Sam's Exchange: Who is bluffing who?

© Photo : Source: Sam BardenSam Barden
Sam Barden - Sputnik International
The European Union (EU) has decided to ban the import of Iranian oil, but not for another six months. Iran however, looks like they are about to call the EU’s bluff and ban exports to Europe with immediate effect.

The European Union (EU) has decided to ban the import of Iranian oil, but not for another six months. Iran however, looks like they are about to call the EU’s bluff and ban exports to Europe with immediate effect. The self-appointed rulers of a united Europe may be doing much more than disrupting the flow of oil to EU members who most need it; they may actually have moved the world financial system to the tipping point of change, something a democracy could never have done. Is this a stroke of genius from the so-called elite of Europe, or an irreversible miscalculation of historical proportions?

The financial and physical sanctions on Iran, imposed largely by the U.S., EU, Israel and the UK, for Iran’s alleged ambitions to build a nuclear bomb, are in fact about economics. It is a test of the current financial system. On the one hand there is the U.S.-European banking cabal, or as we know it the Western banks, and on the other hand everyone else. When countries trade with each other, they need a financial mechanism for clearing their trades. This is what we know as the current banking system. When sanctions are applied, like with Iran, which are designed to exclude a country (Iran) from the global system of settlement, it means in theory they can no longer be part of world trade. The problem here of course is that major trading nations such as China, Russia, India and South Korea, have thumbed their noses at the sanctions and will continue to trade with Iran. So when Iran goes looking for an alternative way to settle its international trade, to find new mechanisms of clearing, they have found they are knocking on an open door.

Rather than use western banks, and settle trades in USD or EUR, Iran is being forced to set up an alternative network.  Far from having difficulty, it seems Iran and their trading partners are actively touting new methods. In fact India and Iran, and possibly China and Iran, have said they will soon start settling oil trades with gold. Neither India nor Iran nor China have said exactly how this will occur, but given gold is priced primarily against the USD, the trade will occur using the USD as a price base initially. As the USD begins to debase, presumably the gold and oil will begin to become price reference points in their own right. The gold bugs out there will be calling for a sharp increase in the price of gold, but the point is that a gold pool will be used to underwrite trade rather than letters of credit issued by western banks. The alternative network emerges.

Rather than the USD as the world reserve currency (with a move towards a global currency) what we are likely to see as a result of the emergence of an alternative to the existing banking network is a move towards a global standard. As a new network emerges, one which is multi-lateral, it is likely that national currencies will be priced against hard assets such as gold, or in my view energy. In order for this to happen as part of the new network, the way in which we price oil and gas will also change. A more likely market structure will be one which is decentralized, unlike today’s centralized market, but networked. Like a series of networked exchanges, the new system will have several pricing points for hydrocarbons, which will exist in dynamic equilibrium, similar to an eco-system, which will be the basis of an Energy standard. This system will remove the extreme price volatility we are seeing in today’s dysfunctional markets.

As we move towards this system, there will be fallout. We are already seeing it now in the form of independent oil refineries going bankrupt. Petroplus, one of the UK’s biggest oil refineries, which accounts for 10% of the UK’s fuel supply, has filed for bankruptcy. As the refinery ran out of cash, and was unable to extend its credit facilities with banks, it was forced to close and file for bankruptcy. The knock-on effect of course is panic buying of fuel in the UK adding pressure to the problem. This only serves to highlight the fact that there is no real cash in the current financial system, only credit and as the banks close the credit tap, the urgency for a new system becomes more pressing. Greece faces the same situation, the only difference is that counties cannot go bankrupt, they can only default.

The winds of change are blowing strongly in the world financial markets and fundamental change is in process. So is it genius or lunacy from which the European elite are acting in pushing oil sanctions on Iran, creating this change? It all depends on the outcome.

The views expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

Current markets are anything but global or integrated.  What if we had a paradigm shift in the way we think and transact when doing business with each other?  Balanced global trade can only occur if we have transparent, accessible and efficient markets.  We are on the cusp of achieving this, although most people cannot see it.  Sam’s Exchange aims to give its readers a clearer view and a platform for discussion.  Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.

Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company.  Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East.  He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction.  He holds a degree in economics and finance from Victoria University, Melbourne, Australia.


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