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If This Happens, Oil Prices Will Go Lower Than $20
Iran no longer has sanctions restraining its oil production and it is free to do business with Western countries. Iran also has the freedom to impose its conditions. Given that Europe has become its biggest trading partner, it comes as no surprise that it wants buyers to pay in euros rather than U.S. dollars for its oil. The decision adds to international tensions and has placed considerable additional pressure on oil prices. Iran is a Saudi Arabia and U.S. rival on the ground in the Syrian civil war and other geopolitical situations.
Iran’s goal is not only to increase production, but it’s also to slash its reliance on U.S. dollars, as reported by Reuters. Iranian government sources urge buyers to pay in euros, considering the exchange rate between the euro and dollar upon delivery. Iran simply wants to ease its own reliance on the U.S. currency. (Source: “Exclusive: Iran wants euro payment for new and outstanding oil sales,” Reuters, February 8, 2016.) The same source mentions Iranian authorities want to convert to euro frozen financial assets because of sanctions. In U.S. currency value, this is equivalent to about $100 billion.
Tehran has already discussed “billing” in euros in contracts with France’s Total SA, Spain’s CEPSA, and Litasco. Essentially, Iran wants to punish the United States for imposing years of economic tyranny by de-dollarizing the oil trade. This is happening while the petrodollar is under tremendous pressure. Russia and China are already defining oil sales in yuan and the petrodollar recycling system is in crisis.
Iran Wants to Trigger the End of the “Petrodollar”
If other manufacturers were to move away from the dollar as they did Russia and Iran, another instrument of U.S. hegemony would be lost. For decades, the use of the dollar to pay for oil and other raw materials has ensured a stable international demand for this currency. This has helped to support the exchange rate against rival currencies and against a negative balance of trade. In other words, the petrodollar mechanism has helped finance the United States’ external deficit. The demise of the petrodollar is a threat to the U.S. economy itself.
