Lagniappe

 

 

Chuck Marvin:
Tune out OPEC's bad boys

OPEC's in-house hooligans Mahmoud Ahmadinejad of Iran and Hugo Chavez of Venezuela made waves at the group's recent summit by recommending that the global oil market relist crude in a currency other than the U.S. dollar.

Their claim is that the dollar's decline has eroded the effective value that oil exporters get for their product. Indeed, the dollar is trading at a record low against numerous currencies.

Europe's common currency has appreciated almost 70% against the dollar since late 2000. As the value of the dollar has fallen, any foreign entity accepting greenbacks has seen the buying power of the currency shrink.

However, the price of crude oil has risen by roughly 290% over the same time period. The jump in crude prices is partly due to rising global demand for the commodity. Another major cause has been the decline in the value of the dollar, according to a research report by Deutsche Bank Global Markets Research analyst Binky Chadha.

But David Knapp, oil markets senior editor at industry data provider Energy Intelligence, says the increase in crude has more than offset the sliding dollar. The euro has gained only about 16% against the dollar in 2007 while the price of oil has nearly doubled. "What are these people complaining about?" he asks.

From an economic standpoint, a change in the denomination of oil from the dollar to a basket of currencies or to an alternative single currency like the euro would have a negligible direct effect on global markets, says Dean Baker, co-director for the Center for Economic and Policy Research. The market for dollars and euros is so deep that enormous transactions between the currencies take place in seconds.

Furthermore, futures markets like the New York Mercantile Exchange and the Intercontinental Exchange trade crude oil in dollars, so oil would retain a strong bond to the U.S. dollar even if OPEC was to distance itself from it.

"The only difference between holding dollars and holding euros is where you can go shopping once you are paid," said Jim Williams, energy economist at WTRG Economics. "Although Iran and Venezuela are making a big deal of this, the currency that OPEC prices its oil at doesn't matter very much in the grand scheme of things."

A redenomination out of the dollar would have virtually no affect on integrated oil companies like Exxon Mobil (XOM - Cramer's Take - Stockpickr - Rating), BP (BP - Cramer's Take - Stockpickr - Rating) or Royal Dutch Shell (RDS.A - Cramer's Take - Stockpickr - Rating), according to Knapp. This breed of companies has so much international exposure that they are well versed in dealing with foreign banks and currencies.

Most analysts believe that the true motive behind the redenomination effort is political. The U.S. has been involved in ongoing high-profile feuds with Iran over an alleged nuclear weapons program and with Venezuela over internal policies that appear undemocratic. In turn, Iran and Venezuela have been doing everything they can to undermine the U.S.'s dominant position on the economic and political stage.

According to Baker, the primary consequence of a redenomination of oil out of the U.S. dollar would be a symbolic slap in the face. Still, the secondary effects of this could have lasting consequences for the U.S.

For one, the U.S. is a net importer for the world economy, with massive dollar outflows traveling to the countries that make the products Americans use in their daily lives. These dollars are often invested in U.S. securities like Treasury bonds.

If foreign countries with large investments in U.S. securities were to lose faith in the U.S. economy they could dump these securities on the open market. Because there would be less demand to buy U.S. government securities, the price of the dollar would likely deteriorate further, says Ron Simpson, managing director of Action Economics, a provider of commentary on the fixed-income and currency markets.

Second, because the U.S. plays such a critical role on the world economic stage, a drop in confidence in the American economy could have spillover effects to the rest of the globe. Weaker economies usually mean softer demand for oil. And that could ultimately lower global oil prices -- an outcome that Iran and Venezuela may not have counted on when they first stepped on to their pedestals to rant against the U.S. and its currency.

This last aspect could be the reason why the suggestion made by Ahmadinejad and Chavez was met so coldly by their peers in OPEC's summit last weekend. Saudi foreign minister Saud al-Faisal said in a ministerial meeting that merely thinking about redenomination could have a painful effect on the value of the dollar and ultimately the security of oil exports.

All told, with Saudi Arabia being the de-facto leader of the OPEC cartel, it appears that the likelihood of redenominating oil in an alternate currency is minute, at best.

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Chuck Marvin is a Masters degree candidate in the Business and Economic Reporting program at NYU. He is also a Reporter-Intern for Project Klebnikov, a consortioum of investigative journalists that is investigating the 2004 assassination of Forbes editor Paul Klebnikov. Petroleumworld not necessarily share these views.

Editor's note: This commentary was originally published by Thew Street,
on November 26, 2007. Petroleumworld reprint this article in the interest of our readers. Petroleumworld does not necessarily share these views.

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Petroleumworld News 11/28/07

Copyright© 2007 Chuck Marvin. All rights reserved.

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