country’s oil bourse could become a reality during the tenure of former President Mohammad Khatami, but they do not expect the country to become the dominant oil trading center of the Middle East anytime soon.
Former Oil Minister Bijan Namdar Zanganeh was also among those who favored the IOB. He had said that no barrier is going to stop the government from opening the country’s oil bourse.
However, his deputy for international affairs, Hadi Nejad-Hosseinian, was more realistic about the problems facing the plan. He maintained that one of the main challenges in the way of launching the bourse was lack of coordination between the government and the Bourse Council.
Another challenge was that the experts involved were not fully conversant with the financial tools required for an oil exchange.
All these challenges are still applicable. After a great deal of effort and management reshuffle, the Bourse Council ratified the plan for establishing Iranian Oil, Gas and Petrochemicals Bourse last year under Article 95 of the Fourth Five-Year National Development Plan (2005-10), urging the Oil Ministry to take measures for implementing the national scheme.
The Bourse Council has made up its mind to make the IOB operational at the earliest. It is predicted that the bourse could follow in the footsteps of metals and agricultural bourses.

Sensitivity
The pros and cons of setting up the IOB have still not been thoroughly examined. After the proposed plan became a hot topic of discussion among lawmakers, officials were urged to implement the president’s directive regarding the IOB. This is while the Majlis threatened to oppose the plan if it is exploited by any state entities.
The presidential directive had underlined transparency and accountability in the oil industry.
To calm the situation, Assemipour said the bourse will be equipped with an online system to disseminate information and prevent rent-seeking practices. He blamed sensitivities related to the bourse as the main reason behind its delay.
“The IOB is based on petroleum exchanges such as Nymex and IPE, will use software that meet international standards and will be aligned with the trade systems of other international petroleum exchanges,“ he said.
Nevertheless, the debate over the IOB continues to this day.
In the midst of all this, the neighboring Persian Gulf states jump-started schemes to compete with the proposed Iranian Oil Bourse. Qatar and Dubai were among the first to set up their own oil bourse under a plan devised by Nymex and IPE.
Russia has also announced its plans to open an oil bourse which will undertake transactions in ruble instead of US dollars.
Experts are of the opinion that all these new developments should alarm Iranian officials, as they are still behind schedule for setting up the IOB.
The good news is that some of the top oil-producing countries such as Venezuela and major oil consuming countries, most notably China and India, have announced their support for the IOB. China and Russia also back Iran’s right to implement its own civilian nuclear research program.

Iran has around 126 billion barrels of proven oil reserves, about 10 percent of the world's total.

Upheavals
There is speculation that the Iranian Oil Bourse is aimed at escaping any possible future economic sanctions spearheaded by the US.
A number of economists believe that establishment of the bourse will prove to be very difficult. This is because more than 68 percent of the global oil transactions are in US dollars and Iran’s economy will experience upheavals by abandoning dollars.
Some experts believe that even if the IOB were to commence operations, there is not much harm it can do to the US economy.
The IOB faces problems such as lack of economic, legal and administrative structures to start the international operations as well as inefficient financial, banking, insurance and customs infrastructures.
Officials acknowledge that the IOB will be mostly threatened not by dollar or euro, but by inefficient policies related to management of bourse affairs. For instance, while Assemipour was talking about the imminent commencement of IOB, he was replaced by Karbasian.
Majlis Economic Commission was against the appointment of Karbasian. It said that he was qualified for the job but was affiliated to a certain political group. They also claimed that he can misuse his position and act in a factional manner. However, Karbasian rejected these allegations and stressed his commitment to implement the plan.

National Plan
The IOB, which will be located in the free trade zone of Iran’s Kish Island in the Persian Gulf, remains a national plan. It will allow national and international investors to buy or sell oil in euros and make it unnecessary to purchase dollars for oil transactions. If successful, the IOB will provide Iran with huge economic benefits, especially if it invoices at least some of its energy contracts in euros.
Iran has around 126 billion barrels of proven oil reserves, about 10 percent of the world’s total and the world’s second largest proven natural gas reserves after Russia. From an economic perspective, selling oil in euros would be logical for Iran as trade with the Eurozone countries accounts for almost half of its total trade. At present more than a third of Iran’s oil exports are destined for Europe.
The IOB could create a new euro denominated crude oil marker, which in turn would enable the Persian Gulf nations to sell some of their oil in euros.
The bourse can help attract greater levels of foreign direct investment in Iran’s hydrocarbon sector. And if it facilitates futures trading, it will give regional investors an alternative to invest in Iranian markets.

Impact
The decline in dollar’s value against the euro since 2002 has reduced Iran’s purchasing power against its main importing partner. But this is a temporary phenomenon as more states will increase the percentage of trading in euros and this will increase calls both in Iran and the Persian Gulf littoral states to conduct oil exports in euros.
A move away from the dollar would further benefit Iran, as more than half of its assets in the Foreign Exchange Reserve Account are now in euros.
Needless to say, the current petrodollar system greatly benefits the US; it enables it to effectively control the world oil market as the dollar has become the top currency for international trade. In terms of its own oil imports, the US can print dollar bills without exporting commodities or manufacturing goods as these can be paid for by minting yet more dollar bills. Therefore, just because the decision displeases the US does not mean that the rationale is purely political.
In view of the US insistence that the UN Security Council impose sanctions on Iran over its civilian nuclear program, the government must carefully weigh the economic benefits against the potential political costs.
Iran’s economy depends largely on petroleum exports and any move to develop it would serve the national interests. The best policy choice for Iran would be to put aside its internal political differences and establish IOB, as the economic advantages of such a bourse are clear. But in order to mitigate the impact of potential political risks, it should allow flexibility for customers. If Iran allows customers to select the currency for purchasing oil, such an approach would facilitate euro transactions without creating an uproar about sidelining the US dollar.