Opec has rekindled talk of switching the pricing of oil to the euro from the dollar, because of the continued weakness of the US currency.
The cartel is under pressure from its members, who have seen the potential value of their earnings fall sharply since 2000, as a result of the continued reliance on the dollar. The dollar has fallen in value by 44 per cent against the euro over the past seven years.
Opec secretary general Abdalla El-Badri tells MEED in an exclusive interview that the producers’ cartel may switch to the euro within a decade to combat the dollar’s decline.
“Maybe we can price the oil in the euro,” says El-Badri. “It can be done, but it will take time.”
Any change is likely to be gradual because of the continued dominance of the dollar in international markets. Opec’s benchmark index, which combines the price of oil from all its members, is denominated in US dollars, and the 13 member states sell the vast majority of their crude in dollars.
“In oil exchanges in New York, Singapore or Dubai, you can see the currency is euro or yen,” he says. “But as long as we see the final sign in dollar, that means the pricing is in dollars.
“It took two world wars and more than 50 years for the dollar to become the dominant currency. Now we are seeing another strong currency coming into the [frame], which is the euro.”
El-Badri’s comments follow calls from several Opec leaders at the cartel’s third summit in Riyadh in November 2007 for the group to study the effect of the falling value of the US dollar on their economies.
Venezuelan President Hugo Chavez and Iranian President Mahmoud Ahmadinejad have led calls to cut the historic link between crude oil and the dollar. Iran already prices most of the oil it sells in euros, although one analyst tells MEED the majority of its trade is in dollars, in line with the international market.
Dollar pricing is a sensitive issue. Saudi Arabia’s Foreign Minister Prince Saud Al-Faisal warned at the time of the summit that the dollar could collapse if Opec conducted a public discussion on the merits of ending pricing in dollars.
“Everybody is very anxious in the international community,” said Al-Faisal. “Hopefully we can find a way to safeguard our economies in these uncertain times.”
Nonetheless, with the decline in the value of the dollar, pressure on Opec is likely to continue . Fadel Gheit, senior energy analyst at US investment bank Oppenheimer, said five years ago he thought the chances of a switch to the euro were “slim to none”.
However, the subsequent drop in the dollar has placed unprecedented pressure on Opec to respond, he says.
“In hindsight, had [Opec] switched to the euro five years ago, it would have realised hundreds of billions of dollars,” says Gheit.
While not ruling out a straight switch to the euro, Gheit favours the creation of Opec’s own oil currency basket, which would be made up of different global currencies to reflect the main inter-national markets.
“The oil-producing countries could develop a currency that truly reflects supply and demand, and this could move it away from reliance on a single indicator,” he says.
The Paris-based International Energy Agency (IEA), a vocal critic of Opec’s reluctance to boost the supply of oil to world markets, says the issue of which currency Opec countries should trade their oil in will ultimately be determined by the market.
Lawrence Eagles, head of the IEA’s oil division, argues that it is better to retain the dollar and use the foreign exchange market to correct any imbalances.
“If you start to change the base currency, you are likely to come across liquidity issues,” says Eagles.
He cites the example of the London Metals Exchange, where traders have been able to work in any currency, yet the dollar has prevailed as the base currency for transactions.
“In five years’ time, you may want to change currencies again,” says Eagles.
“To my mind, changing your underlying currency is a political move rather than an economic one.”
Bankers expect the trend of the US dollar weakening against international currencies to continue.
“We are looking to [sustained] dollar weakness, not to developed economies but to developing economies,” says Jeff Applegate, chief investment officer of the US’ Citi Global Wealth Management.
The US Federal Reserve has already cut interest rates twice this year, to 2 per cent. However, it is likely to cut rates even further in a bid to stave off a recession, which will make its currency even less attractive.
“We do not think it is done” says Applegate. “We think there is more to do.
“We are looking for the Fed to go another half per cent by the spring. The risk is that will not be enough and the Fed will need to do more.
“The onus is on the Fed to be on the warpath and, given what the fed has done in the year to date, it is clearly already on the warpath.”
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