Background To US-Iran Talks.

The New York Times on March 17 published an interview with Ali Larijani, who said he would soon send negotiators to Iraq to meet with US representatives there. The paper said he suggested in the interview that "the overture would not be without some cost".

The NYT quoted Larijani as saying: "I think Iraq is a good testing ground for America to take a harder look at the way it acts. If there's a determination in America to take that hard look, then we're prepared to help". The paper then said "the [March 16] announcement in Tehran came against the backdrop of discussions in the...[UNSC] over the prospect of censuring Iran for its nuclear activities... Both sides have been looking for leverage in the increasingly heated conflict, and Iran has long alluded to the prospect that it could be a help - or hindrance - in Iraq", where a majority of the population are Shi'ite Muslims. Iran is the only Shi'ite theocracy in the world.

Larijani said he would send negotiators to Baghdad to meet with Khalilzad. The paper added: "After briefing members of Parliament on the developments around the nuclear issue, he said that the decision on Iraq was made only after receiving a request from Hakim. Larijani also said that Khalilzad had reached out to Iran on several occasions asking for help". But the White House has made it clear that Khalilzad is only authorised to discuss Iraq with the Iranian negotiators, not any other issue. US and Eu diplomats have made it clear Iran will not be allowed to enrich uranium on its soil.

The Tehran Oil Bourse: Of all the things that could wreck the US dollar, the projected Tehran oil bourse - tentatively scheduled to open on March 20 to trade in Iran's crude oil and other petroleum products in euros rather than US dollars - is probably not among them. The much greater threat to the US currency is the US current account deficit, Agence France Presse noted on March 17, which rose to 7% of GDP in the fourth quarter of 2005.

The Tehran announcement drove the euro up to 1.202 against the US dollar as traders renewed their concerns about the world's fiat currency. The opening of the Tehran bourse has been described by a Bulgarian university professor named Krassimir Petrov as "the ultimate nuclear weapon that can swiftly destroy the financial system underpinning the American empire". Both Petrov and William Clark, writing in a publication called the Energy Bulletin, have suggested that the decision by US President George W Bush to attack Iraq on March 20, 2003, was to thwart then-dictator Saddam's move to price his crude oil exports in euros rather than dollars. They and other writers have been warning that Iran's decision to open a euro-denominated oil bourse placed the mullahs in the same danger of being attacked.

That appears to be an overstretch, indeed, as AFP put it. First, there is the question of how much crude an Iranian oil bourse would handle. Iran is the world's fourth-largest producer of crude oil, but producing only about 5% of the world total, and is unlikely to add much to that.

The Iranian oilfields are mature and over the next decade their output will begin to fall rapidly, unless IOCs spend heavily on them in the coming years. At present Iran is losing about 400,000 b/d of oil production capacity every year. The rate could exceed 500,000 b/d in the next decade if Iran fails to attract the technology and capital from qualified IOCs.

Other OPEC members likely to trade on the Tehran oil bourse probably would include Venezuela, the world's 10th-largest producer, run by President Hugo Chavez, who is eager to humiliate the US. There appear to be few others at the moment. Saudi Arabia, for instance, has nearly become a US client state, as has Kuwait. Mexico, Canada and Norway are unlikely to fall in line in euro trade, Norway especially since neither it nor the UK uses the euro as its currency. Russian President Vladimir Putin briefly floated the idea of pricing Russian energy exports in euros in 2003, only to have the idea shot down decisively when Prime Minister Mikhail Kasyanov a few days later said: "This topic cannot even be discussed. There can be no administrative decisions here. The market decides...oil is a commodity that is traded for dollars, and if it is sold for dollars, it means that suits the buyers and sellers".

A decision by any other country than Iran or Venezuela to trade in euros in Tehran is going to be made on a commercial basis and not a political one. At this time, it is not a commercial decision which appears to make sense despite the fact that a number of Middle East oil exporting countries, angered by the recent US decision to block a Dubai state-owned company from buying and operating six US key harbours, said their central banks were considering switching their reserves from US dollars into euros.

According to a March 14 story in The Independent of London, the UAE, which includes Dubai, said it was looking to move a tenth of its dollar reserves into euros. The governor of the Saudi Arabian Monetary Agency (SAMA), which is the kingdom's central bank, condemned the US move blocking Dubai Ports World from taking over the US ports as "discrimination".

As an example of the dollar's imperviousness to reports of petro-switches, the UAE announcement had almost no effect on world currency markets, whose traders are nervous enough to respond to slight rumours of wheat blight in the Caucasus to shift in and out of currencies with lightning speed. The US dollar, which had spent the previous week strengthening against the euro before the threats by the Middle Eastern central bankers, fell slightly against the European currency by a quarter of a percentage point to a one-week high of $1.1945 - before it retreated later.

There is the question of which crude oil importers will want to pay in euros rather than dollars. Although the use of the dollar as the world's fiat currency has been falling for about 30 years, some 70% of international currency reserves, which finance international trade, are in dollars. Japan and China alone have built up nearly US$2 trillion in US Treasury bonds and other dollar holdings. China has floated trial balloons about switching reserves out of the dollar, only to have those balloons shot down by the People's Bank of China, the country's central bank.

Japan and China now face a quandary. They and their fellow international creditors are as much hostage to their debtor as the US is hostage to them. Any fall in the dollar that would be driven by a switch to petro-euros risks damaging their reserves.

The peril of driving down the US dollar was illustrated on July 21, 2005, when the People's Bank of China discarded its strict peg of 8.28 yuan to US$1, valuing its currency against a basket of foreign currencies instead, and allowing the trading band for the yuan to widen slightly, by 2%, to 8.11:US$1. In hours, the yuan rose to its new level. At that time, China was holding US$600 bn in foreign reserves. The 2% move against the dollar cost China US$30 bn in dollar reserves.

China and Japan are now two of the world's largest importers of crude oil, although both are dwarfed by the US, which produces only 7.61m b/d of oil against consumption of more than 20m b/d.

Then there is the question of what the holders of euros are going to do with their money. With Britain and Norway, two major oil producers, excluded from the euro currency zone, the euro bond market is dwarfed by the dollar bond market, to the point where there is no place in Europe to invest prospective vast sums of petro-euros.

By and large, once crude oil transactions take place in euros, the euros are exchanged for US dollars. In November 2000, when Saddam Hussein announced he would switch international transactions from a US dollar standard to euros, a UN study estimated that Iraq's initial shift in pricing cost the country at least US$270m in transaction and other costs. Saddam recouped that money when the euro rose 17% against the dollar on other factors.

Asia Times Online on March 17 said: "This obviously leaves the world's holders of US Treasuries in a quandary. There is little doubt that they would love to diversify away from the US currency, not least because of the growing danger of a dollar collapse. But a possible dollar collapse is much more likely to stem from the unsustainability of the country's gigantic and growing trade and budgetary deficits and the irrational fiscal policies of the Bush administration".