|
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. |
