Dollar Unnecessary in Iran Stealth Oil Trades

In Southeast Asia, nestled in the South China Sea, lies Malaysia. Just slightly larger than New Mexico and established in 1963, Malaysia is not typically the first location that comes to mind when thinking of international intrigue. Nevertheless, that is exactly where this Ian Fleming style story of international finance takes place?a story that at its heart is another piece of the tale of the death of the U.S. dollar.

As reported by Reuters:

Iran is using a little-known port off the East Malaysia coast to hide millions of barrels of oil from Western sanctions, according to shipping data, industry sources and officials.

The U.S. has levied sanctions against Iran for the better part of 30 years, initially as a response to the Islamic revolution of 1979. U.S. President Barack Obama?s recent tightening of sanctions is ostensibly in response to Iran?s growing nuclear capability and fears it will develop nuclear weapons. A number of nations have joined the U.S. in imposing sanctions against Iran ranging from banning of sales of military weapons to Iran to banning companies from doing business with Iran.

Latest reports show that Iran?s oil exports have dropped to approximately 1 million barrels of oil per day, compared to a year ago, when the country was averaging exports of about 2.4 million barrels per day, representing a significant loss of revenue. Is it any wonder, then, that Iran is trying to get around the sanctions with a little trip to Malaysia? Here?s the story. Just a few miles from the coast of Borneo is the port of Labuan, what Reuters refers to as no-man?s land:

?Labuan is like a no-man's land. There's no reason to be paying attention to Labuan," said a Singapore-based source familiar with floating storage operations in Southeast Asia.

It is in these calm, seemingly unimportant waters that a scenario is unfolding that may hasten the decline of the U.S. dollar. With the loss of revenue from reduced oil exports and growing demand from countries such as China, Japan and India for its oil, Iran is doing its best to circumvent the sanctions.

So how does Iran find a safe haven for its oil? Recent research by Reuters Freight Fundamentals revealed that Iran is using its own freighters to ship oil to the port of Labuan, Malaysia, where it is then loaded onto empty vessels for ultimate sale to Asian buyers. This ?scheme serves to subvert international sanctions and serves as a way for Iran to keep critically important oil money flowing into its economy. As Reuters reports:

While not illegal, the dead-of-night transfer of oil in the South China Sea illustrates the lengths to which Iran will go to keep exporting its oil to skirt Western sanctions aimed at pressuring Tehran's suspected pursuit of nuclear weapons. A European Union oil embargo has virtually halted access around the world to insurance for Iranian crude and oil products.

Doing business with Iran's oil industry carries reputational and financial risk and the threat of losing insurance coverage.

But Iran?s stealthy oil trading is having another important impact?it is demonstrating to other countries that the U.S. dollar is not indispensable. In order to maintain uniformity in markets, oil has historically been priced in ?petrodollars,? a system that has been highly beneficial to the United States, as this Casey Research Dispatch explains:

The "petrodollar" system was a brilliant political and economic move. It forced the world's oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world's oil for free, since oil's value is denominated in a currency that America controls and prints.

Iran?s transactions with its Asian trading partners are not priced in dollars. For the U.S. these repercussions could be catastrophic. In a recent Wealth Cycles post, we documented how the U.S. dependency on financing debt by selling Treasury Bonds is highly dependent on the dollar maintaining its position as a global currency powerhouse.

In two large spurts, the Federal Reserve's banknote, the dollar, lost much of its sway over the people who comprise some of the largest economies in the world last week.

The willingness of countries like China, Japan and India to turn a blind eye to the Iranian subterfuge may be indicative of more than just a lust for oil. China has made no secret of its desire for an alternative to the dollar as the world?s reserve currency. As more countries succeed in circumventing the dollar with no negative impacts, the trend is likely to catch on, hastening the dollar?s decline. Likewise, individuals are beginning to realize they, too, can ditch the dollar, using alternative currencies such as BerkShares or Ithaca Hours to transact business in their communities (See the WealthCycles.com article, Alternative Currencies Putting Dollar In Its Place, for more on this.)

Gold and silver also are money. In many parts of the world, including some of Iran?s down-low trading partners, the people spend their paper currency but treasure their gold and silver as their savings accounts. They understand what Americans are still coming to realize?that paper currencies come and go, but gold and silver hold value and preserve wealth.

Source: http://wealthcycles.com/blog/2012/09/14/dollar-unnecessary-in-iran-stealth-oil-trades

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