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Iran is allowed to produce six million barrels of crude oil per day as set by OPEC.
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Iran has been planning to open a commodity exchange, variously referred to as the Iran Petroleum Exchange (IPE), International Oil Bourse or Iranian Oil Bourse (IOB), since the past six years.
Whatever the term implies the bourse will trade in petroleum, petrochemicals and gas in various non-dollar currencies, primarily the euro.
However if successful, the bourse could establish a euro-based pricing mechanism for oil trading or oil marker as dubbed by traders, reported ISNA.
The geographical location is expected to be in the Persian Gulf Island of Kish, which is a free trade zone.
Background
The three current oil markers are US dollar denominated: North America’s West Texas Intermediate crude (WTI), North Sea Brent Crude, and UAE Dubai Crude.
Interestingly, the idea behind opening this bourse in Iran far preceded the measures taken by the United Arab Emirates to open its own UAE Dubai Crude!
However, New York Mercantile Exchange (NYMEX) in New York City and the London based International Petroleum Exchange (IPE) are still the two major oil bourses.
The proposed Iranian Oil Bourse would make it the fourth oil exchange, denominated by euro.
Timeline
IOB which is yet to be launched missed at least three announced opening dates.
Initially, it was planned to open on March 21, 2006. But “technical glitches“ hindered its launching and the date was postponed, according to the Petroleum Minister Kazem Vaziri Hamaneh.
In the same year, on April 26 Iran over again decided to open the oil market when Vaziri Hamaneh announced once more to set up the bourse in the first week of May.
During this month, Minister of Economy Davood Danesh Jafari gave the Oil Ministry a two-month deadline to present IOB Articles of Association.
He said since the Euro had yet to be finalized as the legal tender of transaction, the final decision rested on the Ministry’s proposed IOB Articles of Association.
In July 2006, a building was purchased for the purpose and the opening date was fixed for September 2006.
On September 15, Vaziri-Hamaneh stated that preliminary arrangements had been made for initiating the oil stock market but once again it failed to proceed.
In early January 2007, the minister over again announced opening the bourse within a month which is yet to take place.
IOB plans to offer financial facilities relating to crude oil during the first stage of its implementation once founded.
Last December, newspapers reported Danesh Jafari as saying that the administration was deciding to cut US dollar-based transaction to a minimum.
In March 2007 the media reported that the Iranian Embassy in Baghdad announced a shift of its major currency from dollar to euro. Iraqis traveling to the country would have to pay for visas in euro in line with other Iran embassy locations.
In March 2007 The Scotsman reported China’s state-run Zhuhai Zhenrong Corp., the biggest buyer of Iranian crude worldwide, began its oil payments in euro since late last year.
Iranian officials have repeatedly said that over half of OPEC members’ customers have switched their payment currency from dollar as Tehran seeks to diversify its reserves.
But news of the Zhenrong change is the first outside confirmation.
Iran’s Central Bank announced in March 2007 that the country had cut its holding of US dollar assets to around 20 percent of its foreign reserves in response to US hostility and illegal pressures.
Remarkably, Japan has announced that it is willing to switch to Yen from US dollars.
Media reports also speculated that the country had moved a step closer to establishing the much-publicized oil exchange, when the Oil Ministry and Ministry of Economy were set to sign a Memorandum of Understanding (MoU), which would set the ground for the high-profile scheme.
Hossein Talebi, the National Iranian Oil Company’s director for information technology affairs, had told Fars news agency that the project would enter the executive phase instantly once the MoU was signed.
The official further said that petrochemicals, crude oil and other related products would be traded at the petroleum exchange.
“This exchange would make Iran the main hub for oil deals in the region,“ he said, adding that most deals will be conducted via Internet.
Talebi said the bourse could also help develop petrochemical industry.
The Ministry of Economy, some brokerage firms and the Tehran Stock Exchange (TSE) are to set up a consortium to contribute, in collaboration with foreign companies, to the establishment of Iran’s oil exchange.
He said the petroleum exchange could help create more transparency in the Oil Ministry’s performance while attracting added foreign investments in national energy industries.
The proposal, initially made in the beginning of the Third Development Plan (2000-2005) became a national project only last year. Relevant technical studies are still underway.
Barriers
Regarding the IOB, Head of Oil Pension Fund (OPF) Mehdi Karbasian told ISNA that 80 percent of the
bourse shares belong to the fund.
Despite purchase of the building for IOB purpose, the Ministry of Economy is yet to appoint its chairman.
The bourse cannot be finalized and established at such short notice and it may take some years before fully processing oil transactions with euro, he said.
In this respect, Ali Saleh-Abadi, head of Stock Exchange Organization said despite the modification of the bourse’s structure, it cannot be established within the framework of previous Articles of Association.
“The bourse will be founded within the agenda of a company that is already registered in the Kish Island. This could help the government adjust the bourse according to new laws pertaining to stock exchange,“ he said.
Moreover, he added at a meeting of managers and planners of the bourse that the scheme would be launched in three short-, middle- and long-term phases.
However, a financial market expert says there is apprehension while inking oil contracts which has become a serious challenge for establishing the oil bourse.
Zahra Nejad-Bahram added bureaucracy and existing structure are serious obstacles. For instance she said, in the process of signing an oil contract,
certain bureaucratic stages have to be passed
involving middlemen, government and certain trade laws.
The only way to successfully establish the bourse would be to first lift structural and legal hindrances.
Not many specialized taskforce are involved in the oil sector, especially with an expertise in the economic-and stock markets, she said.
Many oil importing countries have bourses.
Regretfully, despite Iran being a major oil producer and exporter, it is yet to realize this.
Two major obstacles hinder this scheme, she said adding that oil prices would first need to have certain volume of fluctuation to float in the stock exchange. But, this is not possible for Iran as it is a member state limited by certain rules and regulations imposed by OPEC.
There should neither be any restriction for its production if a product is floated in the stock exchange, she said.
The country is allowed to produce six million barrels of crude oil per day as set by OPEC.
This explains why it has been unable to establish the oil bourse.
Implementing this scheme could play a positive role in making the economic structure more transparent and efficient.
Only when a market is established and oil sale denominations are made in euro, could it cause world governments to divest part of their dollar holdings and save euro for larger transactions.
US is exploiting the dollar role as reserve currency when it is not so in reality.
Once a trusted alternative appears, the dollar is likely to lose its reserve currency role.
Conclusion
While some major oil-producing countries like Venezuela and larger oil-consuming countries, notably China and India, have supported establishment of IOB, economists too believe that Iran should open its bourse despite obstacles.
IPE and NYMEX experts have reportedly confirmed feasibility of the project.
If realized, the bourse could establish a euro-based pricing mechanism for oil trading, broaden the activities of the country’s financial markets, boost its GDP, make its economic and financial structures more transparent and efficient.
It would also promote trade activities, attract added foreign investment, boost financial and trading security, eliminate bureaucracy, reduce oil dependency and help reap benefits of other potentials that have been obscured by oil-dependent economy for decades.
