Dollar vs Euro

Tahir Wood twood at uwc.ac.za
Mon Mar 31 06:17:34 MST 2003


There is an interesting debate going on on aut-op-sy as to whether the
Iraq war can be seen as an underlying dollar vs euro struggle. The
article below refers, also this one at:

http://www.pubtheo.com/page.asp?PID=1181

Any informed comments?
Tahir

When it comes to the global oil trade, the dollar reigns supreme. But
it has
a challenger, writes Faisal Islam
Sunday February 23, 2003
The Observer

Whether the price of oil is surging to new highs, as it is today, or
slumping, as is predicted after a war in Iraq, there is one enduring
constant: the dollar sign. Oil trading, whether from Norway to the
Netherlands, Britain to Bermuda, or Bahrain to Bangladesh, operates
through
the US greenback.
The oil-dollar nexus is one of the foundations of the world economy
that
inevitably filters through to geopolitics. Recycling so-called
petrodollars,
the proceeds of these high oil prices, has helped the United States run
its
colossal trade deficits. But the past year has seen the quiet emergence
of
the 'petroeuro'.
Effectively, the normal standards of economics have not applied to the
US,
because of the international role of the dollar. Some $3 trillion
(1,880
billion) are in circulation around the world helping the US to run
virtually
permanent trade deficits. Two-thirds of world trade is
dollar-denominated.
Two-thirds of central banks' official foreign exchange reserves are
also
dollar-denominated.
Dollarisation of the oil markets is one of the key drivers for this,
alongside, in recent years, the performance of the US economy. The
majority
of countries that require oil imports require dollars to pay for their
fuel.
Oil exporters similarly hold, as their currency reserve, billions in
the
currency in which they are paid. Investing these petrodollars straight
back
into the US economy is possible at zero currency risk.
So the US can carry on printing money - effectively IOUs - to fund tax
cuts,
increased military spending, and consumer spending on imports without
fear
of inflation or that these loans will be called in. As keeper of the
global
currency there is always the last-ditch resort to devaluation, which
forces
other countries' exporters to pay for US economic distress. It's
probably
the nearest thing to a 'free lunch' in global economics.
And for a long time, everything has worked smoothly. The oil industry
was
born in Texas, and so developed in dollars. The complex web of supply
chains, distribution, and futures markets, all run off the central rock
that
is the US dollar.
But now there is the euro. At the time of its launch, various
overblown
claims were made to its role as 'co-hegemon', sharing the spoils of
reserve
currency status. The rapid fall in the euro after its launch put paid
to
such suggestions. But the single currency has since rescued itself,
reigniting talk of euro-ised oil. In fact, it's happening already.
Iraqi oil, two-thirds of which is being snapped up by US companies, can
only
be paid for in euros.
'It was a political move on the part of the Iraqi government to show
that
the euro could be a substitute for the dollar in denominating the oil
price,' says Fadhil Chalabi of the Centre for Global Energy Studies.
That move was made in the same week that the euro reached its historic
low
of $0.82 in October 2000. The subsequent 30 per cent rise in the euro
has
greatly helped the United Nations' oil-for-food programme in Iraq.
Soon afterwards, Jordan launched its own bilateral trade scheme with
Iraq,
carried out entirely in euros.
Last year, in a little noticed Opec speech to a Spanish Finance
Ministry
conference, Javad Yarjani, a senior Iranian oil diplomat, said: 'It is
quite
possible that as bilateral trade increases between the Middle East and
the
European Union, it could be feasible to price oil in euros. This would
foster further ties between these trading blocs by increasing
commercial
exchange, and by helping attract much-needed European investment in
the
Middle East.'
Yarjani said the 'critical question is the overall value and stability
of
the euro, and whether other countries within the union adopt the
single
currency'.
The first point is beginning to be answered. The second refers to
Britain
and Norway. If either joins the single currency, the key Brent
benchmark
could be redenominated in euros, offering an impetus to movers within
Opec.
The rising value of the euro makes redenomination in the immediate
financial
interest of European oil majors such as TotalFinaElf and Shell. Over
the
past year both companies have seen profits gobbled up by the dollar
slump,
as their profits are calculated in euros. Opec member countries too
would
have a strong interest in moving to euros. The eurozone is the biggest
importer of oil in the world and 45 per cent of Middle East imports are
from
Europe. Even US oil majors would benefit from selling their oil in a
currency that is increasing in value, say US energy consultants.
The Iranian and Russian parliaments have recently discussed adopting
the
euro for oil sales.
Last year Russia entered into negotiations with Germany over the
establishment of an exchange to sell oil futures denominated in euros.
Russia, which on some measures is the world's Number 1 oil producer at
the
moment, is awash with petrodollars, but trades mainly with Europe.
Russia's
foreign exchange holdings recently reached an all-time high of $50bn.
At the moment, European consumers are benefiting from the link between
oil
and the dollar. The euro's surge has, in effect, paid for much of the
increase in the price of oil. This, however, is just the flipside of
the
very high prices in France and Germany in Autumn 2000, which were a
combination of a very weak euro and high oil price. US consumers have
no
such additional worries, as there is no currency risk.
So there is a huge list of potential winners from a move to price oil
in
euros, but movement remains slow.
'At various points in time since the early 1970s, oil producers have
discussed this, especially in periods when the dollar has been weak.
Opinions have tended to be wide-ranging, depending on the strategic
and
trade alliances certain members have with particular trade blocs,'
said
Yarjani.
That was an elliptical reference to the overwhelming influence of
Saudi
Arabia, whose government is the staunchest ally of the US within Opec.
'The Saudis are holding the line on oil prices in Opec and should they,
for
example, go along with the rest of the Opec people in demanding that
oil be
priced in euros, that would deal a very heavy blow to the American
economy,'
Youssef Ibrahim, of the influential US Council on Foreign Relations,
told
CNN.
Last year the former US Ambassador to Saudi Arabia told a committee of
the
US Congress: 'One of the major things the Saudis have historically
done, in
part out of friendship with the United States, is to insist that oil
continues to be priced in dollars. Therefore, the US Treasury can
print
money and buy oil, which is an advantage no other country has. With
the
emergence of other currencies and with strains in the relationship, I
wonder
whether there will not again be, as there have been in the past, people
in
Saudi Arabia who raise the question of why they should be so kind to
the
United States.'
Historically, empires have been exporters of capital, rather than
importers
like the US. The dollar has been vital to this revolution. At the
euro's
launch Martin Feldstein, a Harvard economist, pointed to the
possibility
that the single currency could weaken the status of the dollar to the
extent
that it 'could complicate international military relationships'.
Feldstein
is an outside contender to replace Alan Greenspan at the Federal
Reserve.
Oil pricing is just the background to a wider issue. The Bank of China
and
the Russian Central Bank are both rumoured to be waiting for the best
moment
to increase the holdings of euros. Only 5 per cent of Chinese reserves
are
held in euros, but more than 20 per cent of its trade is with Europe.
Middle
Eastern states hold $700bn of US assets, but comparatively little in
Europe.
So is the euro the missing link between the 'axis of evil' and the
'axis of
weasel'? It is greatly appreciated in the former and was invented in
the
latter. Research by State Street shows that the euro has gained 'safe
haven'
status since last August as the dollar has lost it. It's likely this
shift
is a temporary phenomenon. Petroeuros may just change that.





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