Log in

View Full Version : Petrodollar Recycling


Ali
12-07-2005, 03:10 AM
Dollar’s rise aided by Opec holdings (http://news.ft.com/cms/s/9c6d7db6-64fe-11da-8cff-0000779e2340.html)

Middle Eastern oil exporters have rediscovered their love of the US dollar in the past year, helping fuel the currency’s rally to two-year highs against the euro, yen and sterling.

The position marks a sharp turnround from the third quarter of 2004, when the proportion of bank deposits held in dollars by members of the Organisation of the Petroleum Exporting Countries slumped to a record low.

By the middle of this year, the proportion of Opec deposits held in dollars had rebounded from 61.5 per cent to 69.5 per cent, with the share held in euros falling from a high of 24 per cent to 16 per cent, according to figures released on Monday by the Bank for International Settlements.

The data will reinforce the view that the dollar’s surprise strength this year has been partly caused by Opec’s recycling of petrodollars. The currency has risen 13.5 per cent to $1.17 against the euro when most commentators had forecast a fourth straight year of losses.

Oil exporters have become financial kingmakers as real oil prices have leapt 170 per cent in real terms since 2001 to 25-year highs. The US Department of Energy estimates Opec oil revenues will total $430bn this year, up 27 per cent from 2004.

BIS attributes the sharp rise in the proportion of dollar deposits to the stabilisation of the dollar and the 300-basis point rise in US interest rates since June 2003, which has lifted the return on US deposits. In contrast, the European Central Bank only initiated its first rate rise of the cycle last week.

While this may seem an obvious factor, BIS found that the currency composition of Opec deposits had become much more sensitive to changes in interest rate differentials than before. BIS found that many oil-producing nations had been net sellers of US Treasuries since 1997, instead buying corporate and agency bonds and equities with higher risks and rewards.

Meanwhile Marvin Barth, currency economist at Citigroup, reported anecdotal evidence of strong Opec buying of Japanese and European equities. However, he argued that high oil prices would ultimately weaken the dollar by redirecting global savings from Asian countries such as China and Japan, which keep the bulk of their reserves in dollars for use in currency intervention, to the oil exporters which, even now, are not as dollar-focused. Moreover, if interest rate differentials are key to Opec behaviour, the start of the eurozone tightening cycle could end the dollar’s newfound popularity. Interesting. OPEC members buy dollars, dollar strengthens...

...and if oil producing countries price and sell their oil in Euros...

The Real Reasons for the War With Iraq (http://www.ratical.org/ratville/CAH/RRiraqWar.html)

The Real Reasons Why Iran is the Next Target (http://www.globalresearch.ca/articles/CLA410A.html)

Iran Oil Bourse (http://english.aljazeera.net/NR/exeres/C1C0C9B3-DDA9-42E2-AE9C-B7CDBA08A6E9.htm)

I've posted these three links before, but they're posted here again, in the light of the FT report.

Here's another one:
Single GCC Currency (http://english.aljazeera.net/NR/exeres/6472D68F-7D5D-4F37-A7AE-C345CEF5117B.htm) It seems that at present there is little appetite - at least publicly expressed - to move away from the dollar peg, let alone consider invoicing future oil sales in Gulf dinars.

Reasons given for maintaining the status quo include the fact that the dollar is the de facto currency of international trade and that Opec oil sales are invoiced in dollars.

It is also a fact that GCC governments hold vast sums of dollar-denominated assets, such as US Treasury bonds. A move away from the dollar would see more uncertainty as to the value of these assets.

However, the dollar peg is not the optimal choice for the region's economies.

As GCC economies mature and attempt to diversify away from dependence on hydrocarbons, the utility of the dollar peg needs to be critically examined.

Even if the current arrangement is kept as a convenient convergence tool up until 2010, once launched GCC leaders should seriously consider viable alternatives such as a managed free float or a loose peg to a trade-weighted basket of currencies.

Key problem

One key problem with the dollar peg is that it effectively means that GCC central banks have outsourced their decision-making powers on interest rates to Alan Greenspan of the US Federal Reserve.


Not having independent monetary policy tools can be problematic, particularly in terms of combating inflation and encouraging growth.

As a consequence decisions on whether or not to cut, hold or hike rates are based on economic conditions in the US and these are not always the most appropriate for the GCC.


It is often the case that the US economy will grow robustly when oil prices are low while GCC economies will either experience low levels of growth or stagnation.


Conversely when oil prices are high the pace of US growth eventually slows, and US interest rates have been low for several years now in an attempt to stave off recession.

These low interest rates which the GCC central banks have to track, are now exacerbating inflation in the GCC and leading to the overvaluation of some stock-market and real estate-assets.

There is also increasing concern over the size of America's federal debt, which is almost $8 trillion. Its budget deficit this year alone is expected to be $600 billion. In recent years the US economy has been characterised by substantial budgetary deficits. It consistently spends more than it earns.

As a result, the US is becoming more and more dependant on foreign countries willing to hold dollars in their reserve accounts and buy its Treasury bonds.

Essentially the US Federal Reserve prints paper - Treasury bonds and dollar bills - and swaps these for commodities such as oil and consumer items such as Chinese household appliances.

The weakening dollar has also resulted in GCC imports from Europe becoming more expensive. When launched in 2002 a Saudi riyal was worth €0.29 euros; today it is worth only €0.21 euros.

This means that it has become 32% more expensive for GCC states to import goods from the eurozone, which happens to be the region's largest import partner. Unlike the US, the eurozone does not run large trade deficits, and the European Central Bank imposes strict limits on government deficits.

If GCC states were to start shifting some of their dollar-denominated assets into euro-denominated ones prior to currency union, it would provide a good hedge against the expected downward decline in the dollar.

Even more significantly if, post-currency union, the GCC decided to allow the purchase of oil in euros along with the Gulf dinar and other currencies, they would see their euro assets appreciate massively, as a greater number of oil-importing nations would hold higher levels of euros in reserve and therefore increase its value.

sam i am
12-12-2005, 04:52 PM
Ali,

I know we've debated this before...but here goes again.

Why would any country really WANT to trade in Euros over American dollars?

The dollar has been the de facto world currency for quite a bit of time now, and the Euro is plagued by problems, especially the precariousness of the European monetary union historically. Britain has opted out and is not going on the Euro anytime soon. The US dollar is supported by the largest economy in the world and years of the US Treasury paying it's debt, never ONCE defaulting on a loan.

The Euro is still a relatively new currency, backed by a multitude of governments in Europe. where the next no-confidence vote can bring down any government and you have nations like Italy, where there have been, what 40 different governments in the past 60 years? Stability is not, at this current juncture, the Euros strong suit. Maybe, eventually, it will strengthen to a point where it can challenge the supremacy of the dollar, but we'll all probably be trading in yen by then... :) :cool:

Ali
12-13-2005, 04:16 AM
So, the US has no issue with the Fiat Currency for Oil changing to €?

Because it is very much in the interests of the EU and their major trading partners (Russia, China, Middle-East, Asia, etc.) to be able to buy and sell oil in Euros, without first having to convert the euros to dollars. It means that they can keep Euro reserves instead of Dollar reserves and operate that much more efficiently.

Pricing oil in dollars is a barrier to trade which needs to be dismantled, don't you think?

sam i am
12-13-2005, 05:42 PM
So, the US has no issue with the Fiat Currency for Oil changing to €?

Because it is very much in the interests of the EU and their major trading partners (Russia, China, Middle-East, Asia, etc.) to be able to buy and sell oil in Euros, without first having to convert the euros to dollars. It means that they can keep Euro reserves instead of Dollar reserves and operate that much more efficiently.

Pricing oil in dollars is a barrier to trade which needs to be dismantled, don't you think?

Of course not. Dollars are more stable and more widely traded, affording the US the ability to control the market where necessary to ensure it's own ends, silly!

Ali
12-15-2005, 08:31 AM
Of course not. Dollars are more stable and more widely traded, affording the US the ability to control the market where necessary to ensure it's own ends, silly!Hmmm. Okay. Let's compare both currencies to a third, unrelated currency, like the Swiss Franc, over five years, shall we?

USDCHF (http://uk.finance.yahoo.com/currency/convert?from=USD&to=CHF&amt=1&t=5y) EURCHF (http://uk.finance.yahoo.com/currency/convert?from=EUR&to=CHF&amt=1&t=5y)

Which one's more stable?

Try it with any currency and see what you get.

USDGBP (http://uk.finance.yahoo.com/currency/convert?from=USD&to=GBP&amt=1&t=5y) EURGBP (http://uk.finance.yahoo.com/currency/convert?from=EUR&to=GBP&amt=1&t=5y)

USDJPY (http://uk.finance.yahoo.com/currency/convert?from=USD&to=JPY&amt=1&t=5y) EURJPY (http://uk.finance.yahoo.com/currency/convert?from=EUR&to=JPY&amt=1&t=5y)

Seems to me that the Euro's a much better candidate for trading oil than the Dollar, these days.

The main reasons that the dollar has managed to pick up recently is the price of oil and the interest rate increases... and that can't go on forever. Interest rates remain extremely low (http://www.ecb.int/stats/monetary/rates/html/index.en.html) in the EU and can be tweaked at any time if the Euro starts to slide (or to get too strong, as this hurts exporters and nobody wants to be a net importer, right?). As soon as the US Fed stops raising interest rates, which is has to, in order to maintain growth in the US, OPEC producers will dump their dollars and buy Euros - a better bet in the long term, as you can no doubt see for yourself. This, in itself will cause the dollar to slide again.
Who wants to hang on to an declining currency, in any case? And if OPEC decide to sell oil to the EU and their trading partners in a currency which they are already investing in, then what do you think is going to happen?

I suppose one thing in your favour for the future is that wealthy countries will start outsourcing jobs and setting up factories in the US, where the labour costs will be lower than in Asia and Africa! :p

sam i am
12-15-2005, 11:11 AM
Boy, you really want to believe this is going to happen, don't you?

Well, you're entitled to your beliefs, as I am to mine. I guess we'll just agree to disagree.

IF you're scenario ever comes to pass, I'll eat crow, but in the meantime, it's business as usual.....in the US dollar.

Ali
12-19-2006, 05:13 PM
Boy, you really want to believe this is going to happen, don't you?

Well, you're entitled to your beliefs, as I am to mine. I guess we'll just agree to disagree.

IF you're scenario ever comes to pass, I'll eat crow, but in the meantime, it's business as usual.....in the US dollar.You want fries with that? (http://news.bbc.co.uk/1/hi/business/6190865.stm) Iran is to shift its foreign currency reserves from dollars to euros and use the euro for oil deals in response to US-led pressure on its economy.

In a widely expected move, Tehran said it would use the euro for all future commercial transactions overseas.

And Iran is only the first of the OPEC members to dump the dollar (not counting Iraq - who didn't get the chance to, before they were invaded.

Weak dollar makes Opec cut likely (http://news.bbc.co.uk/1/hi/business/6207108.stm)

The weakening dollar is increasing the chances of a cut in output by oil producers' group Opec at its next meeting later this month.

On Monday the dollar hit a 20-month low against both the euro and the pound, denting the revenues of oil exporters which sell the commodity in dollars. Why denominate your assets in a declining currency when the euro is so stable and so local?

Will other oil producing countries in the Middle East, members of The Organization of Petroleum Exporting Countries (OPEC), follow the suit? (http://www.aljazeera.com/me.asp?service_ID=12635)

A switch by OPEC members from the U.S. currency to the Euro could enhance the value of the Euro, the new official currency of the European Union (EU) which first came into existence on Jan. 1, 1999, further, ending the U.D. Dollar supremacy.

And despite a claim by Monica Fan, currency strategist at RBC Capital Markets’ that the news from Iran had little impact on the market "as it had already been announced by the Finance Minister on Dec. 4 and an estimated 70% of Iran's $45.5 billion reserves are already held in non-dollar assets," the impact of Iran’s move on the dollar has immediately been felt.

Yesterday the dollar was slightly lower against its major counterparts, reversing early gains.

Fan however, warned that the "more bearish effect" from Iran is that "the market will suspect this is the precursor to similar moves by other Middle Eastern governments".

Combined, the foreign-exchange reserves of Libya, United Arab Emirates, Saudi Arabia, Egypt, Lebanon, Kuwait, Yemen, Jordan, Qatar, Oman and Bahrain carry a total of about $170 billion, Fan said, according to MarketWatch.

A day before Iran announced converting its dollar-denominated assets held overseas into Euros, Sultan Nasser al-Suweidi, the United Arab Emirates' central bank governor, said that "we're waiting for a clear trend to emerge before converting our reserves into Euros or any other currency."

The bank holds 98% of its reserves in greenbacks but plans reducing its dollar holdings to between 50% and 90%.

Analysts aroused fears over Iran’s move, warning it would prompt another U.S. war in the region. When other countries, like Iran, sought payment of oil in other currencies, most notably Euro, the punitive action was in order.

The American President George W. Bush's Shock-and-Awe in Iraq was not about Saddam's nuclear ambitions, or the alleged link to Al Qaeda network which the U.S. blames for September 11 attacks, it’s about defending the dollar, and setting an example that anyone who seeks payment for oil in currencies other than U.S. Dollars, which is what Saddam did in 2000, would be likewise punished.

But if the U.S. decided to commit the same mistake it made in Iraq again; i.e. invading Iran, it will definitely bring an end to its political hegemony not just the hegemony of its currency, in the region and the world.

History teaches that an empire should go to war for either defending itself or benefiting from war; otherwise, as Paul Kennedy stated in his The Rise and Fall of the Great Powers, "a military overstretch will drain its economic resources and precipitate its collapse". Not to mention Venezuela (http://www.allheadlinenews.com/articles/7005889640).

You'd better hope the Chinese doesn't dump all their Dollars, too, or you'll really be in the poo.

sam i am
12-22-2006, 10:52 AM
I'm not quite ready for the fries yet.

As we agreed, the Iranians switching to the Euro was widely anticipated and, thus, not a real factor in the change in oil prices worldwide.

Nice try, though.;)

Ali
12-27-2006, 07:45 AM
As we agreed, the Iranians switching to the Euro was widely anticipated and, thus, not a real factor in the change in oil prices worldwide.This has nothing to do with oil prices.

This has EVERYTHING to do with the value of the dollar and its role as the fiat currency for global oil transactions.

Iraq was about to switch from dollars to Euros before they were invaded. This is a fact and is one of the reasons they got nailed.

Iran has been planning to do so, hence all the pressure on them about their Nuclear Weapons program.

Other OPEC member states are thinking about switching to the Euro, which means that their customers, like China, are going to have to flush their dollar reserves in order to buy oil. At this rate, even the US will have to buy Euros before they can buy oil!

It's a widely-regarded economic fact that a lot of the purchasing power of the dollar relies on it being used by all the world to sell and buy oil. It's also the reason why the US will do anything (http://www.ratical.org/ratville/CAH/RRiraqWar.html) it can to maintain this arrangement, because for the dollar to lose its status as global reserve currency will spell disaster for the American Economy.

And it's happening now, regardless of what the US and Israel manage to convince the UN to do.

Iraq and Iran's decision to price their oil in Euros is partly political, but there's also an Economic reason. The dollar's recent instability means that the value of the oil produced by OPEC members drops as the Dollar devalues. It also messes up the pricing. Is 100 dollars per barrel really as high a price when you can buy less with the dollars you get for your barrel?

Watch this space. If Iran's Oil Bourse goes well, then it's certain that the rest of OPEC will do the same (except Saudi, of course ;) ) and the Dollar will slide even further - along with the Superpower status of the US.

sam i am
12-27-2006, 06:25 PM
As usual, you're ATTEMPTING to sell a pig in a poke.

Of course the Iraqis are going to continue to price in US dollars, as is the largest economy in the world, the US. The Saudis, as you state above, are exceptionally unlikely to drop the dollar either.

As for the Chinese....well, I'm loathe to predict, but the Chinese hold FAR too many US assets to see the dollar plunge and maintain their domestic growth rate.

Overall, we're still in a wait and see pattern, I'll grant you that much, but your hopeful anticipation, colored with with barely disguised glee, is unseemly in an economic discussion, my friend.

Ali
01-02-2007, 05:37 AM
Of course the Iraqis are going to continue to price in US dollars, until the violence subsides and the US military leaves the region... let's hope the violence continues, eh?

as is the largest economy in the world, the US. whic has no oil to sell... so how are they going to price it in dollars? If it's priced in euros, they'll have to buy in euros.

The Saudis, as you state above, are exceptionally unlikely to drop the dollar either.not if they want continued US support of their corrupt and evil regime, no.

As for the Chinese....well, I'm loathe to predict, but the Chinese hold FAR too many US assets to see the dollar plunge and maintain their domestic growth rate.the dollar IS plunging and the Chinese are losing out because of it. The dollars's plunging because the US deficit is so huge and most of the debt is owned by China.

Overall, we're still in a wait and see pattern, I'll grant you that much, We waited and saw that Iran did go forward with the switch to the euro. Let's wait and see if the other oil producing states (who are geographically closer to the EU and do most of their trade with the ever-expanding EU) do the same. Venezuela next, methinks. Does the US not buy a lot of oil from Hugo?

but your hopeful anticipation, colored with with barely disguised glee, is unseemly in an economic discussion, my friend.You misunderstand my "glee". I do not want to see the US crumble, I just want the interference in other parts of the world to stop. I see the US Dollar's loss of influence as a precursor to this - which is why I welcome it.