Iran Nuclear Deal Will Lead to Inevitable Petrodollar Challenge

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The Iran nuclear deal will be discussed in Congress over the next 60 days, subject to the same political back-and-forth it always has been.

“Iran has been so politicized here in the United States,” Scott Ritter, former Marine intelligence officer, former United Nations weapons inspector, and author of “Target Iran,” told Money Morning. “It’s impossible to have a hearing in front of the United States Senate where someone can speak calmly and rationally about Iran.”

But in the grand scheme of Middle East politics, this recent nuclear deal is not as much about containing Iran’s nuclear breakout capability as it is about recognizing Iran as a major power-broker in the region.

“This agreement basically cuts a Gordian knot and allows the Obama administration to move forward on the important issues – not the nuclear issues,” Ritter said. “Frankly speaking, once it’s debated in Congress and the ‘haters’ have their say, this is going to be such a non-issue. It’s never going to come up on the radar again.”

So what exactly is in this Iran nuclear deal, and how should markets digest it?

What Is the Iran Nuclear Deal?

The recent deal is, with some modifications, almost identical to a similar Iran nuclear deal in 2004 – the so-called “Tehran Agreement.”

But tensions were high then, as the United States was embroiled in a war with Iraq over their supposed nuclear indiscretions and UN violations pertaining to the Nuclear Nonproliferation Treaty.

Just two years before, the Iranian National Council of Resistance held a press conference in Washington identifying facilities in Iran – in Natanz and Arak – for the alleged purpose of building weapons-grade nuclear fuel.

This evidence, which came from a group associated with the Mujahedin-e Khalq – once deemed a terrorist organization by the U.S. State Department – that Ritter said was “of extraordinarily dubious quality,” was enough for the United States to impose a sanctions regime on Iran in the following years.

“It was the United States who inserted the issue of possible military dimensions to Iran’s nuclear program in 2005 that scuttled the ‘Tehran Agreement,'” Ritter said. “It had the United States transfer the Iranian portfolio from the International Atomic Energy Agency to the Security Council, where this regime of economic sanctions could be imposed.”

The recent Iranian nuclear deal will remove those sanctions while forcing Iran to relinquish a large stockpile of enriched uranium as well as many of its centrifuges, in addition to severely limiting its enrichment capacity and requiring nuclear inspections by the International Atomic Energy Agency.

“This agreement simply was a way to get the United States and Europe out of this political morass that they built themselves when they allowed the issue to be politicized with possible military dimensions,” Ritter said. “They removed it from Vienna [to the IAEA] and took it to New York [to the UN]. It’s now gone back to Vienna.”

So, what does the Iran nuclear deal mean for investors?

What Will the Iran Nuclear Deal Do for Investors?

Not much – at least in the short term.

There’s a lot of discussion about how the Iran nuclear deal will affect oil markets, but the idea that suddenly supply will flood to the markets and push oil prices down is a little too simplistic.

“Iran is in a tough place because the more oil it brings to the market, the less pressure there is on the market and the lower prices are going to be. And Iran needs prices to go up,” Ritter said. “I think Iran is betting on the fact that energy supply and demand is cyclical and at some point in time, the global economy is going to reboot. There’s going to be high demand again coming out of developing areas of the world – China, India, etc. –  and now they’re going to be positioned to effectively exploit that.”

Ritter added that “Iran’s not just going to be awash in money.”

“They’ve been running fake budgets for a long time – a lot of deficit spending – and they’ve got a lot of internal issues that they have to deal with,” Ritter said. “That’s that what this money is going to be used for initially – to get their own house in order.”

And that goes without mentioning that Iranian oil shipping and delivery systems are in a shambles. As Money Morning Global Energy Strategist Dr. Kent Moors said, “The Iranian infrastructure is disastrous and it’s going to take a while to rebuild.”

“Market pundits are creating a tempest in a teapot,” Moors said. “Don’t look for oil prices to be affected by Iranian production anytime soon.”

While oil prices won’t see any dramatic fluctuations on this deal, there is a bigger long-term investment story brewing here.

A story that involves the future of the petrodollar.

Iran, Saudi Arabia, and the Petrodollar

The petrodollar – the U.S. dollar’s role as the currency to settle global oil transactions – was between a rock and a hard place.

A continuation of sanctions on Iran would have surely emboldened the dollar’s adversaries – Russia and China – to use Iran as a staging ground for an assault on the dollar.

After freezing Iran’s account at the U.S. Federal Reserve in 2012 and pressuring Belgium to prohibit Iranian transactions in the international SWIFT payments system, Iran was effectively locked out of the oil markets.

Iran responded, leaning on India, China, and Russia to circumvent the international dollar payments system.

India swapped gold for oil. Gold that Iran then used to buy food and manufactured goods from China and Russia in their efforts to stockpile the yellow metal.

It fueled this attack on the petrodollar. This effort, however, seems to have been averted with the recent Iran nuclear deal.

“Now that Iran is plugging back into the global economy, the dollar is there to stay,” Ritter said. “They’ll be trading in dollars, they’ll be using dollars, and I don’t think there’s any threat of Iran disrupting that horse cart.”

What this will do is embolden Iran’s enemy, Saudi Arabia.

This deal represents a breakdown in the relationship between the United States and Saudi Arabia that began in the 1970s and has helped prop up the petrodollar ever since.

“The Saudis said, ‘Okay, we’ll price oil in dollars, so that secures the role of the dollar as the global reserve currency,'” said Jim Rickards, the Financial Threat and Asymmetric Warfare Advisor for both the Pentagon and CIA. “But there was a quid pro quo. We agreed to guarantee the continuation of the House of Saud, the royal family of Saudi Arabia – and by extension, the national security of Saudi Arabia because they’re a relatively weak military power.”

The thawing of U.S.-Saudi relations began in December 2013. Rickards said that’s when “President Obama stabbed the Saudis in the back by anointing Iran as the regional hegemonic power.”

“Where does that leave Saudi Arabia? Out in the cold,” Rickards added. “So now Saudi Arabia is saying, ‘Wait a second, you’ve undermined our national security, you’ve reneged on your side of the petrodollar deal, why should we hold up our end? Maybe we’ll start pricing oil in gold or euros or maybe Chinese yuan.'”

And Saudi Arabia is already looking to shore up ties with Russia.

“Saudi Arabia has tied itself to an aggressive American foreign policy that’s no longer in play,” Ritter said. “They don’t have a pressure relief valve, and I think Russia will provide that for them. I think by opening relations with Russia and expanding relations with Russia, Saudi Arabia will be able to indirectly deal with the complexities that are going to come with new, improved global relations with Iran.”

With Saudi Arabia making overtures to Russia, a country that hasn’t been shy about its criticism of dollar hegemony in oil markets and global transactions, we could begin to see a more concerted effort to engage in financial warfare.

The Bottom Line: Look for Iran to become a major player in the region and in oil markets with the recent Iran nuclear deal. But that is going to be a long game. Oil markets are not going to see any dramatic price movements anytime soon as a result of this deal. The much more compelling story comes from Saudi Arabia and how it furnishes ties with Russia. Russia may very well enlist Saudi Arabia in this game of financial warfare with the United States, and it could be an important step in an effort to threaten dollar dominance – in the oil markets and elsewhere.

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