Dollar vs Euro
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:
Any informed comments?
When it comes to the global oil trade, the dollar reigns supreme. But
a challenger, writes Faisal Islam
Sunday February 23, 2003
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
the US greenback.
The oil-dollar nexus is one of the foundations of the world economy
inevitably filters through to geopolitics. Recycling so-called
the proceeds of these high oil prices, has helped the United States run
colossal trade deficits. But the past year has seen the quiet emergence
Effectively, the normal standards of economics have not applied to the
because of the international role of the dollar. Some $3 trillion
billion) are in circulation around the world helping the US to run
permanent trade deficits. Two-thirds of world trade is
Two-thirds of central banks' official foreign exchange reserves are
Dollarisation of the oil markets is one of the key drivers for this,
alongside, in recent years, the performance of the US economy. The
of countries that require oil imports require dollars to pay for their
Oil exporters similarly hold, as their currency reserve, billions in
currency in which they are paid. Investing these petrodollars straight
into the US economy is possible at zero currency risk.
So the US can carry on printing money - effectively IOUs - to fund tax
increased military spending, and consumer spending on imports without
of inflation or that these loans will be called in. As keeper of the
currency there is always the last-ditch resort to devaluation, which
other countries' exporters to pay for US economic distress. It's
the nearest thing to a 'free lunch' in global economics.
And for a long time, everything has worked smoothly. The oil industry
born in Texas, and so developed in dollars. The complex web of supply
chains, distribution, and futures markets, all run off the central rock
is the US dollar.
But now there is the euro. At the time of its launch, various
claims were made to its role as 'co-hegemon', sharing the spoils of
currency status. The rapid fall in the euro after its launch put paid
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
be paid for in euros.
'It was a political move on the part of the Iraqi government to show
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
of $0.82 in October 2000. The subsequent 30 per cent rise in the euro
greatly helped the United Nations' oil-for-food programme in Iraq.
Soon afterwards, Jordan launched its own bilateral trade scheme with
carried out entirely in euros.
Last year, in a little noticed Opec speech to a Spanish Finance
conference, Javad Yarjani, a senior Iranian oil diplomat, said: 'It is
possible that as bilateral trade increases between the Middle East and
European Union, it could be feasible to price oil in euros. This would
foster further ties between these trading blocs by increasing
exchange, and by helping attract much-needed European investment in
Yarjani said the 'critical question is the overall value and stability
the euro, and whether other countries within the union adopt the
The first point is beginning to be answered. The second refers to
and Norway. If either joins the single currency, the key Brent
could be redenominated in euros, offering an impetus to movers within
The rising value of the euro makes redenomination in the immediate
interest of European oil majors such as TotalFinaElf and Shell. Over
past year both companies have seen profits gobbled up by the dollar
as their profits are calculated in euros. Opec member countries too
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
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
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
moment, is awash with petrodollars, but trades mainly with Europe.
foreign exchange holdings recently reached an all-time high of $50bn.
At the moment, European consumers are benefiting from the link between
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
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
such additional worries, as there is no currency risk.
So there is a huge list of potential winners from a move to price oil
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
trade alliances certain members have with particular trade blocs,'
That was an elliptical reference to the overwhelming influence of
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,
example, go along with the rest of the Opec people in demanding that
priced in euros, that would deal a very heavy blow to the American
Youssef Ibrahim, of the influential US Council on Foreign Relations,
Last year the former US Ambassador to Saudi Arabia told a committee of
US Congress: 'One of the major things the Saudis have historically
part out of friendship with the United States, is to insist that oil
continues to be priced in dollars. Therefore, the US Treasury can
money and buy oil, which is an advantage no other country has. With
emergence of other currencies and with strains in the relationship, I
whether there will not again be, as there have been in the past, people
Saudi Arabia who raise the question of why they should be so kind to
Historically, empires have been exporters of capital, rather than
like the US. The dollar has been vital to this revolution. At the
launch Martin Feldstein, a Harvard economist, pointed to the
that the single currency could weaken the status of the dollar to the
that it 'could complicate international military relationships'.
is an outside contender to replace Alan Greenspan at the Federal
Oil pricing is just the background to a wider issue. The Bank of China
the Russian Central Bank are both rumoured to be waiting for the best
to increase the holdings of euros. Only 5 per cent of Chinese reserves
held in euros, but more than 20 per cent of its trade is with Europe.
Eastern states hold $700bn of US assets, but comparatively little in
So is the euro the missing link between the 'axis of evil' and the
weasel'? It is greatly appreciated in the former and was invented in
latter. Research by State Street shows that the euro has gained 'safe
status since last August as the dollar has lost it. It's likely this
is a temporary phenomenon. Petroeuros may just change that.
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