Tuesday, July 3, 2012

Introducing the E-3...Tehran looking outside dollar economics....

Introducing the E-3...Tehran looking outside dollar economics....
By Chris Cook

TEHRAN - How many barrels has the Group of Seven (G-7) leading industrialized nations? This neatly sums up the way in which the institutions of global governance are skewed towards the centers of finance capital in developed nations rather than the resource rich, but less developed, countries upon which they depend.

Here in Tehran, now entirely cut off from the global financial system and with the rial falling like a stone, that question has never been more relevant.

Dollar economics....
The combined effect of the dollar economics of the G-7 and the "oil curse" of producer nations is visible from the hotel high in north Tehran where I look south over a sea of car-choked smog and unplanned urban sprawl stretching to the mountains in the far distance.

The first problem is the way that the toxic combination of Western property rights, rent-seeking and compounding debt imperfectly grafts (in more ways than one) onto Iran's government and business culture.

The second problem is that carbon fuels are massively under-priced and implicitly subsidized, and car-choked urban sprawl and desperate levels of pollution are the results.

But now, some of the smartest people on the planet have made possibly one of the dumbest, and certainly one of the greatest, strategic errors in history. The smart people at the US State Department and Treasury have prevailed upon the craven Belgian-based SWIFT bank messaging system to entirely cut off Iran from the dollar system.

So Iran has to look outside dollar economics for solutions, and I am here to advocate an approach that addresses both problems by literally re-basing Iran's economy on the absolute value of energy rather than a black hole of debt.

Problems and solutions
It is said that 21st-century problems cannot be resolved with 20th-century solutions, but the irony is that solutions are in fact to be found prior to 1700, when the modern institutions of Western finance capital - the joint stock company and modern "credit intermediary" banks - were first created.

I am observing the re-emergence of two elements: firstly, collaborative legal and financial frameworks, using partnership-based agreements, and secondly, the direct investment through "unitisation" of flows of value from productive assets.

When Enron opaquely used "prepay" commodity transactions (where commodities are sold for cash now with delivery later) they not only defrauded investors and creditors, but also rediscovered a technique which has existed for thousands of years but was supplanted by modern banking.

Prepays are now in routine use, both openly - eg an oil deal by Jupiter Energy in Kazakhstan, and a gas deal by Chesapeake Energy in the US - and opaquely, which is where the damage is done through what I term "macro" market manipulation.

Macro market manipulation
Iran's oil sector management have - like most of the oil market - been entirely unaware that for the past seven years or so the oil market has been completely manipulated through the use of prepay contracts. An oil price for the most part supported at inflated levels has operated to Iran's benefit.

However, the booms and busts of successive oil market bubbles have made it very difficult to plan and invest for the long term, and of course for Iran this is made worse through lack of access to the financial markets.

I predicted that the oil market price would fall as it recently has although I admit that the Iran "risk premium" sustained the oil bubble for far longer than I thought. The market is now massively over-supplied; the Saudis have hedged their production at the expense of "muppet" investors, and the price is now in a managed decline probably to US$60 per barrel or less, at which point - after an interval suiting the manipulators - it will be pumped back up again.

The intended outcome of what is essentially economic warfare conducted by investment banks on behalf of the US and Saudi Arabia is firstly to deliver politically acceptable gasoline prices before the US election. Secondly, the aim is to bring the economies of nations such as Iran, Russia, and Venezuela to their knees. This is calculated as being more likely to lead to regime change than coercive methods ever could.

Fortunately, the smartest kids on the block do not realize that the world has moved on.

Energy economics
Sauce for the goose is sauce for the gander, and the same (Islamically sound) technique of prepay contracts could be used by any producer who can find a buyer more interested in investing in rights over intrinsically valuable energy than in intrinsically worthless dollars.

In my research at University College London, I was intrigued to find that UK sovereigns financed their expenditure for some 500 years through the use of "prepay" instruments known as "stock". These credit instruments were, like prepay, issued at a discount and were returnable in payment of taxes. In fact, the origin of the phrase "rate of return" was literally the rate over time at which stock could be returned to the King's Exchequer in payment of taxes.

The difference between energy economics and dollar economics is that in energy economics, we proceed from the outcome, such as heat, electricity, or transport, and proceed to identify the least energy cost in terms of fuel. Dollar economics, by contrast, aims for the least dollar cost and the maximum profit or rent for the holders of privileged property rights.

It is completely straightforward, trivial in fact, for energy producers to issue stock returnable in payment for energy, and if this is done it offers a simple but radical monetary and fiscal solution not only to Iran, but also to every other nation suffering from dollar economics.

Energy charter
The purpose of the Energy Charter Treaty of 1994, now signed or acceded to by 51 states, was to create an organization and a legal and financial framework to facilitate "Western" investment in energy using conventional finance capital. Like the World Trade Organization and World Intellectual Property Organization it is an instrument of finance capital and dollar economics.

That is in contrast to the Energy Charter of the Economic Cooperation Organization of 10 nations ranging from Turkey to Pakistan and including Iran and much of Central Asia, (ECO), a charter I proposed and was put forward by Iran; it was to have been considered at a meeting of the ECO Energy ministers this week, and indeed that is why I am in Tehran. Unfortunately, a series of mishaps led to the postponement of that meeting, but had the beneficial effect of enabling me to explain what my proposal actually is, rather than what one or two officials mistakenly believed it to be.

Unlike the Energy Charter Treaty, the ECO Energy Charter is simply an agreement between nations, aimed at energy cooperation. It comprises a statement of principles, and a set of policies of which the key one is the introduction of the new tools of energy economics that I have outlined. These consist firstly of an "Energy Clearing Union" agreement and secondly the creation, issue and exchange of energy stock within that framework.

E is for energy cooperation
The idea is that those nations engaging in energy cooperation through the use of energy economics would come to form a self-organizing "E" grouping that is complementary to the existing G-7, G-8, G-20 and so on.

While the ECO nations may - if these often fractious neighbors can agree - come to form the E-10, in my view the most important regional relationship remains that between Russia and Iran, which no longer have a common border but now face each other across the oil and gas rich Caspian Sea.

Iran and Russia are hard pressed on their own to resist the economic warfare directed at them even through energy cooperation in the Caspian. Iran is in a double bind in current negotiations because any definitive agreement to solve the current impasse would knock out one of the elements holding the oil market price up.

Through using a Caspian gas price as a Eurasian energy benchmark and by literally monetizing gas, the problems of dollar economics may be transcended and a new era in energy cooperation could begin provided one or more major consumer nations is included.

Rumors are swirling around Tehran that the distrust between Iran, the European Union and United States is such that Iran is now asking China to guarantee any agreement that may be reached with the P5+1 - the five permanent members of the United Nations Security Council plus Germany - at their next meeting, to be held in Beijing.

If Iran and Russia as major producers, and China as the fastest growing consumer, were to link in an "E-3", this could introduce a completely new dimension to global energy politics.

Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.

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