Now the U.S. administration has made the transition to President Biden we see the U.S. engaging with Iran indirectly in Vienna via the other JCPOA participants. Meanwhile although the global Covid demand shock lingers, the recovery of the oil price which began immediately after the U.S. election has been more or less sustained. 

President Trump had prepared neither a strategy nor a competent team prior to taking office and he never really filled this vacuum while golfing, tweeting and generally 'surfing the edge of chaos'.  President Biden, on the other hand has assembled a comprehensive and competent team, many of them veterans of the Obama administration.

U.S. energy strategy

For over a century, U.S. foreign policy has been defined by the U.S. need for energy security. The muscular Bush/Cheney U.S. energy strategy based on military dominance ended in 2007/2008 after a Chinese economic veto led to financial meltdown. As I have documented many times, President Obama's smart energy strategy was a “Transition through Gas” from oil to renewables. A Clinton presidency would have continued this strategy, but the interruption of President Trump's “Energy Dominance” strategy from July 2017 saw instead a reversion to oil “molecules of U.S. freedom” via financialisation/monetisation of U.S. shale oil.

In my analysis, President Biden's administration is now reconfiguring the U.S. relationship with China generally and their competing needs for energy security in particular. John Kerry's pre-eminent status as U.S. Special Presidential Envoy for Climate indicates that Transition Through Gas to a low carbon economy remains central to U.S. energy strategy.

The Covid oil shock 

Over a period of 27 months from 1st July 2017 the U.S. patiently reconfigured the global oil market so that WTI once again assumed a primary role in global oil pricing alongside Brent. More to the point by March 2020 and the global outbreak of Covid the U.S. dollar had essentially been pegged to U.S. shale oil using option strategies. 

The outcome was what appeared to be a soft 'cap' on oil prices around $60 to $65/bbl and a 'collar' around $45 to $50/bbl.  However, this oil peg could not survive the colossal initial demand shock in March 2020 as a lockdown propagated from China and the demand for oil products evaporated and oil prices rapidly declined from mid-March onwards.  The claim that there was any kind of 'oil war' between Saudi and Russia is a transparent distraction.

As new information has emerged it has been possible to piece together the extraordinary oil market events of April 20, 2020 when the WTI oil benchmark price collapsed to minus $37/barrel the day before the June 2020 WTI contract expired. In 20 minutes of frantic selling a small group of individual UK traders accidentally made a $500m profit allegedly at the expense of a Chinese fund managed on behalf of unsuspecting Chinese unsophisticated retail investors.  

Not only did the U.S. CME exchange know by April 8th that an unprecedented negative price was likely, but the normally fierce U.S. market investigators subsequently ignored the physical oil transactions which created this WTI contract 'Black Hole'. In other words, this oil price spike was engineered like the July 2008 spike to $147/bbl and almost certainly by the same culprits.

Whatever the reason for the meltdown in the market price, China was able to buy hundreds of millions of barrels of oil at bargain WTI benchmark prices which arrived in China from June 2020 onwards in a stream of hundreds of oil tankers.

A market paradigm shift?

In my analysis, China was able to use this unprecedented demand shock to complete a strategy to take control of oil market pricing. The combination of massive purchasing power as a 'Buyer of Last Resort', scant respect for U.S. sanctions and a fleet of new oil refineries sees China routinely refining over 14m barrels of oil a day and able to daily export millions of barrels of oil products at prices with which no regional refiner can compete.

So China is now in a position to control and manipulate the market from the buy-side in the same way that the sell-side has supported or manipulated the benchmark price since at least 2001. How does this affect Iran? I asked Mahmood Khaghani, my long-standing colleague, especially bearing in mind Iran's strategic alliance with China. 

 “It seems to me firstly, that Iran's resources are as strategically important to President Biden as to President Xi and secondly, that Iran has always been skillful in negotiations with powerful competing nations. But I believe that such destructive and negative 'dollar diplomacy', while possibly gaining a tactical short term commercial advantage, would be a gross strategic error bearing in mind Iran's unique financially isolated position,” Khaghani explained.

In my view, there is a historic opportunity for Iranian energy diplomacy addressing our health and climate and challenges through 'energy for peace'. 

I have always been reluctant to stray beyond my field of expertise to Iranian nuclear energy issues so I asked Mr. Khaghani’s view.

“From the Shah's time onwards, the Iranian scientific and political consensus has always been that nuclear power generation would come to replace oil and gas.  But it seems to me that energy efficiencies and cost reductions in renewable energy are now at such a level that nuclear energy can simply no longer compete with renewables on cost,” Khaghani stated.

I was reminded by the recent launch in Abu Dhabi of the Murban oil benchmark contract of my 2001 proposal for an Iran-led Middle East oil and product pricing benchmark contract. Unfortunately, the resulting Iran Oil Bourse was not as we would have wished. The global oil market benchmarks have been subject, as I predicted, to great volatility for 20 years making budgeting and economic planning by producer and consumer nations difficult at best. 

So it seems to me that while such Middle East benchmark would if successful be a battleground between the U.S. and China for oil market dominance which would be good for exchanges, traders, investment banks and the professionals who feed off them, but even worse for market end-users.

I recalled Mr. Khaghani's role in Iran's imaginative and humanitarian “Energy for Peace” intervention during the first Nakhchivan conflict. Gas was supplied by Iran to Armenia in exchange for a supply of power and I asked Mr. Khagnhani if he still had such swaps in mind?

Khaghani said, “Indeed, there is a historic opportunity to transform global physical oil and gas markets through supply (rather than sales) of flows of upstream raw energy in exchange for downstream flows of refined fuels. These downstream fuel flows may then in turn be swapped for heat/cooling, power, mobility and so on. Such flow swaps may be geographic swaps such as the Caspian oil swap of oil supplied into North Iran swapped for Persian Gulf oil flows; energy conversion swaps, such as Iranian gas for Armenian power or even swaps of technology use in exchange for flows of energy savings.”

Mr. Khaghani added that the problem with such flows is that they rarely meet the needs of both parties at the same time. He reminded me of the Energy Fintech presentation I made two years ago in Tehran to several audiences introducing the Energy Credit Obligation (“ECO”) funding instrument.

The ECO is so simple it can be difficult to comprehend. It is essentially a promise issued by an energy producer in exchange for value received from an acceptor who may pass on (assign) the ECO in exchange for value so creating a chain of acceptors A>B>C>D. Eventually an ultimate acceptor will return the ECO to a producer in payment for supply rather than paying $ or €.  

An 'ECO Clearing Union' agreement will mutually assure acceptance of all ECOs issued, managed, clearing and settled on a shared transparent energy accounting system. Mr. Khaghani and I first proposed an Energy Clearing Union in Tehran in 2008, and subsequently proposed a Gas Clearing Union to the Gas Exporting Countries Forum (GECF) in 2011. Note there is nothing new about circular clearing A>B>C>D>A of obligations. Such chain settlement routinely occurs during the North Sea Brent crude oil forward physical contract settlement process.

Perhaps now, 10 years on, such a Gas Clearing Union and Gas ECO funding offers a constructive solution to the current U.S./China dispute which Iran is very well placed to facilitate from the current isolated position. In doing so, Iran would not only achieve a Transition Through Gas to a low carbon economy but could also use ECOs to finance the reanimation of Iran's economy. Here I propose the creation of a distributed Iranian Energy Treasury through joint participation of Iran's Central Bank (as monetary authority) and energy complex. 

I asked Mr. Khaghani how such an ambitious proposal should be implemented.

“My approach as a scientist has always been through proof of concept 'pilot' projects. I recommend that these should be rapidly implemented on a small scale in rural Iranian locations which by suffering the highest legacy carbon fuel costs also offer the greatest returns from smart investment in renewable energy and energy efficiency,” Khaghani remarked.

Since natural gas (CH4), once processed, is the same everywhere it is perfect as the basis of a transitional global means of exchange and funding. Mr. Khaghani and I have long believed that through a global Gas Clearing Union, the pricing of oil in dollars and gas against oil will give way to the pricing of oil and dollars in the intrinsic and stable energy value of natural gas. 

It seems to me that there is sufficient time for such a simple but radical proposal for funding the transition to a low carbon economy to be presented to the COP26 event in Glasgow, Scotland, in November.