Euros for OPEC Oil Apr05

The main growth engines of the world economy are the USA and China. Estimated GDP growth rates for 2005 are 1.4% for the EU and Japan, 3.4% for the USA and 8.2% for China. Global economic growth is likely to be slightly lower at 4.1%. Higher oil consumption in 2005 for China (8mb/d), USA/Canada (25mb/d) and Western Europe (17mb/d) will require  increased OPEC production (30mb/d) to top up Non-OPEC production (54mb/d). Oil price in 2005 is expected to average around US$50/b.

Why is oil traded in US dollars? How does it benefit USA?

The USA dominates oil exploration, extraction, transport, production, marketing and consumption of oil. Therefore, it is not surprising that the global oil trade is in dollars. Daily, about US$3.2bn are exchanged to cover the sale of 80mb of oil traded at US$40/b. Oil traded in dollars offers the US a huge financial and strategic advantage. The US Treasury issues (prints) dollars – money that is accepted by the rest of the world for trade in oil, gold, goods and services. Dollars held by foreign national banks as reserve currency or for trade between third parties incur neither an interest cost nor an immediate US government commitment to supply goods and services.

For the USA, a fluctuating exchange rate, a strategically managed interest rate and a sustained trade deficit result in a huge debt to the rest of the world. This debt helps the US to finance investment in research and development of hi-tech industrial goods and services creating new jobs and a sustained growth in GDP. Sustained US GDP growth and domination of global trade ensure that the dollar remains the world’s principal trade and reserve currency.

The huge US debt has eroded the value of the dollar and diminished the export competitiveness of the EU and developing countries in the global market. An ongoing devaluation of the dollar reduces US debt relatively and facilitates its exports, especially agricultural products that benefit from subsidy as well. US exports of sugar, rice, wheat, maize, soya, animal feed, poultry and beef have impacted adversely on many countries, especially developing countries where unsubsidised peasant farmers have been devastated.

Simultaneous increases in OPEC’s oil/gas production and prices continue to yield high export earnings for these countries. With US$400bn of revenue each year, they are creating public sector jobs, increasing public sector wages and spending huge sums on imports to modernise their telecoms, power, water services and rural infrastructure. Their economies are expected to result in 7.3%GDP growth in 2005 compared to 7.01% in 2004 and 3.8% in 2003.

Most of OPEC’s substantial dollar revenue is used in acquiring US assets including US Treasury bonds. This investment in the US helps to create new jobs and sustain US GDP growth. It deprives the EU from its share of OPEC’s direct foreign investment.

Can OPEC and the EU secure mutual economic benefit if their oil trade is partly in euros? How would this switch from dollars to euros, resulting in OPEC holding euros as an additional reserve currency, affect the euro? Would stable euro exchange and interest rates make it more acceptable as a reserve currency worldwide? Would global acceptance of the euro as a reserve currency lead to the EU having a larger share of international trade?

The EU and OPEC have much to gain from economic and trade collaboration. OPEC’s adoption of the Euro as an additional reserve and trade currency will reduce its exposure to the devaluing dollar. OPEC’s investment in EU industry, utilities, telecoms, real estate and financial services would create new jobs and capacity that will make the EU more prosperous and ensure a healthy return on OPEC’s investment. In their own countries, OPEC would attract more EU joint ventures for developing their domestic economies and infrastructure that would be mutually beneficial.

Politically, the EU-OPEC economic partnership would strengthen the influence of both on the world stage, especially in extinguishing the fires of discontent that burn in the Middle East.