Financial Times Editorial Comment: Perils of petroeuros
Financial Times Editorial Comment: Perils of petroeuros
Copyright The Financial Times Limited 2007
Published: July 25 2007 19:39 | Last updated: July 25 2007 19:39
The good news: oil cost $43.60 this June rather than around $70 per barrel as traded in the markets. The bad news: this is not a price for buyers, it is the real price felt by members of the Organisation of the Petroleum Exporting Countries, after adjustment for currency fluctuations and inflation. The dollar is down, which puts downward pressure on Opec’s purchasing power. There is an argument for a switch from denominating oil in dollars to euros or a basket of currencies. However, Opec should be careful about taking that step.
Opec members import a quarter of their goods from the eurozone and less than a tenth from the US. Since the dollar has lost a great deal of its value against the euro in the past five years, these imports have clearly become more expensive. As a result, Opec members bewail that they are pinched for money. But do not feel bad for cash-strapped Saudi princes too soon.
Complaints about lost Opec purchasing power are, for the most part, an excuse to justify the high oil price. To the extent that Opec is able to set the price of oil by tinkering with supplies, it could simply increase the nominal price of oil to make up for a fall in the dollar.
Opec might switch from dollars to euros or a more diverse currency basket but it would still try to keep the real price of oil at the same level. Only if it changed its pricing strategy, or is less powerful than commonly assumed, would a switch away from petrodollars affect the real price of oil, and therefore the world economy. If that happened then the price of oil to Americans would fluctuate more and the price to others might fluctuate less.
There is also a large difference between the currency used to price oil – the dollar – and the pricing of actual transactions which might use the euro, the yen, or another currency. If more actual oil transactions were switched from dollars to euros it could put further downward pressure on the greenback. That, in turn, would affect the existing dollar assets held by oil-producing states. The implications of this could be much larger than any changes to the stream of incoming oil revenues. Fund managers of the Abu Dhabi Investment Authority’s close to a trillion dollar holdings may have more to say about the currency decision than oil ministers trying to maximise current oil revenues.
The dollar has undergone large fluctuations in the past just as the euro might in the future. It should take a great deal more than a new dollar low for Opec to take the chance of abandoning petrodollars in favour of petroeuros.
Copyright The Financial Times Limited 2007
Published: July 25 2007 19:39 | Last updated: July 25 2007 19:39
The good news: oil cost $43.60 this June rather than around $70 per barrel as traded in the markets. The bad news: this is not a price for buyers, it is the real price felt by members of the Organisation of the Petroleum Exporting Countries, after adjustment for currency fluctuations and inflation. The dollar is down, which puts downward pressure on Opec’s purchasing power. There is an argument for a switch from denominating oil in dollars to euros or a basket of currencies. However, Opec should be careful about taking that step.
Opec members import a quarter of their goods from the eurozone and less than a tenth from the US. Since the dollar has lost a great deal of its value against the euro in the past five years, these imports have clearly become more expensive. As a result, Opec members bewail that they are pinched for money. But do not feel bad for cash-strapped Saudi princes too soon.
Complaints about lost Opec purchasing power are, for the most part, an excuse to justify the high oil price. To the extent that Opec is able to set the price of oil by tinkering with supplies, it could simply increase the nominal price of oil to make up for a fall in the dollar.
Opec might switch from dollars to euros or a more diverse currency basket but it would still try to keep the real price of oil at the same level. Only if it changed its pricing strategy, or is less powerful than commonly assumed, would a switch away from petrodollars affect the real price of oil, and therefore the world economy. If that happened then the price of oil to Americans would fluctuate more and the price to others might fluctuate less.
There is also a large difference between the currency used to price oil – the dollar – and the pricing of actual transactions which might use the euro, the yen, or another currency. If more actual oil transactions were switched from dollars to euros it could put further downward pressure on the greenback. That, in turn, would affect the existing dollar assets held by oil-producing states. The implications of this could be much larger than any changes to the stream of incoming oil revenues. Fund managers of the Abu Dhabi Investment Authority’s close to a trillion dollar holdings may have more to say about the currency decision than oil ministers trying to maximise current oil revenues.
The dollar has undergone large fluctuations in the past just as the euro might in the future. It should take a great deal more than a new dollar low for Opec to take the chance of abandoning petrodollars in favour of petroeuros.
posted by Carlos T Mock at 9:27 AM
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