Few weeks ago when Iraq said that its oil will be sold only for the Euro, once again the relationship between oil and the Euro was put in the limelight.
Obviously what the regime of Saddam Hussein intends to do is quite a different story. Iraqi government knows that the global excess production capacity is very limited and it may be even less than the volume Iraq is exporting.
Hence Iraq thinks it is the right time to exert an upward pressure on the price. The Euro excuse can serve the purpose.
A while ago and in the course of the joint meeting of PGCC-Europe "Jack Sante", a European parliament member who formerly headed the European Commission (named by the Arabic newspaper "sharg-ul-osat" as the spiritual father of the Euro) had said in Dubai: "I am sure if the trade of oil for the Euro is considered, then the level of trust and cooperation between European Union and the Persian Gulf Cooperation Council (PGCC) will be enhanced and this would in turn help stabilize the world oil market".
Maybe Saddam's regime has been inspired by Jack Sante's statement reported by Reuters. Whatever the reason, we feel it is a good subject to debate on.
Oil and the Dollar:
After the dominance of "Brettonwoods" monetary system in the world (1944) and especially after its collapse and the floating status the Dollar gained (1971), this currency has always enjoyed the position of the money of the monies and has been regarded as the global instrument for pricing. Such a status for the Dollar has helped the U.S. to consolidate its economic dominance over the world.
World oil pricing in the Dollar has been a great help in that direction. Particularly after the first oil shock of 1973 when the oil prices increased few folds the ensuing demand for the Dollar strengthened its status just when it had become so weak that had turned into hot money.
Thus the hot Dollars turned into petro-dollars. However since the Dollar had been weakened against other valid currencies, the purchasing power of the OPEC member countries inside America was greater than what it was in the industrial countries.
Also because most OPEC countries were under the dominance and influence of the U.S, the increase in the oil price caused the return of most of the wandering dollars back to America.
The recent oil price rises have helped the macro economy of the U.S., dealt with earlier (views on news "U.S. presidential election and oil prices" 1st Mar.2000).
The strength of the Euro against the Dollar is, in the long run, dangerous for the U.S economy. Hence weakening of the Euro, at its embryonic state, is of great importance for America.
Oil and the Euro:
As mention earlier, no doubt after the dominance of Brettonwoods monetary system over the global economy, all countries of the world suffered economically.
The Western Europe and Japan suffered the most because they had strong economies of their own developed industries and could in many ways compete with the American technologies.
However the great economic dimensions of America alongside the dominance of the Dollar had reduced their status to second grade economic powers.
Therefore Europeans already had sufficient incentive to fight the Dollar dominance and such a motive has been stipulated, explicitly or implicitly, in their national strategies.
The establishment of the European Union whereby economies of 11 countries merged the climax of which was the monetary union embodied in the "Euro" has managed to resolve the issue of superiority.
If the Euro land is compared with the Dollar land, one can see that the Euro land can well compete with the mighty U.S. currency.
If then the dominance of the Dollar is done with and the Euro can gradually attain a more suitable status then naturally the era of the American dominance will also come to and end.
One other point to mention is that the size of the ultimate Euro land and the question of other Europeans joining the monetary union is very much dependent on the success of the Euro.
If what has been mentioned is not to be regarded as mere wishful thinking, then the Euro must be used as the basis of pricing for commodities so that its gradual strengthening will be coupled with a constant weakening of the Dollar.
This is where the pricing of oil in the Euro can be of great help.
Oil is traded in huge volumes every day, and if the OPEC members decide to sell their oil for this currency and keep their currency reserves in the Euro, it will obviously have a great impact on the demand for the Euro and will follow with a lack of demand for the Dollar.
This will naturally bolster this European currency and weaken the American currency.
Oil exporters & European monetary union:
For the oil exporting countries to help weaken the Dollar and bolster the Euro there is an inherent paradox.
Although these countries, like all others, will benefit in the long run from loosening the grip of the Dollar on the global economy, yet in the short and middle terms, during which crude oil is still sold in the Dollar, any weakness in this currency will be harmful to them.
This will also reduce the purchasing power of the exporting countries in Europe and Japan when the Dollar is weakened against the Yen and the Euro.
In other word, despite the fact that support of the Euro will be beneficial to the oil exporters in the long run and these countries have suffered a lot from the dominance of the Dollar (particularly when its value was in the decline), nevertheless the situation is very different in the short term because weakening of the Dollar will directly weaken their purchasing power in the non-Dollar blocks.
Hence if the European monetary union expects the oil exporters (OPEC and others) to use the Euro in their transactions, it should be prepared to compensate their short term loses.
Above points can form the basis for a serious dialogue between the European Union and the OPEC members. The non-OPEC members can also cooperate with them in this task.
The final word of wisdom for the oil exporting countries is that the long term dependence of pricing based on the Euro alone will be repeating the mistake made with the Dollar.
The wisest pricing will be to choose a basket of three major currencies; the Dollar, the Euro and the Yen. This way there will be a relative stability and individual fluctuations of any one of the said currencies will not pose a serious threat.
Source: www.iies.ac.ir
© 2000 Mena Report (www.menareport.com)
