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Iran Asks Oil Buyers To Pay In Euros, Switches Away From $.

Iran, the world's fourth biggest oil exporter, is seeking payment for oil sales in euros as it shifts currency reserves out of US dollars. As a result, about 57% of Iran's income on crude oil exports of 2.38m b/d is now in euros, according to Gholam-Hossein Nozari, managing director of the NIOC. State-owned NIOC, acting under instructions from the Central Bank of Iran, has inserted a new clause in oil supply contracts that allows it to request payment in euros or other currencies. "The payment clause now gives the option to NIOC, as a seller, to receive currencies other than the dollar as payment due to the monetary policy of Iran vis-a-vis a weakening dollar", said Hojjatollah Ghanimifard who is in charge of NIOC sales. But Ghanimifard added: "our oil contracts are still based on the dollar because the international market assessments are in US dollars".

Iran issues official selling prices for its oil in US dollars every month and buyers do not expect that to change. Iran has been exporting about 63% of its crude to Asia, with the remainder sold to Europe and Africa. A small portion is sold into South America. The US has banned imports of Iranian crude since 1995. Apart from customers in Europe, some in Asia are also paying for Iranian oil in euros.

The shift in Iran's monetary policy may have cut the dollar's portion to less than a third of Iran's foreign reserves, down from 40%, a state-run newspaper said.

When the campaign "Shock and Awe" got under way against Baghdad, some analysts asserted it was not about Saddam's nuclear ambitions or the alleged link of the Baghdad regime to al-Qaeda; it was about defending the US dollar, for Saddam had decided to switch over to the euro as the currency of his oil trade. According to this logic, the US could not have allowed Saddam's decision go unchallenged. When Iran threatened to go the same course, it was added to the "axis of evil". The same analysts claim that the defence of the US dollar is almost as important as oil.

The US dominates the world economically, politically, socially and militarily and one tool used in great effect to sustain this domination has been the greenback. Oil, the world's largest commodity, is traded in US dollars. This means everyone interested in buying oil needs dollars and that too in abundance. This arrangement means the US effectively part-controls the global oil market: one could only buy oil if one had dollars, and only one country has the right to print them - the US. The more dollars in circulation outside the US, or invested by foreign owners in American assets, the more the rest of the world has to provide the US with goods and services in exchange for these dollars.

The dollars cost the US next to nothing to produce, and thus the US is importing vast quantities of goods and services virtually for free. Since so many foreign-owned dollars are not spent on American goods and services, the US is able to run a huge trade deficit year after year without apparently any major economic consequences. Hence, when Iran announced ordering its central bank to direct foreign transactions, including oil trade in euro and transform the state's dollar-denominated assets held abroad to the single European currency, it would hurt this status quo.

If Tehran succeeds in its ambitions, it might push others too in the same direction - signalling the demise of the dollar as the currency for energy trade. Many say it could ultimately bring to an end the era of what has often been termed as the "American Century". With heightened concerns among the oil producers on the weakening dollar and its impact on their oil earnings, the prospect offers an economic logic.

Only a day before the Iranian announcement to convert its dollar-denominated assets into euros, the UAE's Central Bank Governor Sultan Nasser Al-Suweidi said the emirates were waiting for a clear trend to emerge before converting their reserves into euros or any other currency. The UAE Central Bank holds 98% of its reserves in US dollars but plans to reduce its dollar holdings. Last month, Suweidi said he was evaluating when to shift 8% of the UAE's $24.9 bn in reserves into euros.

Venezuelan President Hugo Chavez is taking measures to ensure that a growing share of his country's oil income is deposited into euros as the dollar depreciates. Banco Central de Venezuela has already slashed the percentage of its reserves invested in dollars and gold to 80% from 95% a year ago. Bank Indonesia's senior deputy governor, Miranda Goeltom, recently said the Jakarta-based central bank, with $39.9 bn in reserves, was boosting its euro holdings. If the trend catches up, this would be a recipe of disaster for the US.

Other analysts, however, have taken the Iranian announcement with a pinch of salt. Since 2005 Iran has been deferring the launch of a euro-based oil exchange.

There is the prospect of an oil price war between Saudi Arabia and Iran. An indication to that effect was made by Nawaf Obaid in an article published on Nov. 29 by The Washington Post. Obaid, a national security consultant to the Saudi government, said use of the oil weapon was one of the options Riyadh was considering in the event of a deepening crisis between Saudi Arabia and Iran.

The crisis is over three equally serious issues: (1) Iran's nuclear ambitions are a main worry to Riyadh as well as to its other five Gulf Co-operation Council (GCC) partners. In view of that, the GCC rulers have recently decided to launch a plan to jointly develop a nuclear energy programme to match Iran's, so that it could also become military if Tehran's ends up producing atomic weapons. (2) Iran is outbidding Saudi Arabia for regional influence in the Arab world, mainly through its alliance with Syria, Lebanon's Hizbullah and other Shi'ite movements in the region, Hamas, Islamic Jihad, etc. As such, Iran is acting as a regional super-power seeking to eclipse the status of Saudi Arabia as leader of the predominantly Sunni world of Islam. (3) Iran, in collaboration with the Ba'thist dictatorship of Syria, is acting as a spoiler in Iraq. Apart from funding and arming Shi'ite militia groups, Iran is helping Sunni-Ba'thist insurgents against the US-backed government of Baghdad.

The grounds under which lie most of the world's proven oil reserves - reserves which are the cheapest to extract in the world - are inhabited by Shi'ites of the Ja'fari order. Ja'fari Shi'ites follow 12 Imams in Islam. The 12th Imam - called al-Mahdi - has been a child in a state of occultation since the 9th century AD. According to Ja'fari Shi'ite beliefs, al-Mahdi will return to Earth to rule the world with justice before Judgment Day. According to one of the Grand Ayatollahs in Ja'fari Shi'ism, the time for al-Mahdi's return is getting close; some say he could return at any time between now and 2008.

The Eastern Province of Saudi Arabia, a desert region on the Persian Gulf coast inhabited by Ja'fari Shi'ites, contains the world's biggest reservoir of oil. Southern Iraq, also inhabited by Ja'fari Shi'ites, is the world's second biggest oil reservoir. The province of Khuzistan, in south-western Iran, contains the world's third biggest oil reservoir.

Iran is ruled by a Ja'fari theocracy. Saudi Arabia is ruled by Wahhabism, which is a puritanical branch of Sunni Islam. Iraq's population consists mainly of a Ja'fari Shi'ite majority and several minorities, including Sunnis, and such ethnic groups as the Kurds, the Turkomans, the Assyrian and Caldean Christians, etc.

When the US invaded Iraq - in March 2003 - some people thought the Americans had thus come to control the world's oil. But the US has failed to control Iraq peacefully and, since Feb. 22, 2006, the country has been in a sectarian Sunni-Shi'ite war. The US and Iraq's Sunnis accuse Iran of fuelling this war by siding with the Shi'ites. Now one of the Iran-backed leaders of the Shi'ites, Abdul-Aziz al-Hakim, denies he has warned that the Sunnis will be the biggest losers of a sectarian war if the US withdraws from Iraq. Hakim met US President Bush at the White House on Dec. 4. Iraq's Sunni VP Tareq al-Hashemi Bush in the following week.

The Sunni militants who destroyed the Shi'ite shrine in Samarra' on Feb. 22 follow a Neo-Salafi ideology developed in the late 1940s. The Neo-Salafis, mainly consisting of Wahhabi radicals like al-Qaeda leader Osama bin Laden, regard Shi'ites including the Ja'faris as heretics. They are particularly hostile towards those Ja'faris who regard Imam Ali and his 11 direct descendants as being divine; they are opposed to Ja'fari religious rituals which they call a form of paganism.

Sunni-Shi'ite massacres in Iraq follow suicide bombings staged almost daily against innocent Ja'faris by Neo-Salafi militants. These militants are known as "takfiris" (those who regard others as heretics) or jihadis (holy warriors and suicide bombers). The Neo-Salafis have recently announced a Sunni caliphate in Iraq, which is a universal state whose promoters regard it as being in charge of the whole world. This counters the universal Ja'fari theocracy of Iran which also regards itself as being in charge of the world, with Hizbullah in Lebanon being one of its branches. There is a similar branch in the Saudi Eastern Province.

Writing in The Washington Post on Nov. 29, Obaid warned that Saudi Arabia will intervene - using money, weapons and its oil power - to prevent Iranian-backed Shi'ite militias from massacring Iraqi Sunnis once the US begins pulling out of Iraq. Obaid is a cautious person. He would not have written such a warning in a US newspaper of such high standing and The Washington Post would not have published it, had he not been authorised to do so by someone at the top political leadership.

Iraq's Sunni Arab neighbours, led by Saudi Arabia and Egypt and including Jordan, fear that the sectarian violence in Iraq could spill into large-scale civil war between Shi'ites and Sunnis in the Muslim world and set off a political earthquake far beyond this part of the Middle East.

It is important to note that the Muslim world has a population of about 1.4 bn. Of this the Sunnis account for about 90%. The Ja'fari Shi'ites account for less than 10%. But the Shi'ites are concentrated on the world's biggest oil provinces in the Middle East - mainly in Iran, Iraq, the Saudi Eastern Province and in communities spread all the way from Kuwait down to Afghanistan, Pakistan and India.

Obaid wrote that the Saudi leadership was preparing to revise its Iraq policy to deal with the aftermath of a US pullout, and was considering options including flooding the oil market to crash prices and thus limit Iran's ability to finance Shi'ite militias in Iraq. Obaid said: "To be sure, Saudi engagement in Iraq carries great risks - it could spark a regional war. So be it: the consequences of inaction are far worse". The article said the opinions expressed were Obaid's own and not those of the Saudi government, headed by King Abdullah ibn Abdul Aziz. But, again, it is unlikely that such a piece could have been written without permission.

Obaid wrote: "To turn a blind eye to the massacre of Iraqi Sunnis would undermine Saudi Arabia's credibility in the Sunni world [as being its leader] and would be [regarded as a Sunni] capitulation to Iran's militarist actions in the region".

The UK newspaper The Scotsman on Nov. 30 quoted an "official Arab source" as saying: "Saudi Arabia is worried about Iran imposing its political agenda on the region. We don't want Iran and its allies to have a free hand. Iran knows that it is vulnerable and that Saudi Arabia has the upper hand [through the oil weapon] and maintains real weight and power".

The Scotsman quoted a "Western diplomat based in the Saudi capital", Riyadh, as saying Saudi Arabia was already funding Sunni tribes in Iraq. Saudi Arabia, the world's biggest oil exporter and a close US ally, fears Shi'ite Iran has been gaining influence since the 2003 invasion of Iraq.

Adding weight to the problem is the accusation of the US and other Western powers that Iran was developing nuclear weapons. If one combines the predictions of al-Mahdi's imminent return to Earth and Iranian nuclear weapons, then one like the state of Saudi Arabia would be very worried and thus - if the situation worsens with the departure of US forces from Iraq - would not hesitate to use its oil weapon.

Saudi Arabia used its oil weapon in February 1986, when during the Iran-Iraq war Iranian forces invaded southern Iraq and took over the oil-rich Faw Peninsula. From there the Iranian forces could have Kuwait and the Saudi Eastern Province within the range of the theocracy's missiles. As a result, Saudi Arabia acquired long and medium-range missiles from China and began flooding the world's oil market with extra crudes until the price of crude oil crashed below $7/b in the summer of 1986.

Saudi Arabia and fellow Arab oil states used the oil weapon in the wake of the Arab-Israeli war of October 1973 which, among other things, led the a quadrupling of world oil prices and triggered a global recession.

In his Washington Post article, Mr Obaid listed three options being considered by the Saudi government: (1) providing Sunni military leaders (ex-Iraqi officer corps, now the backbone of the insurgency) with funding and arms; (2) establishing new Sunni brigades to combat the Iranian-backed Shi'ite militias; and (3) choking off Iran's ability to fund the militias by flooding the oil market. Obaid added: "If Saudi Arabia boosted [oil] production and cut the price of oil in would be devastating to Iran. The result would be to limit Tehran's ability to continue funnelling hundreds of millions [of US dollars] to Shi'ite militias in Iraq and elsewhere".

Indeed, during Hizbullah's 34-day war against Israel from July 12 the Ja'fari Shi'ites in the Eastern Province of Saudi Arabia demonstrated and hailed Hizbullah's Secretary-General Sayyed Hassan Nasrallah as a hero of the Arab world. It is important to note here that Nasrallah, a religious man descended from the Prophet Muhammad, is the representative of Iran's Supreme Leader Ayatollah Ali Khamenei.

Hizbullah is an offshoot of Iran's theocracy in Lebanon. A similar Hizbullah has been established in the Eastern Province of Saudi Arabia, headed by a representative of Khamenei; there is a similar system in Bahrain, where the majority of the population is Ja'fari Shi'ite.

Ayatollah Khamenei is not just the leader of Iran, as his theocracy universal, meaning he also rules the world. As such the Supreme Leader has a representative in each of the Ja'fari Shi'ite communities around the world.

Wahhabism is hostile to those devout Ja'faris who believe that al-Mahdi is God's representative having divine powers. This is why there is a sectarian Sunni-Shi'ite war in Iraq. But there is sectarian tension between Sunnis and Shi'ites in all other parts of the Middle East, notably including Lebanon, Bahrain, etc.

Two lingering issues are keeping the energy world nervous for the short term: (1) OPEC's price defence efforts by cutting production, at a time when world oil consumers should be assured of adequate supplies for winter; and (2) a confrontation between a US-led Western alliance and Iran over Tehran's nuclear ambitions.

Obaid's article came after US Vice President Dick Cheney held talks in Riyadh with King Abdullah on Nov. 25. After those talks, Saudi Arabia's National Security Adviser Prince Bandar ibn Sultan flew to Jordan to brief King Abdullah II of the outcome of the Riyadh meeting. On Nov. 30, President Bush had a meeting in Amman with Iraqi Prime Minister Nouri al-Maliki.

Maliki is a Ja'fari Shi'ite and belongs to al-Da'wa al-Islamiya, which is backed by Iran. Although not much was revealed to the world media about the talks between Bush and Maliki, APS has been told that the US president pressed the Iraqi prime minister that he should disarm the Shi'ite militias in order to end the sectarian violence in Iraq. But the APS source says Maliki failed to give Bush a firm promise he will disarm the Shi'ite militias, and that he asked the US president to send more American troops to Baghdad in order to defeat the Sunni insurgency.

Iraq's Shi'ites are particularly apprehensive about plans by Neo-Salafi insurgents to escalate their war against the Ja'fari majority. The Neo-Salafis, most violent branch of Sunnis, have vowed to exterminate the Shi'ites in Iraq.
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Publication:APS Review Downstream Trends
Date:Dec 25, 2006
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