The petroeuro threat

[sreckiki]

I found this article and I am interested in knowing what the smart people on this board think about it....

http://web.israelinsider.com/Views/7828.htm

I also have another question (which may be dumb but )... do you think that the dollar is going to drop in the next days? (because since 5 days, it looks like it's what it's doing!)

[Epee_Pox]

Apart from your post, I haven't seen this idea of an Iranian oil market in Euros that would diminish the petrodollar discussed anywhere.

On the contrary, recent news is that petrodollars are adding up faster than ever, perhaps too fast.

The current-account surpluses of oil exporters last year exceeded the surplus built up by the thrifty, export powerhouses of Asia including Japan. In 2005, Asia's surplus increased $42 billion, to about $391 billion, according to International Monetary Fund data. But oil exporters increased their surplus by $200 billion to $424 billion.

Much of that cash gets recycled through the global financial system, instead of back into oil-producing economies. For instance, a substantial portion of these petrodollars do a round trip into U.S. dollar assets like bonds and real estate.

A recent report from HSBC concludes another major beneficiary in the months ahead will be emerging markets. "Gulf liquidity will remain a source of support to emerging market asset prices for some time," the report concludes.

The report notes that the increase in liquidity coming just from the Middle East -- about $300 billion since 2001 -- is more than enough to snap up the outstanding stock of all emerging-market external debt, which amounts to about $250 billion. It is also enough to buy a sixth of the $1.8 trillion market capitalization of emerging markets. And those who fret that foreign demand for U.S. government debt might drop as Japanese and European money stays closer to home may take comfort that the increase in Middle Eastern petrodollars amount to enough to purchase 7% of U.S. Treasury debt in public hands.

No wonder Egypt, a big recipient of petrocash according to HSBC, was one of the world's top stock performers in 2005. Petrodollars also offer a partial explanation for financial conditions in places like Ecuador and Turkey, which have been able to issue relatively long-term debt at bargain prices.

For investors, this all might be a source of some relief. But for regulators and central bankers, the concern is still too much money in the world financial system, not too little.

[keith]

This comes up on a regular basis - from day dreaming leftists, frothing at the mouth anti-americans and the odd article in the Economist.

Thing is switching from the US dollar to the Euro, or Yen, or Yuan might have a big effect on the US dollar but it wouldn't have a real benefit for the oil producers. It also happens to a degree already since the oil market is so global. A year plus ago when the Euro was strong and the dollar weak you the 'rise' in the price of oil in was simply due to that currency fluctuation (a weakening dollar strengthening euro) - so the rising price of oil, in dollars, was a flat price in Euros. There is an extra cost of course in selling something in one currency, but compared to the cost of dealing in multiple currencies or not doing most of your trade in the currency with one of the largest markets....

As to the sheer volume pertro dollars sloshing around being a problem. Blame the Federal Reserve and Bank of Japan.

[Inquartata]

Never heard of Clark or the "well known" Petrov....

But the British Pound Sterling was for a very long time the reserve currency of the world. It's supplantation by the dollar was not accompanied by economic disaster for Britain.

PS The title of this thread sounds like that of a Ludlum novel.

[Epee_Pox]

Non sequitur time, but I have to say how much I enjoy this forum. Signal-to-noise ratio is far better than almost any other that I've seen, the intelligence and knowledge of the participants is consistently high, and the range of topics is both broad and interesting.

I keep telling people "seriously, go to the water cooler at fencing.net. I know you don't fence and don't care about fencing. Trust me."

We now return you to your regularly-scheduled macroeconomics discussion.

[keith]

Originally Posted by Inquartata

Never heard of Clark or the "well known" Petrov....

well I am sure that, like you, in the circles in which they revolve they are viewed as having a unique insight.

Originally Posted by Inquartata

But the British Pound Sterling was for a very long time the reserve currency of the world. It's supplantation by the dollar was not accompanied by economic disaster for Britain.

Well give or take the odd sterling crisis in didn't do much harm. So yes if the US had to manage its budget/trade surplus/deficit the way other countries had to it would have a profound effect on america - some of that would be good since removing the prop under the dollar would help export businesses. On the other hand a need for balanced budgets and the need to support a weakened currency through higher interest rates would be bad.

So many commodities are traded in USD, not just oil, that it makes no sense to change that arrangement. Unless like the UK the US becomes a less significant consumer of those commodities. Which means that the Euro nor Yen are viable alternatives - the Yuan might be at the point the Chinese economy is consuming/producing at the rate of the US and has capital markets as transparent/liquid and regulated. So that'll be no time soon.

[Epee_Pox]

Originally Posted by Inquartata

Never heard of Clark or the "well known" Petrov....

William R. Clark is Manager of Performance Improvement at Johns Hopkins University School of Medicine. His published stuff argues that the war in Iraq had nothing to do with terrorism-fostering instability, had nothing to do with enforcing UN resolutions, and was not a reaction to 9/11, but is instead strictly and solely an effort to prevent OPEC from switching to euros just as oil supplies are about to peak.

Krassimir Petrov received his Ph. D. in economics from the Ohio State University and currently teaches Macroeconomics, International Finance, and Econometrics at the American University in Bulgaria. He states in his online postings that he is presently looking for a career in Dubai or the U.A.E. He wrote an online document earlier this year that speculated on the creation of this Iranian oil bourse, which has been re-posted on any number of websites that... to be polite, let's just say they engage in creative speculation about how the world is run.

So these two gentlemen are extremely well-known in international economics circles, their published articles in respected journals are widely accepted, and their assertions as to this topic are but common knowledge. Honestly, Inq, try to keep up with the rest of the class.

[Feltan]

Originally Posted by Epee_Pox

.....So these two gentlemen are extremely well-known in international economics circles, their published articles in respected journals are widely accepted, and their assertions as to this topic are but common knowledge. Honestly, Inq, try to keep up with the rest of the class.

Despite the respect that the economic community may, or may not, have for these two individuals -- I find the whole thing suspect.

I find it suspect for the same reason a surgeon sees health problems as an opportunity to operate, and a carpenter sees problems as new opportunity to use a hammer.

Regards,
Feltan

[jBirch]

Originally Posted by keith

Thing is switching from the US dollar to the Euro, or Yen, or Yuan might have a big effect on the US dollar but it wouldn't have a real benefit for the oil producers.

Except to poke the US in the eye. Don't forget about the amount of resentment in the Middle East over US foreign policy.

It also happens to a degree already since the oil market is so global. A year plus ago when the Euro was strong and the dollar weak you the 'rise' in the price of oil in was simply due to that currency fluctuation (a weakening dollar strengthening euro) - so the rising price of oil, in dollars, was a flat price in Euros.

True to an extent. As the dollar reduces, the real value owed to foreign holders of treasury bills reduces too "reducing" US debt (as that debt is standardised on US currency).

What a drop in the US dollar really effects is the US's ability to generate new debt in the future and its ability to import raw materials. As the US manufacturing sector weakens due to increased foreign competition, is the US going to be as reliant on raw materials transactions for its economic lifeblood? Is the US economy going to shift away from heavy manufacturing to more electronics/knowledge?

At any rate, what I've always wondered is why OPEC doesn't standaradise on some OPEC nation currency (or create their own regional Euro currency), rather then on some foreign currency.

James.

[keith]

Originally Posted by jBirch

Except to poke the US in the eye. Don't forget about the amount of resentment in the Middle East over US foreign policy.

Indeed but a threat to ego is different to a threat to wellbeing. Also the fact that this hasn't yet been done is, I think, a comment on the real cost (to oil suppliers) of attempting to set up a secondary Euro based oil market. Remember that many of the groups bidding to buy oil in Euros are borrowing in USD or even in the case of european oil importers have all their infrastructure set up to handle trade priced in USD. Oil sold in Euros would probably have to trade at a discount to Oil traded in USD in order to cover the transition costs and establish the market. So Iran might like to thumb its nose at america and the mighty greenback but not if its going to hurt there oil export income.

Originally Posted by jBirch

True to an extent. As the dollar reduces, the real value owed to foreign holders of treasury bills reduces too "reducing" US debt (as that debt is standardised on US currency).

What a drop in the US dollar really effects is the US's ability to generate new debt in the future and its ability to import raw materials. As the US manufacturing sector weakens due to increased foreign competition, is the US going to be as reliant on raw materials transactions for its economic lifeblood? Is the US economy going to shift away from heavy manufacturing to more electronics/knowledge?

So if the Oil market switched to Euros the dollars value would fall, due to a falling demand for dollars. Now that would reduce the US debt since it is in USD but theory means that an increased rate of return has to be offered to reduce the risks of declining value of the principle - rates go up. This is what happens to every other currency when the domestic economy is viewed us being unstable due to increasing government debt and trade deficits. The fact that these rules don't apply to the US is in part due to the dollarisation of world trade.

So no arguement that if commodities trade shifted from dollars to something else it would be a shock to the US economy - well probably more of a shock to the US political class. Imagine a world where US military action overseas could trigger a run on the dollar........

Originally Posted by jBirch

At any rate, what I've always wondered is why OPEC doesn't standaradise on some OPEC nation currency (or create their own regional Euro currency), rather then on some foreign currency.

well there aren't enough Riyal floating around for that to work. The dollar is a stable currency in part because of the demands on dollars for international trade. Trade in any other currency and you then have to manage the costs/risks of multiple currency conversions. You can sell oil in USD then pay guest workers in USD, or import/invest in other commodities priced in USD (gold, coffee, etc etc) and US manufactured goods or services which makes life easier.

Now a Euro market for oil might make sense if you wanted to spend that money on euro denominated goods. While that may be a substantial amount of goods - its limited to manufactured goods & services from Euro economies. Unless central banks start holding their reserves in Claret, Mercedes, Rolls, and Beemers it probably won't happen.

[jBirch]

Originally Posted by keith

Indeed but a threat to ego is different to a threat to wellbeing.

True. But where choice prevails, people (and nations) prefer to deal with people whom they like versus people they don't like. Even at marginal cost. In the case of threat analysis, I think that the mere fact that Europe is not the US (and is even friendly) is a compelling argument for Iran switching. The biggest reason for Iran not to do this, IMHO, is because there are members of OPEC (Saudi Arabia in particular) who would make the reverse calculation: US is the friend, not Europe.

Also the fact that this hasn't yet been done is, I think, a comment on the real cost (to oil suppliers) of attempting to set up a secondary Euro based oil market. Remember that many of the groups bidding to buy oil in Euros are borrowing in USD or even in the case of european oil importers have all their infrastructure set up to handle trade priced in USD. Oil sold in Euros would probably have to trade at a discount to Oil traded in USD in order to cover the transition costs and establish the market. So Iran might like to thumb its nose at america and the mighty greenback but not if its going to hurt there oil export income.

This is kind of specious if you ask me. You're positing that there is no threat to any rumblings to switch to Euros because the cost is prohibitive, correct? This is a weak foundation to build foreign economic policy on, I think.

So if the Oil market switched to Euros the dollars value would fall, due to a falling demand for dollars. Now that would reduce the US debt since it is in USD but theory means that an increased rate of return has to be offered to reduce the risks of declining value of the principle - rates go up.

Yes and no. There is no reason why rates on old debt rises, just because the value of that principal changes. You don't pay more mortgage, for example, because your house appreciates. What it does do is put a higher cost on any *ADDITIONAL* debt that the US wants to incur.

This is what happens to every other currency when the domestic economy is viewed us being unstable due to increasing government debt and trade deficits. The fact that these rules don't apply to the US is in part due to the dollarisation of world trade.

Agreed.

So no arguement that if commodities trade shifted from dollars to something else it would be a shock to the US economy - well probably more of a shock to the US political class. Imagine a world where US military action overseas could trigger a run on the dollar........

Again, agreed. I think that the US has a huge vested interest in the status quo but...the recent unilateral actions of US foreign policy have made most nations think hard about allowing this hedgemony to increase (or even stay stable). Over time, if the US stays on its current foreign policy trajectory then there will be mounting pressure on other states to switch to a more liberal currency. The US will then have to expend even more resources to combat that rising pressure and maintain the status quo.

well there aren't enough Riyal floating around for that to work. The dollar is a stable currency in part because of the demands on dollars for international trade. Trade in any other currency and you then have to manage the costs/risks of multiple currency conversions. You can sell oil in USD then pay guest workers in USD, or import/invest in other commodities priced in USD (gold, coffee, etc etc) and US manufactured goods or services which makes life easier.

Ain't that the rub? The US dollar is secure because it is the standard. Any threat to remove it as the standard has severe implications at home, don't you agree?

Now a Euro market for oil might make sense if you wanted to spend that money on euro denominated goods. While that may be a substantial amount of goods - its limited to manufactured goods & services from Euro economies. Unless central banks start holding their reserves in Claret, Mercedes, Rolls, and Beemers it probably won't happen.

Globalisation is putting this concept at risk. I can pay for GM products in Euros so the consumption question is moot. It really comes down to markets that can demand a certain national currency exclusively from others. I can buy wheat and oil and other commodities just as easily in other currency. The only real barrier to switching is the upfront conversion costs, not any real tangible rationale.

It is the specific goods from specific markets that drive a specific currency. If those specific national goods are in demand then the currency is valued. If not, then not. This, of course, takes the position that currency valuations have some sort of bearing in reality.

The only good that the US exports that can do this is, IMHO, interestingly, defense equipment and technology. Since the US is so dominent in this area, it's goods are in hot demand. THAT's the true threat, IMHO. That a rising European Union (or Russia or China) can supply defense equipment on par with what the US can do.

James.

[gojujay]

Originally Posted by jBirch

Except to poke the US in the eye. Don't forget about the amount of resentment in the Middle East over US foreign policy.

Not so much that they'll spend TOO mcuh to do it...

[Inquartata]

Originally Posted by keith

well I am sure that, like you, in the circles in which they revolve they are viewed as having a unique insight.

Yes, you're probably---hey, WAIT a minute...

[Inquartata]

Originally Posted by Epee_Pox

So these two gentlemen are extremely well-known in international economics circles,

Yeah, I can look up a name on the net as easily as you can, EP. I found the blurbs about them, too. But it's a prodigious leap from the existence of a few website publications and minimal vitae to "extremely well-known in international economics circles".

Or was your tongue in your cheek there?

[Inquartata]

Originally Posted by jBirch

Except to poke the US in the eye. Don't forget about the amount of resentment in the Middle East over US foreign policy.

It's not greater than it was back in the 1970s. They could have tried this then, were it a really viable tactic. Instead they went with an embargo, which was semi-effectual, at least in the short term...

At any rate, what I've always wondered is why OPEC doesn't standaradise on some OPEC nation currency (or create their own regional Euro currency), rather then on some foreign currency.

Same reason it can't keep any other joint policy going: the opportunities for profit accruing to any member states which "cheat" are enormous. It's the downfall of all cartels in the end.

[PeterGustafsson]

Hi!


If the Iranians would want to sell oil to France and Germany for Euros, and France/Germany would accept that, what would stop such a transaction? I can not see any hindrance (short of US. pressure/blackmailing) for a oil country to sell to a big market with a big currency in that currency, while at the same time sell to others in dollars.

What gives?


Have a nice time!

Peter Gustafsson

[Epee_Pox]

Originally Posted by Inquartata

Yeah, I can look up a name on the net as easily as you can, EP. I found the blurbs about them, too. But it's a prodigious leap from the existence of a few website publications and minimal vitae to "extremely well-known in international economics circles".

Or was your tongue in your cheek there?

Ahem.

Tongue was so firmly planted in cheek, it took root and bore little fruits that ripened and dropped to the ground singing hymns to the gods of sarcasm.

Didn't think I even needed a smiley on that one.

[jBirch]

Originally Posted by PeterGustafsson

Hi!


If the Iranians would want to sell oil to France and Germany for Euros, and France/Germany would accept that, what would stop such a transaction? I can not see any hindrance (short of US. pressure/blackmailing) for a oil country to sell to a big market with a big currency in that currency, while at the same time sell to others in dollars.

What gives?


Have a nice time!

Peter Gustafsson

Hey Peter,

My understanding is that there is only one global price for oil and that it is set on the NYMEX in US Dollars. (Ie// Russian Oil is the same as Canadian Oil is the same as Iranian Oil).

You can certainly conduct the transaction in Euros solely, but the cost is first translated into USD then exchanged at whatever the daily rate is into Euros. If you were the Oil Exporter, you'd receive payment in Euros but then you'd have to convert it BACK into USD to buy any US goods or to resell that oil to another market with a less Euro centric currency.

James.