Strategic market consultant: Iran at the crossroads

Young journalists club

News ID: 1596
Publish Date: 10:51 - 09 July 2013
Tehran, YJC. -- Chris Cook a former director of the International Petroleum Exchange believes that the election of President Rouhani represents a crossroads not only for Iran, but regionally and globally.
Cook who is now a strategic market consultant, entrepreneur and commentator visited Iran seven times since 2004.

He in his exclusive article for Trend news writes:

I have the highest regard for this great country and I look forward to many more visits in the future.

I believe that the election of President Rouhani represents a crossroads not only for Iran, but regionally and globally. Iran has converged from two directions at this crossroads: an energy road and a financial one.

How Sanctions Benefit Iran

When I made a presentation at Iran's Chamber of Commerce in July 2012, I said the current sanctions regime was the best thing that could have happened to Iran and I was asked to explain this provocative statement.

Firstly, I pointed out that to export two million barrels per day (bpd) at $50/bbl raises as much revenue as exporting 1m bpd of crude oil at $100/bbl, but without leaving 1m bpd in the ground for future generations. To those sceptical of the likelihood of such a fall in price I explained that a peaceful outcome to negotiations will end the substantial 'Iran Risk Premium' in the oil price and that with an additional 1m bpd of supply, the oil price could easily collapse as it did in 2008. On that occasion it dropped from $147/bbl to as low as $35/bbl.

Moreover, today's high oil prices have not only acted to deter consumption, but have enabled Iran to act against unsustainable energy subsidies and pin the blame for an unpopular policy firmly on the US and EU. Iran's far-sighted strategic decision to process Iranian oil and gas into petrochemicals is now bearing fruit, since it keeps in Iran value previously extracted by the country's oil buyers, and transcends sanctions on crude oil.

As I pointed out then and again this year, the cheapest energy of all is energy saved. Iran should make a crucial strategic decision as Denmark did in 1973, to invest massively in 'least energy cost' projects aimed at drastically cutting wasteful use of a finite resource. Another way of putting it is that rather than drilling for oil and gas, Iran should instead prospect and exploit oil and gas savings.

There appears to be a realisation there can be no return down the Western energy road to the profligate energy policies the consequences of which continue to make the air of Iran's cities less tolerable by the day.

Secondly, I said in relation to financial sanctions that being ejected from the international SWIFT bank payment system meant that Iranians would necessarily have to use their renowned ingenuity to do something else. I also pointed out that the inability to access Swiss hard currency bank accounts would deter anyone tempted to take advantage of an official position.

In my view, even if Iran is tempted through negotiations to go back down the Western financial road, the toxic combination of partisan US politics and external relationships are such that financial sanctions are to all intents and purposes irreversible, at least in relation to the dollar.

So if there is no way back on either the energy or financial roads, what is the way ahead?

The Way Ahead

In 2001 I pointed out to Central Bank Governor Mohsen Nourbakhsh that Iran and other oil producers were being gravely prejudiced by the operation of physical and derivative oil markets being run by banks and trading houses in their own interests and I proposed a regional Oil Bourse to address this. Unfortunately, the Oil Bourse that subsequently developed had nothing whatsoever to do with the market architecture and instruments the Wimpole consortium suggested in 2004 in a major feasibility study for which it pains me to say remains unpaid to this day.

Mark Twain remarked that history does not repeat itself, but it does rhyme. So I was fascinated to see that Iran's power exchange Irenex is, in precisely the same way as Turkey's developing gas and power markets, seeking to adopt a failed Western market model. Not only is the Western financial power market not fit for purpose, but in the UK it is being actively replaced in a process called 'Electricity Market Reform'.

I write with some authority on this subject since not only did I architect the UK's 'Balancing Point' natural gas contract in the mid-1990s, but observed with scepticism the formation of the UK electricity market. I was equally critical of Norway's Nordpool power market instruments when advising them at the outset at a time when Nordpool power derivatives' market trades were simply recorded by hand on a white board.

Not only are there lessons to be learned from such recent market history as how not to construct markets and instruments, but there are in fact constructive lessons to be learnt which pre-date the advent of modern Western finance in the late 17th Century.

Back to the Future

In the course of my recent studies as a Senior Research Fellow at a research institute of University College London, I have established that the simple but radical prepay financial instrument now re-emerging in use in fact pre-dates the banking system.

Simply put, to prepay is to pay now for a commodity or service at a discount and take delivery later. Since the financial system meltdown in October 2008, prepay is emerging in use by those for whom conventional investment and bank lending are either no longer acceptable or accessible. By way of example, Russia's Rosneft recently raised $10bn from the major trading houses Vitol and Glencore as prepayment for crude oil and is exploring further prepay financing with China.

However, it has long been forgotten that for 600 years, UK sovereigns funded their expenditure by agreeing with tax-payers a prepayment of taxation which was almost exclusively land tax, at a discount.

Such public funding by prepaid taxation remains evident in well-known terms in the English language itself:

* Stock - name of the then wooden record of the prepay instrument;

* Tax Return - annual accounting when the wooden stock record was returned to the sovereign's Treasury and matched against the wooden counter-stock record from which it was physically split;

* Rate of Return - was simply the rate over time at which the stock could be returned to the Treasury issuer and the profit without compound interest that could be realised from the initial discount.

An Energy Treasury

The way ahead I believe, lies in the convergence of energy and finance. My advice to President Rouhani is to bring together the financial planning and budgeting functions of the oil and gas and power ministries with the banking system in a new way to create an Iranian Energy Treasury.

Such an Energy Treasury would oversee the creation and issue by the network of Iran's energy producers of credits which are accepted in payment, priced by reference to an energy benchmark unit, for the use of electricity, natural gas and other fuels supplied. Iran's Central Bank would become - as is the case in Hong Kong - a Monetary Authority which no longer issues credits, but instead supervises issuance.

Iranians then need no longer receive an inflationary subsidy in rials, but could have an entitlement to energy prepay credits, an energy dividend which they could either use wastefully or invest. This investment would be in a new wave of 'least energy cost' sustainable housing; transport infrastructure; renewable energy or energy efficiency projects led by the non-financial subject experts in the responsible ministries.

In this way Iran's currency would not only be stabilised through being based on a stable and imperishable energy standard unit of account, but could within suitable frameworks of trust, become generally acceptable in exchange by Iran's energy counter-parties both regionally and internationally.

Of course, the value of Iran's energy is only a relatively small but important part of the true value in Iran, the majority of which is comprised in the beautiful but vulnerable land and the exponentially increasing intellectual value comprised in a nation with a 4000 year cultural tradition of learning and study.

How these resources may be sustainably mobilised into a 21st Century knowledge economy consistently with Iran's ethical values, is for another time.
Tags
Your Comment