http://www.resourceinvestor.com/pebble.asp?relid=34222
The Dollar Collapse's Oil Ramifications By Stephen Clayson 25 Jul 2007 at 12:55 PM GMT-04:00 LONDON (ResourceInvestor.com) -- Oil is a commodity traded almost universally in U.S. dollars, but for how long? For decades, the motley band of petrostates that comprises the Middle East has, with few exceptions, dined out on dollar revenues from the sale of the black stuff. With the run-up in the oil price, times have been better than ever for most Middle Eastern countries. Today's oil prices have made them far more important internationally, and far wealthier, particularly in the cases of the governing elites, than they otherwise would be. So much so that OPEC, which is dominated by Middle Eastern countries, has shown itself as willing to manage the oil it supplies onto the world market in order to keep prices up around current levels. However it was intriguing that a recent report from OPEC suggested that the average price of oil, adjusted for inflation and currency fluctuations, in June of this year was $43.60 a barrel versus $44.30 barrel in June of last year. This is despite oil's present, unadjusted position close to record levels in the high $70s a barrel. So as the dollar has depreciated and the euro has appreciated, the real value of a barrel of oil has slipped, albeit not by much. But that isn't all. An economist from U.S. investment bank Morgan Stanley was recently quoted estimating that a 10% drop in the value of the U.S. dollar against major currencies cuts Middle Eastern purchasing power by about 5%. It is also germane that the euro, and to a lesser extent the pound, have appreciated significantly against the dollar, because Middle Eastern countries import much more from Europe than from the U.S. For example, according to Deutsche Bank, Germany's largest bank, Saudi Arabia sources approximately 26.5% of its total imports from the eurozone, 12.2% from the U.S, nearly 7% from Japan and approximately 5% from the U.K. The drop in Middle Eastern spending power that has resulted from the simultaneous appreciation of the euro with the pound and the weakness of the dollar is increasingly being cited, not unreasonably, as a reason why OPEC is reluctant to pump more oil, as its most influential members wish to keep prices high in order to mitigate the erosion of their purchasing muscle. But what happens when, as is inevitable, the dollar starts to fall in an even more substantial way? The obvious solution for the Middle Eastern petrostates is to stop pricing the oil they sell in dollars and start pricing it in euros. Pricing oil in dollars might have made sense when there was a paucity of other relatively stable currencies, when U.S. demand was more significant as a proportion of world demand than it is today, and when the Middle East imported more from the U.S. - but not any more. However, the extra demand for the dollar created by its use as the currency of global oil trading is a significant prop for the currency. Take that away, and another round of depreciation is likely. One would expect that the U.S. government to exert considerable diplomatic pressure to maintain the dollar's position, but with a changed diplomatic environment and the emergence of very real geopolitical rivals to the U.S., such as China, success can certainly not be guaranteed. It is also worth noting that China is on trend to be largest consumer of oil before long. So maybe one day, oil will be priced in renminbi. But for now, the euro looks like the way to go - to the detriment of the dollar.
