December 21, 2006 – I had been hearing rumors for a long time, since last March, that Iran was getting ready to trade oil in Euros. And since then, I’ve been following this situation very closely. Recently from the Tehran press there has been a flurry of rumors regarding the sale of Iranian oil in Euros, but still, it has been difficult to confirm. Well, I finally received the confirmation I wanted. The BBC reported this week that “Iran is to shift its foreign currency reserves from dollar to euro and use the euro for oil deals in response to US-led pressure on its economy.” Furthermore, Tehran is urging all Iranian businessmen to start taking out loans in Euros, not dollars, and has claimed that they will shift away from the dollar into Euros for all future commercial transactions overseas.
So what does this mean for Iran? In Venezuela, Chavez was kicked out of office temporarily in a coup attempt shortly after he sent his Finance Minister to Russia to discuss the sale of oil in Euros. So we’ll have to wait and see if there are any political and economic ramifications for Iran’s actions. On the more immediate end, this does not bode well for the dollar.
Some analysts have said that they doubt Tehran’s announcement will have any short-term impact on the dollar because Tehran has been speaking of these actions since last March. I disagree. China had been talking about decreasing the amount of dollars in their reserves since last December, but last month when they announced their intention of doing so again, the price of gold spiked by $16 an ounce in one day. And Tehran is not just talking. This change is real and it will exert real downward pressure on the dollar as it will undoubtedly hasten many other countries to decrease their reliance on the dollar as well.
Tehran’s actions may not exert immediate downward pressure on the dollar but I believe it will have an affect fairly soon. Iran is the world’s fourth largest exporter of oil. Iran will most likely still continue to sell oil in dollars but buyers of Iranian oil will also most likely immediately start purchasing oil in Euros and unloading some of their petrodollar reserves. Why hold on to a currency that is widely expected to lose further ground next year when you can convert your petrodollars into petroeuros for future oil purchases? Tehran’s move may be the first step to hasten the transitioning of the world’s petrodollar reserves into petroeuro reserves. Furthermore, if there is no reaction in terms of military intervention or economic embargoes imposed upon Iran by the United States, Tehran’s actions may have a domino effect, encouraging Putin in Russia and Chavez in Venezuela to sell their oil in Euros.
All in all, Tehran’s actions have may set the scene for a tipping point in 2007. We’ll have to wait now to see how it will all unfold.
J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.