On the bourses

March 9th, 2006

As the originator of the “Iran Oil Bourse” I hope you can spare me some space to comment in relation to Ms. Berg’s recent articles.

The original concept five or so years ago was not of an “Iran Oil Bourse” but of a “Middle East Energy Exchange” providing a new Gulf benchmark price which would not be manipulated by investment banks and oil traders – as is the case with the North Sea “Brent” crude oil complex and has been for at least 10 years.

It makes no sense at all – and never has – for crude oil coming out of the Gulf and going to the Far East to be priced against a North Sea benchmark – but Brent has always been used since it is the “least worst” solution.

From personal experience – including very high level conversations – I think that there is no prospect whatever that Iran would unilaterally attempt to create a crude oil benchmark contract whatever currency it may be priced in. A domestic market in products, petrochemicals, and so on, is another matter.

The current global market in oil is owned, controlled, and operated by intermediaries for their own benefit and is fast deteriorating – as I warned it would five years ago – into an “ICE-bound” (ICE = Intercontinental Exchange, currently completing an audacious but brilliant strategy by applying the coup de grace to NYMEX) global monopoly extracting ever increasing profits at the expense of producers and consumers. Barclays Capital recently estimated that intermediary profits from commodity markets (of which energy is a huge component) will double to $26bn in the next three years.

Moreover, this market is now awash with hedge fund money, and despite Ms. Berg’s confidence in NYMEX and IPE/LCH, I believe that these centralized institutions face little-appreciated systemic risks as “single points of failure” in the face of the unregulated, opaque, and massive off-exchange, or “OTC,” market in energy and energy derivatives.

The difference between the LTCM near-meltdown in the financial markets and an energy market crisis this winter or next is that the Fed can’t print oil to bail out the system.

In relation to clearing, Ms. Berg is unfamiliar with the concept of a “Clearing Union” because no partnership-based “enterprise model” (i.e., legal and financial structure) enabling one has ever existed. Naturally, market users would have to back up a mutual guarantee in some way, whether through margin, collateral, or otherwise.

It’s just that there isn’t the “central counterparty” Ms. Berg is used to.

In a nutshell, I believe that the future lies in the creation of a neutral global oil trading network and “Energy Clearing Union” owned by ALL market constituencies: and this concept is beginning to get across. Certainly the Norwegians were interested in it: “Norwegian Bourse Director wants oil bourse priced in euros” – a development which followed a paper I submitted at the request of their consul-general in Edinburgh.

~ Chris Cook, formerly a Director of the International Petroleum Exchange and now a member of the Wimpole Consortium tasked with creating an energy exchange for Iran

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One Response to “On the bourses”

  1. irdial Says:

    I wonder if Anne Berg is for or against Iran’s independence and existence? Before she wrote that piece, she must have realized that all of the problems she enumerates would certainly be known about by Chris Cook, so my take on this nasty little piece of negative text is to ask the following: what positive input do you have to make Ms Berg? Do you have a suggestion to offer to achieve the goal of slamming the breaks on the war juggernaut – or are you in fact scared shitless of an unstoppable free Islamic Republic of Iran?

    A priceless quote from that site:

    Victory means exit strategy, and it’s important for the president to explain to us what the exit strategy is.

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