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Its not oil. . . . its the Euro stupid!
Here is a good article. The war is about the value of the dollar versus the euro, its strength derived from its role as the big international currency especially amongst the oil producing nations. That is why Europe and America are split on the issue.
When will we buy oil in euros?
When it comes to the global oil trade, the dollar reigns supreme. But it has 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
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.