Chris Cook has a post at The Oil Drum on his proposal for an energy backed alternative currency - Banking on Energy.

At a high-level conference in Tehran in January I made a proposal in respect of an “Energy Standard” for international trade which was very well received, to the extent that it has been suggested that a presentation be made to the Economic Cooperation Organisation (ECO) states concentrated around the Caspian Sea, but extending to Pakistan and Turkey.

The concept is extremely simple, and it is that international trade should be denominated not in dollars, but in energy. Producers of energy, such as Russia and Iran may then-–in exchange for value received--issue Units redeemable either in electricity, or in “energy vector” fuels such as gasoline, heating oil, fuel oil and above all natural gas, which all have a fixed value denominated in energy.

Global transactions will then take place within the framework of an International Energy Clearing Union subject to the collective guarantees of energy producer and consumer nations generally. Both energy creditor nations – such as Russia, Iran, the GCC and Norway – and energy debtor nations, such as the US, UK and EU would all pay an amount into a global “energy pool” in support of the guarantee. The resulting balances would be deployed in massive investment in new renewable energy infrastructure and energy efficiency savings.

The US, which is the biggest energy debtor by far, could therefore be funded by the Pool in redeploying much of its increasingly baroque military expenditure not just into the “Green New Deal” proposed in the US, but also globally, in partnership with the immense UK and EU intellectual capital at the cutting edge of research and development.

The use of an “energy dollar” or “Petro” energy unit, as it was referred to in Iran, addresses one of the most pressing issues. This is the catastrophic waste of carbon-based energy in those countries blessed or cursed with large oil and gas reserves. Anyone who wishes to see the negative effects of gasoline available at 30 cents per gallon on the environment and on the quality of life, need only travel to Tehran.

President Ahmadinejad recently proposed to massively raise gasoline prices and to compensate the population with cash subsidies, and the Majlis threw out the proposal. The unitisation of gasoline, on the other hand, allows the price of gasoline to be raised to global levels, and for the population to be compensated with Units redeemable for gasoline. While some will continue profligate use of gasoline, most will cut back on gasoline use and exchange their Units for something else of value.

Perhaps the most interesting potential lies in the global market in natural gas, where Iran, Qatar and Russia own two-thirds of global reserves and recently instituted a Gas OPEC based in Doha. The unitisation and clearing of natural gas offers the potential basis for an International Energy Clearing Union, I believe. The massive loans which financed Qatar's LNG infrastructure may be refinanced interest-free simply by selling Units redeemable in natural gas to major consumers such as China, who thereby both lock in a price, and may found a new global energy-based reserve currency.

I believe that it is only through the use of an energy standard – rather than a fiat currency or gold - that the transition from carbon-based fuels to renewable energy may be painlessly made, and in so doing, allow the US, and other nations to repay their energy, and other resource debts.

President Obama, for his part, may dispense with the deficit-based “Cap and Trade” mechanism which, like emissions trading, attempts to monetise by political fiat something with no intrinsic value – which of course brings us back to Treasury Secretary Geithner's proposal also to do just that.

So I will conclude by saying, not for the first time, that oil is not priced in dollars: dollars are priced in oil, and recommend that the G20 turn their attention to a sustainable International Energy Clearing Union alternative to our current unsustainable global monetary system.

Chris Cook (of Iranian Oil Bourse notoriety) is proposing a variation on the ideas used for local currencies, promoting oil, gas and land based monetary units to the Iranians - Petro Clearing January 2009.

Chris Cook (of Market 3.0 and the Iranian oil bourse fame) has an interesting article in the Asia Times - Oil market collapse waiting to happen. Does physical oil really get traded in Yahoo chat rooms ?

The New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) crude oil market price has become almost entirely irrelevant in the real world of physical and forward oil trading, which largely takes place, believe it or not, in Yahoo chat rooms. While NYMEX members still provide a massive pool of trading capital or "liquidity", the inconvenient truth is that oil market pricing power has moved across the Atlantic to the price of North Sea crude oil.

The price of North Sea (Brent) crude oil is now the direct benchmark for over 60% of global crude oil pricing, and, through the mechanism of massive "arbitrage" trading between Brent and WTI, it also constitutes an indirect benchmark for most of the other 40%.

Most people - including virtually all mainstream press reporters - believe that it is the price of futures contracts that is used as a benchmark. In fact, it is the reported "spot" market price of "dated" Brent/BFOE (see below) cargo transactions that constitutes the direct and indirect benchmark for most global oil transactions. The massively traded ICE Futures Europe Brent/BFOE Crude Oil contract is merely a financial bet on these underlying prices, and these financial contracts are settled in cash, not oil.

For many years, the production of the Brent oil field has been in decline, and the production of other North Sea oil fields has therefore been amalgamated with it to ensure a sufficient number of transactions to give a credible benchmark price.

We now see four fields - Brent, Forties, Oseberg and Ekofisk ("BFOE") - together supplying the BFOE "Brent" contract whereby 600,000 barrel "cargoes" of these qualities of oil may be bought and sold forward for eventual physical delivery.

The problem is that even this extended North Sea BFOE production is still only running at less than 70 cargoes per month, which is a total monthly production of little more than 40 million barrels. Even at $150 per barrel that represents a value of only $6 billion, and at current prices less than $4 billion.

Sitting on this base of physical trading is an off-exchange complex of price risk consisting of the simple forward BFOE contracts themselves, a host of derivative contracts, and an increasing number of "structured finance" transactions. It is estimated that in total, some $260 billion was recently invested in oil markets one way and another, and this pool of funds was superimposed as an inverted pyramid of risk on this relatively tiny base of physical crude oil.

Could these transactions have been instrumental in causing an oil market speculative bubble?

The answer is obvious: of course they could, and in all likelihood, they did. Unfortunately, because the transactions directly affecting the BFOE price took place off-exchange, not only does no regulator know, but none is in a position to know. Worse than that, even if regulators did know, there are no agreed market regulatory standards to enforce, and any offenders are for the most part smugly immune from enforcement action in offshore jurisdictions in any case.

As I pointed out to the Treasury select committee, to blame national regulators, such as the FSA in Britain and CFTC in the US, for problems of a global marketplace does not help, other than in providing a useful scapegoat. This is because the problem lies both in the global scope of the market and in its conflicted structure, where the interests of trading intermediaries or middlemen are diametrically opposed to those of end-user producers and consumers of oil and oil products.

In the absence of a new approach to market structure we will inevitably see repeats of the recent spike in oil prices as waves of hot money swill in and out of the market. In my opinion, that will inevitably lead, sooner rather than later, to a market meltdown - similar to the literally overnight collapse of the tin market in 1985 from $800 to $400 per tonne.

The conventional wisdom is that the "central counterparty" clearing houses of futures exchanges, which guarantee the performance of transactions, backed by a pool of capital and margin, are a strength of these markets.

In my view, they also constitute a single point of failure, where oil price risk is concentrated in exactly the same way that Fannie Mae and Freddie Mac were massively exposed to house price risk.

I made a presentation a couple of years ago in Lausanne to an audience of high-level security experts at a seminar covering the subject of economic terrorism. This fascinating seminar covered the subject of the susceptibility of global markets and commerce to acts aimed at causing economic destruction, rather than physical destruction and death.

I pointed out that current levels of gearing and risk, and the concentration of risk in single points of failure, together mean that the only difference between "economic terrorists" and proprietary traders such as hedge funds is motive. The former would destroy a market deliberately: the latter by accident.

While the oil market survived the recent storm surge of money, the inevitability of future waves of speculative money sweeping into the market, mean that an oil market meltdown is an accident waiting to happen.