28 comments on Interview with Chris Cook, Originator of the Iranian Oil Bourse
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My guess is that Iran knew it would never work, but was willing to throw a few dollars at a consultant for PR purposes. Chris Cook saw it as a good opportunity and took the money.
Maybe there is more to it, but I don't know what. The storyline is so general, it is impossible to really analyze. Was the plan to have a regional exchange in Iran? If so, their credit risk would offset all other gains combined. And why would Saudi Arabia sell through an Iranian exchange? Or was the plan for just Iranian oil? If so, I still don't see the benefits.
The whole things seems to be based on a poor understanding of markets. Speculators and middlemen do play a useful role in absorbing risk and reaching customers. There is nothing wrong with Iran, or anyone else trying to cut them out. If they are taking too big a piece of the pie it should be easy, if not it should be impossible.
In theory a Middle Eastern Exchange probably could provide a useful function. In reality, getting those countries to cooperate on it would be a lot harder than just paying a bunch of middle men.
Yes there is... there's Leila the model pretending to use a PC... and the two women in the background arguing with the guy from the Bureau de Change..we took the snaps in the bank round the corner...remember?
I dont know why you're wasting your time on this one, Chris. Its obviously been so much bollocks for almost a year now.
Internet fluff, pumped up by conspiratorially minded people like William R. Clark. which the Iranians have played up to in an attempt wave a red rag at the American bull.
Yet you are a cruel and heartless one!
Don't forget that Chris Cook's real forte is the financial ethics of Shariah law.
In December last year the `Islamic Finance Forum' - a website familiar to every TOD reader - put the $64000 question:
To which CC responded:
Thanks heavens he's bringing financial enlightenment to Iran.
I wonder what his line is on polygamy, stoning of adulterers, choppity-chop for thieves etc.
I'm not joking about this - see here
I agree with you about the Internet fluff and I think this interview shows that 90% of what's been written about the exchange has been just that.
I was for six years til 1996 a Director of the International Petroleum Exchange. After that I was, and still am, active in the area where global markets intersect with the Internet.
If you are interested
http://www.exchange-handbook.co.uk/index.cfm?section=articles&action=detail&id=38754
was written about five years ago and this analysis largely informs the strategy I advocate, although I now understand far more than I did then concerning the operation of the global monetary system.
I am also interested in "enterprise models" (ie legal and financial structures) particularly "partnership-based" models, which I believe may in fact be optimal, and also happen to be Islamically sound.
Which latter fact is both relevant to the Iran initiative and an interesting side effect which at least one of our correspondents appears to find sinister. He really should read a little more of my work in that respect before commenting.
I digress.
About 2000 I was asked to assist a trader with his defence who was accused by the IPE of certain trading offences .
In the course of the disciplinary process it became apparent that the IPE were shooting the messenger.
ie they knew perfectly well that it was not he, but the customers of the market, who were abusing the "Settlement Trade" procedure and thereby making millions of dollars in trading physical and OTC priced against the manipulated benchmark price.
The IPE themselves - which went "for profit" a few years after I left - were conflicted, since the trading volumes (and hence their fees) were huge.
Unfortunately I alleged "systematic" rather than "systemic" abuse and got shafted as a result.
An Iranian colleague of mine knew the then Governor of the Iranian Central Bank, and he suggested in June 2001 that we write to him setting out the way that producers and consumers alike were and continue to be screwed by the operation of the current market.
We recommended in our letter that a Middle East Energy "Exchange" be formed, and a "Persian Gulf" benchmark contract originated and traded on it.
This letter led, in due course, to the current initiative.
Our feasibility study never envisaged an "Exchange" but a global market network as outlined in the above article.
If you have any other questions or observations please let me know.
Best Regards
Chris Cook
One more thing. Your comment re throwing a few dollars at consultants leads to a hollow laugh.
We invoiced the Iranian Oil Ministry two thirds of bugger all 2 years ago, and have not been paid yet.
Can't really send in the bailiffs can I?
Best Regards
Chris Cook
Thanks for your reply. I have long been a vocal sceptic of the Iranian Oil Bourse, both as a viable trading platform and as a threat to U.S. dollar hegemony - for which it gets much air time.
I don't believe that the dollar is propped up by dollar pricing of oil and don't believe Iran has the qualities needed to create the exchange - primarily a trustworth financial system.
I am more open to learning more about how intermediaries manipulate oil markets. I am sceptical, again, that this is a major factor in current high oil prices, but don't doubt it exists. Any more information you have on this topic would be welcome.
My reading of the interview led me to believe that part of the concept behind the Iranian exchange idea is a limited understanding of the role of the market. In many cases intermediaries bear risk and should be compensated for it. I also think it is harder than it sounds to separate speculators for "legitimate" market participants and that in any case disagree that one is good and the other bad.
If insiders are have rigged the market it is wrong. If there is any clear evidence, it should be brought to light. However, based in what I have seen I still have to conclude that for the most part, the investment banks and others who are earning large returns in oil and other markets do it because of capabilities, rather than conspiracies. I also think most of the risk-bearing entities do play a valuable role and on a system level reduce, rather than add to costs.
*
I agree with both of your first paragraphs, and never envisaged that they had the ability to create an exchange and viable benchmark price unilaterally.
As you imply the absolute level of crude oil prices is not in the hands of intermediaries, who do not control supply and demand of physical crude oil.
In my view, the exponential economic growth mandated by a deficit-based financial system is finally running up against the capability of the oil industry to meet the resulting demand.
However, I maintain that irrespective of the absolute level of oil price, the level of price volatility is for the most part artificially high, and that it is probable that at least some intermediaries (I won't name names, but you only have to look at who has risen to the top in what organisations) collude to ensure this, probably by manipulating benchmarks and compensating each other through OTC and physical "wash" trades from the profits they make in those instruments.
You only have to look at the influx of investment banks into the sector and forecasts that the take of intermediaries will double in the next three years.
At whose expense, pray?
The market is structurally rigged against end-users and in favour of the intermediaries who own the marketplaces. Even when investment banks lose control of benchmark pricing when hedge funds pile in, they simply make more money from "prime brokerage" and trading against their knowledge of hedge fund positions, strategies and of course actual orders and "stops".
IMHO intermediaries currently receive massively too much reward for the actual risks they run and abuse the asymmetric information flows quite flagrantly.
Unfortunately, there is no regulator with the capability, information or jurisdiction to do anything about this "Bezzle" as Galbraith memorably called the situation when losers don't even know they are losing....
I regret that I have come to understand the oil market only too well: I am not sure as to how well I have communicated that knowledge to the people who are probably uniquely placed to do something about it, however.
Best Regards
Chris Cook
Thanks again for a good reply. I think we agree on the broad framework of the issues. We may differ on scale and the impact of the market inefficiencies/manipulations.
I do think that expodential growth is overrunning the ability of the world to provide enough oil. I am not so sure that the cause is deficit financing or that there is any solution less problematic. The track record of idealists on this front is poor.
I agree that investment banks have unfair assymetrical information and are able to use it to their advantage. I am not as convinced that there is a conspiracy to create volitility that is compensated through designed trades. I certainly don't say it is impossible or that the motive isn't very powerful. I just haven't seen any evidence that it it exists on a scale adequate to move markets. I agree the sector is unregulated, but am not convinced this can or should be remedied.
I expect your comments about banks making money on prime brokerage and trading applies equally or more to equities. Do funds trade commodities through investment banks? Prime brokerage just allows banks to share risks with hedge funds, I don't see it as a major factor here.
I accept that hedge funds make and lose huge amounts of money on volitility. The case is still out on whether they will be net gainers or losers. I do think they have played the oil bull market well. As I remain bullish, I think they will make a fortune.
However, I think the net impact is good. Yes, they raise energy prices in the short-term. But this is sending essential economic signals to consumers and producers - including alternative energy producers. If the funds are right, they will have smoothed the upward curve of the energy price and helped communicate the dire shortages early. They will be rewarded for this as well as the huge risk they took in these bold positions. They may have more information than you or I, but don't have insider information on long-term oil price trends.
If they are wrong, and they still may be. They will get crushed. The reality is more compex than this as funds are not uniform (some are on either side of the transactions), but they are net long. Also their role is big enough to influence price and at some point the music stops and they will need to get out.
I appreciate the position you take and acknowledge your expertise. I don't claim that you are wrong or what you claim can not be taking place. However, at this point I can only view it as surmise. I do not think you or others have provided adequate evidence.
I noted on another thread that your Energy LLP concept may be useful and viable. I said that it appears to be a way to securitize returns from projects and that to the degree it can make that market broader, more standardized and more efficient, it could play a valuable role in introducing alternatives. While less fun, I think it could be an easier and more productive fight than single-handly sorting out global energy markets.
None-the-less, I wish you luck in both ventures and would enjoy an ongoing discussion on both subjects.