OPEC Has Already Turned to the Euro

[patriotvoice]

"As the dollar's rate of exchange continues to fall against the world's major currencies, there has been much speculation about the likely knock-on effect. One area receiving a lot of attention is crude oil in general, and OPEC in particular."

...

"As the dollar has fallen, the dollar price of crude oil has risen. But the euro price of crude oil remains essentially unchanged throughout this 3-year period. It does not seem logical that this result is pure coincidence. It is more likely the result of purposeful design, namely, that OPEC is mindful of the dollar's decline and increases the dollar price of its crude oil by an amount that offsets the loss in purchasing power OPEC's members would otherwise incur. In short, OPEC is protecting its purchasing power as the dollar declines."

http://goldmoney.com/en/commentary/2004-02-18.html

On edit:
Changed the topic type.

[FreakinDJ]

1. This is the beginning of the end for American Economic Power

I have been watching this unfold for over 3 years now and have been trying to warn folks. Basically Bush knew of this threat but gambled on taking Iraq any way. It was essentially a role of the dice. Could he invade Iraq and install his puppet government quick enough to fight the dollar crisis.

Apparently not

But it never was of very much concern for him and his Oil Business buddies any way. Most if not all of these companies operate off shore any way. People in the rich 1% of this country can convert their wealth into Euros or gold easier then we can transfer funds between banks. They actually have nothing to lose and every thing to gain.

Once the American Economy begins to crumble and readjust to the new status. The average John E. Taxpayer will be losing his home and portfolio for pennies on the dollar. Now this wealthy 1% can come in and pick up the pieces for pennies on the dollar. The working class will all be but a memory to join the ranks of the working poor

[baby_bear]

2. FreakinDJ, can you tell me this?

I am a scientist so an idiot when it comes to economics, but I believe I read about three years ago that Saddam Hussein had changed the basis of his own country's oil trading value to Euros from dollars and that that was one of the many reasons the neocons wanted to secure the oil for the U.S, interests.

Any validity to that?

thanks
s_m

[madrchsod]

4. yes ,Saddam bought euros

at about 85cents to the dollar-Venezuela was also thinking of going to the euro. it`s almost impossible for the dollar to stay the oil currency..one factor that may keep it for the short term is the Saudi`s and the vast amount of dollars china has..we are pretty much screwed because of the bushboys...

[patriotvoice]

5. I'd say forgo the "almost" and just say "impossible."

Good point on China; I suspect they can convert to Euro's rapidly enough, though. At least we'd still have Taiwan trading in dollars.

Note to everyone: Convert your liquid portfolios into hard assets and pinch your nose; the plunge is coming.

[Petrodollar Warfare]

15. FreakinDJ - Here's a link for your review...

..its long (50 pages when printed in pdf format), but should provide with the nackground info that you are seeking:

Revisited - The Real Reasons for the Upcoming War With Iraq:
A Macroeconomic and Geostrategic Analysis of the Unspoken Truth
http://www.ratical.org/ratville/CAH/RRiraqWar.html

(to print it, here's the pdf link)
http://www.ratical.org/ratville/CAH/RRiraqWar.pdf

Hope that info helps...

[DBoon]

3. Sort of like what happened in Mexico 10 years ago?

Or any other country subjected to IMF "restructuring"?

[tritsofme]

9. In what way is an artificially strong dollar

beneficial to our economy?

[FreakinDJ]

12. This sounds like a typical Right Wing response

to Bush allowing the dollar to devalue and the the fall of America's economic success.

The world converting over to the Euro as the basic trading value means at least 5 years of sever recession. Close but not quite the market crash of 29

[tritsofme]

14. A "typical RW response"????

What kind of bullshit is that?

The dollar readjusting to more normal levels is not going to cause the world to dump it as the reserve currency. There are many more structural problems in the European economy than exist in our own, besides which as I said, the dollar has been very stable so far this year.

You still didn't answer my question. How is an artificially high dollar beneficial to our economy?

If the dollar didn't depreciate some over the past few years manufacturing would be in a bigger hole than it is now, and the already huge trade deficit would be even bigger.

[Petrodollar Warfare]

16. More strucutural problems in EU economy?

...I would rethink this statement:

"There are many more structural problems in the European economy than exist in our own"

....while the EU does have to change some of their labor laws, which Germany et al is doing, I do understand what "strucutual" flaws you are referring to re EU vs. US economy. They have slightly higher unemployment, but I suspect this is a reflection of their more accurate statisitical methods, whereas in the US the population "dissappears" from the stats after elgibility benefits run out. Lastly, the EU has a postive trade accout deficit, and their current budget shortfalls are less than 4% in Franch and Germany. The US's is 5%, and approaching 6%, along with our trade accout deficit position, it is the US that has the most significant strutual flaws in the economy - at least that is what most economists would state.

Make no mistake, if the dollar did not have it's military enforced " petrodollar" status and thus reserve currecny status, the above imbalances would be harshly felt here in the US. Why? Because teh rules of economics would suddenly apply to the US economy, wwhich they currently do not thanks to the dollars reserve/petrodollar role...

[jwcomer]

6. more hype than truth

Hi all,

This euro to crude oil ratio business is more hype than reality.

Don't believe me... then see for yourself.

Light Crude Oil to Euro ratio

Light Crude Oil in Dollars

Is there a difference? Yes. But is crude oil stable with respect to the euro? Not to my eyes. If we are to believe that OPEC has chosen to maintain stability with respect to the euro, they done a pretty poor job of it. So next time you read someone who says otherwise, you should know that they either have not done their homework or are trying to sell you something.

cheers,
Walton

[Tigermoose]

7. Agreed.

These gold bug sites want to convince you that dollars are losing value and therefore you should buy gold.

1. If the dollar goes belly up, so does the world economy.
2. Even if, why would the world go back to gold as its standard? Why should gold be worth anything just because the US Dollar declines?

If China converted to the Euro, they would destroy their own economy by breaking the cycle of giving us money so that we can buy their stuff. If the US can't buy their stuff, they crash like everyone else.

We should be scared of another Iran happening in Saudi Arabia...fundamentalists who have no concern for economic realities, and perhaps would even be willing to destroy their own economies just to screw ours -- an economic suicide bomb. If the Saudis, or the Chinese, stopped buying our bonds, we would hit a deflationary cycle that would not let up until we it balanced out when our trade deficit levelled out -- but that would mean our standard of living would be way lower than it is now, and the correction would be devastating in the short term as our debt laden society finds some balance. Let's hope that greed continues to be a motivating factor -- if foreigners that just don't like us and base their decisions on something other than greed, well, then I'm not sure if the capitalist market will no how to handle that.

What scares me is that Osama Bin Ladin's background is in finance.

[patriotvoice]

10. Hmm.

1. If the dollar goes belly up, so does the world economy.

Really? I need more proof that a catastrophic failure in one fiat currency would cause immediate devaluation of other fiat currencies.

2. Even if, why would the world go back to gold as its standard? Why should gold be worth anything just because the US Dollar declines?

Why should orange juice, or hogs, or water be worth anything? Because they're commodities. Precious metals are also commodities precisely because they are precious. Furthermore, why should people go back to gold? Precisely because they know that a gold-based system worked before fiat economy, and so they'll fall back to it.

You know that whole "retreat to where you know it works" position.

[patriotvoice]

11. Are charts are bogus for prior dates?

Do those charts show the prior values of the commodity adjusted for the present exchange rate? The original link showed prior oil values using prior exchange rates.

Cross-checking with raw data to settle this. :)

[patriotvoice]

13. Bullshit, not hype: independently verified.

I have independently verified the voractiy of the author's claim using daily data from 1-Jan-01 through 31-Dec-03.

See my spreadsheet at
http://www.ideacode.com/~bishop/staging/crudehistory/CrudeHistory.xls

While my figures do not jive 100% with the author's (owing I suspect to sample set size), the yearly spread is within about a euro-dollar. The graph further substantiates the claim that OPEC is keeping oil prices in a Euro-supportable range.

Furthermore, notice that the spread is collapsing. I suspect they've refined their process (pun intended) and are about to make the switch.

When in doubt (and before doubting other peoples) do your own homework first, eh?

[Petrodollar Warfare]

17. You might find these links interesting...

The following 3 artricles are important signs od what it coming. Also, the bottom article analyzed 102 trading days from Oct 03 till Feb 04...and strongly suggests that OPEC isa trying to maintain it's purchasing power by tacitly/quietly pricing oil in euros...but that's just MHO...

'OPEC mulls move to euro for pricing crude oil' (Jan 12 , 2004)
http://www.globeandmail.com/servlet/story/RTGAM.20040112.wopec0112/BNStory/Business

'Oil producers concerned by weak dollar" (Jan 13, 2004)
http://story.news.yahoo.com/news?tmpl=story&u=/afp/20040113/bs_afp/qatar_oil_dollar_attiyah_040113163858

'Minister Ramirez Discusses the Euro, Iraq, OPEC and PetroSur' (Jan 14, 2004)
http://www.venezuelanalysis.com/articles.php?artno=1087

I had never seen 3 disparate articles on the petroeuro subject openly discussed - all in the same week too!

Furthermore, the finance ministers of the 8 are meeting in Feb as well to discuss monetary policy (their last meeting was in Sept 03').

There appear to be some strange reports about the BOJ (Bank of Japan) may not be able to intervene in the currency markets much longer in an effort to prop up the dollar. Meanwhile, I read this disconcerting article about Russia moving out of dollars into euros...

"Russia almost stops dollar imports' (Jan 14, 2003)
http://www.gateway2russia.com/st/art_191216.php

Note: Just as the manuscript for my book was being finalized, a short article appeared In February 2004 illustrating a “bizarre statistical coincidence.” It is too early to tell if this is a coincidence, or has OPEC moved their $22-$28 pricing band to a euro based 22 – 28. Here are some snippets:


"...The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes slipped by 8¢ to $30.44/bbl Thursday.

"The value of the OPEC basket has been above the $22-28 target range for 108 trading days over the past 8 months," Horsnell noted. "Over the same period, the value of the OPEC basket in euros has stayed within a 22-28 euros band on all just 2 trading days, and on those 2 days it was below the band."

He said, "This is of course just a rather bizarre statistical coincidence. It certainly does not imply that the target band has been secretly switched into euros or that the dollar has lot its primacy in the oil market."

by Sam Fletcher, 'Crude futures prices rise in shortened NYMEX session', Feb 20, 2004 http://ogje.pennnet.com/news/news_display.cfm?Section=NEWS&ArticleID=1 ...

##########

So, I anticipate a dual euro-dollar OPEC oil transaction currency at some point at the end of this decade, but the question remains, how maany US soldiers and foreign civillians will die or be wounded until this agreement can be reached? Seems the war on terror follows countries where the 'petrodollar" arrangement is coming under threat (Iraq, then Iran, Venezuela...and perhaps Nigeria at some point?...)

[jwcomer]

18. Sorry, but still hype

patriotvoice,

I have looked at your spreadsheet and am now even more convinced that this amounts to nothing more than hype. However if the charts from your worksheet don't convince you that there is only a weak relationship between the euro and oil then I doubt very much that you will believe any statistical arguments which I present.

I would point out that your hypothesis of a collapsing spread is easily seen to be false. All you need to do is look at the last five months of data (easily seen in my original post.) The spread has grown substantially.

I would encourage you to consider whether three data points can really be used to substantiate the oil/euro conjecture. You have 'verified' James Turk's data but not his hypothesis.

All the best,
Walton

[Petrodollar Warfare]

19. jwcomer - the trend has been obvious since 2002,...

"I would encourage you to consider whether three data points can really be used to substantiate the oil/euro conjecture. You have 'verified' James Turk's data but not his hypothesis."

Well, how about oil traded above the "official" pricing band for 108 trading days over an 8 month period of continous analysis? From July 200 to mid-Feb 2004 the OPEC oil sales were within a 22 - 28 euro band for 106 of those days, with 2 days in which the price slipped below 22 euros.

This is important for a various reasons. First, OPEC has traditionally used a dollar based pricing band for teh past 3 decades, and thus we as Americans have not felt what other nations experience re their currency valuations relative to the dollar(in year 2000 the OPEC $22-$28 pricing band was formalized). This is one reason why all other nations tax gasoline so much - to provide a 'cushion' from oil currecny risk (avg world price of gasoline is about $4.50 to $5.00 US).

As to your statement that OPEC pricing oil is 'hype' based on 3 data points, here's the article from Feb that analyzed it for 102 trading days...(the link is no longer pointing to the same article, but you can still see the point here...)


Feb 20, 2004
'Crude futures prices rise in shortened NYMEX session'
by Sam Fletcher

http://ogje.pennnet.com/news/news_display.cfm?Section=NEWS&ArticleID=1 ...


"...The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes slipped by 8¢ to $30.44/bbl Thursday.

"The value of the OPEC basket has been above the $22-28 target range for 108 trading days over the past 8 months," Horsnell noted. "Over the same period, the value of the OPEC basket in euros has stayed within a 22-28 euros band on all just 2 trading days, and on those 2 days it was below the band."

He said, "This is of course just a rather bizarre statistical coincidence. It certainly does not imply that the target band has been secretly switched into euros or that the dollar has lot its primacy in the oil market."

******
OPEC considers to use euro for pricing of crude oil' (Jan 12, 2004)
http://www.gasandoil.com/goc/news/ntm40467.htm

"Beyond the blow to the greenback's prestige, a move by OPEC to even partly price in euros would ensure that any further depreciation in the US dollar boosts oil prices, Mr Gobert said. And any country -- not just the United States -- using the US dollar for pricing would see the cost of the commodity rise as that currency fell. Indeed, while OPEC has yet to make any formal break with the US dollar, its refusal to boost output has already offloaded much of the cost of the dollar's depreciation on to the American economy.

***Mr Gobert said oil prices at the end of last month, about $ 32 a barrel, would have been much lower if not for the decline in the value of the US dollar over the past 24 months. Using the exchange rates of the dollar versus the euro two years ago, crude would be selling for $ 22 a barrel instead, he said.****

All of the oil prices used in OPEC's benchmark index, or basket, are currently denominated in US dollars. The cartel uses that index as the basis of its price-band policy, whose stated intent is to adjust output so the basket hovers within a $ 22-$ 28 range.

Oil prices have lingered well above that maximum for 26 consecutive trading sessions, which in theory means that OPEC should have increased its output by 500,000 bpd to lower prices. But the cartel has ruled out doing so before its regularly scheduled meeting on Feb. 10, arguing that it is the depreciation of the US currency -- not a lack of supply -- that is fuelling the rally in crude prices.

*************
(That ain't no hype, that's just economics..)
******************
IMHO,
It appears that OPEC is trying to maintain their purchasing power, so they may be *tacitly* pricing oil around 24 euros per gallon. Mr. Fletcher and others are still in halfway denial, but rather than using the typical "conspiracy theory" to reduce their cognitive dissonance, they are using the "bizarre statistical coincidence" as their reality denying coping mechanism.

Indeed, if the currency analysts are correct that the euro may go to 1.40 to the US dollar by year-end, and OPEC continues to price oil in a more stable currency to maintain purchasing power, we might very well experience what happened in Europe when the euro was at its historical low to the dollar in September 2000 (82 cents to the dollar). The following pictures should illustrate the pain of currency risk plus a little dip in supply, especially when we do not have a "tax cushion" for our gas prices here in the US...

"German Truckers Fume Over Fuel Prices," CBS News, Sept. 26, 2000 http://www.cbsnews.com/stories/2000/09/15/world/main233748.shtml

E.U. Commerce came to a standstill in Germany due to high petrol prices in the autumn of 2000. The economic fall-out reached from the U.K., Spain, France to Germany and Greece.

“Thousands of truckers from across Germany clogged the streets around the capital's center Tuesday demanding relief from higher gas prices. And they got some when the government offered low-interest loans to some trucking companies.

”….The protest is the biggest so far in Germany, on the heels of demonstrations that halted traffic in France, Britain and Spain before easing in recent days. Elsewhere Tuesday, minor blockages continued in Spain, where markets ran out of fish, and Greek motorists fearing for shortages due to trucker strikes lined up for gas. <35>


"French fuel dispute escalates," CNN.com, September 7, 2000 http://www.cnn.com/2000/WORLD/europe/09/07/france.fuel /

Similar protests erupted in Paris, with thousands of French farmers driving their tractors into Paris as a sign of their displeasure at the rapid increase in fuel prices.

“….French farmers are threatening to block access to the Channel Tunnel as a growing protest over fuel prices entered its fourth day with no signs of an agreement to resolve the dispute.

“….Oil prices are currently the highest they have been for 10 years. Prices have risen by 25% in the past 18 months.”

OPEC, the organisation of petroleum exporting countries, is due to meet on Sunday to discuss the situation. <36>

*************

So, why would OPEC begin to quietly price oil closer to a euro pricing band as opposed to the dollar? Three reasons immediately come to mind. #1 Economically, they want to preserve their purchasing power. #2 From a trade perspefctive, the newly enlarged EU (as of May 2004 w/ 22 nations) will import *more than half* of OPEC oil exports, which makes them the most important customers. #3.

Despite the rhetoric of Saudi making a supposed promise to lower oil prices for Bush's re-election campaign, I think items #1 and #2 are more importantly. Indeed, to be fully cnadid, me also thinks that OPEC/EU may want to facilitate regime change here in US in 2004....and energy prices is one way to challenge US hegemony/neocon policies in a very covert but painful way...

"Several OPEC members have called for a revision of this price band, saying it has been eroded by inflation and the depreciation of the U.S. dollar, the currency of oil trade."

(OPEC also recently mentioned a new $28-$34 pricing band, but that may not hold.)

Finally, many OPEC finance ministers have stated publically that the depreciated dollar is *in fact* one of the reasons why oil has become expensive. Lastly, the final factor of high oil prices is that Saudi Arabia and all other oil OPEC producers are - according to the President of OPEC - "at near maximum capacity." Now with China's oil consumption gorwing, along with our ridiculous oil consumption, demand is beginning to outrun supply. One day soon we will all learn about Peak Oil, and the pricing band and quotas will become irrelevant that point, as supply will begin an irreversable decrease, while demand increases - unless drastic/draconian measures are taken here in the US, where we use 25% of the world's output...

(FYI: Please don't expect the Bush admin and the US media conglomerates to fully discuss these implications.)

[jwcomer]

21. The sky is NOT falling

Hi GoreN4,

Forgive me if I don't read those articles in detail, I have a low opinion of finance journalism. BTW, crude priced in euros has been above this so called 28 euro ceiling almost every day since that February piece was written; hardly prescient that one. Also, if French and German truckers are upset about fuel costs, doesn't that mean the price of fuel in euros hasn't been very stable - does this support your position?

Despite what you might assume from my earlier posts, I believe the writing is on the wall for euro oil contracts and has been for some time. Indeed, if it were just a matter of economics, then this would happen soon. Even so, I believe that most of OPEC's oil contracts will continue to be denominated in dollars well into the future.

Near as near as I can tell from the latest (2003) BP Statistical review data:
The US+Mexico+Canada import about 25% of OPEC oil
Europe about 20%
China+Japan+Rest of Asia about 50%
Everyone else about 5%

As you can see, Europe is only 20% of the total, and no those 10 new countries don't make a lick of difference (IIRC they added ~<10% to Europe's GDP.) Meanwhile the North America and Asia Pacific countries are OK with the present arrangement. After all Asia has to do something with all those dollars the US keeps giving them (note unlike US/Asia the EEC/Asia trade is well balanced.) They don't have excess euros to buy oil with. Therefore, 75% of OPEC's demand is content with the status quo. Nevertheless, I think it is very likely that eventually we will see OPEC switch to euro contracts for its EEC clients. This may take a while as the US seems politically opposed to this. Moreover, the US has an absurd military presence in the Middle East and a new client state in the region with a seat in OPEC.

My final point, is that we should not be excessively worried about the eventual euro contract transition. It will effect the US/EEC trade balance and will cause the euro to appreciate against the dollar, but it should not cause any extreme US/Asia trade turmoil. The sky is not going to fall.

cheers,
Walton

[patriotvoice]

20. Sorry, I still respectfully disagree.

While I disagree that this is "hype," I do agree that certain statistics lean in favour of corellation while others do not. For example, the "three" data points I have chosen favour the tacit Euro-pricing hypothesis. The last few months tend to support your hypothesis of 'hype.'

I have increased my sample set; it now runs from 15-Dec-1998 through 25-May-2004. I have also plotted the rates of change of EUR price against rate of change of the exchange rate. Finally, I have also plotted the rate of rate of change.

If crude was valued and sold solely in USD, I would expect a direct correlation between the rates of change of EUR price and exchange rate. Furthermore, if there is direct (linear) correlation between these, then the rate of change for them must be constant.


Ultimately, draw your own conclusions.

[jwcomer]

22. If I may

Patriotvoice, you are on the right track.

I would recommend breaking the prices and rates into monthly, quarterly and semiannual averages. This is because OPEC is powerless to effect daily crude prices. The fastest they could intervene directly is on the order of months.

Examine the R^2 for a linear fit of the quarterly percent change in price vs. the quarterly percent change in exchange rate. I did this with your original data and saw no relationship for the monthly or quarterly data. In your larger data set you should have enough data now to make a go at the semiannual but I would hesitate from inferring anything from the annual comparison due to the small sample size.

regards,
Walton

[patriotvoice]

24. kick...

...until I get back to doing that number crunching.

[patriotvoice]

25. kick...

Same reason as before.

[tritsofme]

8. Gold bugs are full of themselves,

Weren't we supposed to be at $1000 oz. by now?'

The dollar has been very stable through the first 5 months of 2004.

There is no huge continual decline in its value relative to other major currencies.

[aneerkoinos]

23. Correction

There has been a quite normal correction (since February, after euro doubletouched 1,29, and it ended last month when dollar started to sink again) in the general dollar slide. The big trend is still well in place, fundamentals have not changed. There is really only one fundamental that matters in the long run, US deficits. And instead of improving with help of weaker dollar, so far US trade balance has been only deteriorating. Big trends usually last 6-7 years, this has been in place only three years, since 2001.