Oil producers moving away from Dollars, torward Euro, Yen

motivez · 12-11-2006, 06:45 PM

Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.

The revelation in the latest BIS quarterly review, published on Monday, confirms market speculation about a move out of dollars and could put new pressure on the ailing US currency.

Market liquidity is traditionally low in December, and many traders have locked in profits, potentially reinforcing volatility.

Russia and the members of the Organisation of the Petroleum Exporting Countries, the oil cartel, cut their dollar holdings from 67 per cent in the first quarter to 65 per cent in the second.

Meanwhile, they increased their holdings of euros from 20 to 22 per cent, the BIS said. The speed of the shift may help to explain the weakness of the dollar, which recently fell to a 20-month low against the euro and a 14-year low against sterling.

The BIS, the central bank for the developed world’s central banks, is customarily cautious in its language. However, it noted: “While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks’ liabilities to oil exporting countries.”

The review shows that Qatar and Iran, whose foreign exchange policy has sparked widespread market speculation, cut their dollar holdings by $2.4bn and $4bn respectively.

Such shifts may be modest compared with the total assets held, but they provide a crucial indication on future thinking.

Currency switches are likely to be progressive, subtle and discreet, as untoward attention could hit the dollar, lowering the value of depositors’ remaining dollar-denominated assets.

The last time oil-exporting countries cut their exposure to the dollar – in late 2003 – it pushed the euro to an all-time high against the dollar. Eighteen months ago, the exposure to the dollar of oil producing countries was above 70 per cent.

BIS data is the best guide financial markets have to the currency investment trends of oil producers, which otherwise do not provide figures. The rise in oil prices since 2002 means oil producing countries have amassed a current account surplus of about $500bn, according to the IMF. This is 2½ times the current account surplus of China.

Overall, Opec’s dollar deposits fell by $5.3bn, while euro and yen-denominated deposits rose $2.8bn and $3.8bn, respectively. Placements of dollars by Russians rose by $5bn, but most of their $16bn additional deposits were denominated in euros.

The dollar has suffered weakness because of concerns about global imbalances and the future course of the Federal Reserve’s interest rate policy.

FT.com / World / US & Canada - Oil producers shun dollar

How much does this mean to us in terms of gas and oil prices moving forward? With the Dollar falling in value and oil being purchased in currencies like the Euro which are worth more than 1 Dollar, will that translate into higher gas prices for the consumer?

I remember reading an article about the effect of a shift away from a PetroDollar on the American economy awhile back, I can't seem to locate it now though. But essentially the theory stipulated that a big part of our economy is based on so many key things being purchased with Dollars as their standard, and a shift to a different currency would fairly rapidly decrease the value of the dollar.

One counter point was that it would increase American exports because it would be cheaper to buy American made goods.

Also how does this tie in to Bernanke apparently doing all he can to decrease the value of the Dollar with the other thread I made?

Link to that thread: Bernanke flooding economy with money v.M3 returns

6, since you work in a related field can you shed some light on what impact this is going to have on us, if any?

6SpeedTA95 · 12-11-2006, 08:10 PM

This may indeed have a minor affect on the dollar if they in fact shifted away from the dollar. However, it is important to note that more than half of the assets are still held in dollars. OPEC also knows that a complete shift away from the dollar would be slitting their own throats. That would make the cost of gasoline/oil fluctuate more than it does now. Granted it would not be a huge shift from what we're used to but it would be noticable. If the asset allocation were to shift to only 20% held in dollars then we would experience more extreme volatility in the energy market. However, as I said the OPEC countries do not really want that. If they drive away US consumers they drive away profit and their own long term economic viability. If the US continues to explore alternatives at its current pace we will likely replace gasoline with a variety of sources on all new vehicles as soon as 2012 and realistically by 2016. These technologies would spill over into the rest of the world. It's not like the US can hold onto hybrid/electric/ethanol/hydrogen tech for ourselves. In short, OPEC could put themselves out of business by 2025 if they dont watch it.

RMNIXON · 12-11-2006, 10:05 PM

Originally Posted by 6SpeedTA95

If they drive away US consumers they drive away profit and their own long term economic viability. If the US continues to explore alternatives at its current pace we will likely replace gasoline with a variety of sources on all new vehicles as soon as 2012 and realistically by 2016. These technologies would spill over into the rest of the world. It's not like the US can hold onto hybrid/electric/ethanol/hydrogen tech for ourselves. In short, OPEC could put themselves out of business by 2025 if they dont watch it.

You just opened up a major issue with those final remarks! The last thing OPEC wants is a major drive for energy alternatives, like some Manhatten Project type operation. And you are also correct that the new technology will spill over into other countries like Russia and China if they can afford to produce it or purchase it. The global economy will have to shift and the major oil producers won't have the current hold on us that they do now. So they want these changes to be slow and have a motive not to let oil prices get to high for whatever reason and push us ahead with these projects. What would be the major impact of their economies if changes happened to fast? What would happen politically and socially?

6SpeedTA95 · 12-11-2006, 11:13 PM

Originally Posted by RMNIXON

What would be the major impact of their economies if changes happened to fast? What would happen politically and socially?

Well I think UAE is desperately concerned about what happens when the oil money runs out. First they have a dwindling supply of traditional reserves, and secondly they realize that with prices above 70/bbl alternatives look attractive and above 80 its downright foolish not to look at them.

If these changes take place over the next decade it will leave the oil exporting economies scrambling to make ends meet economically.

Politically you'd have a few countries like Iran getting desperate for world attention and you'd also have massive depressions in such economies.

hsmith · 12-11-2006, 11:47 PM

Originally Posted by 6SpeedTA95

This may indeed have a minor affect on the dollar if they in fact shifted away from the dollar. However, it is important to note that more than half of the assets are still held in dollars. OPEC also knows that a complete shift away from the dollar would be slitting their own throats. That would make the cost of gasoline/oil fluctuate more than it does now. Granted it would not be a huge shift from what we're used to but it would be noticable. If the asset allocation were to shift to only 20% held in dollars then we would experience more extreme volatility in the energy market. However, as I said the OPEC countries do not really want that. If they drive away US consumers they drive away profit and their own long term economic viability. If the US continues to explore alternatives at its current pace we will likely replace gasoline with a variety of sources on all new vehicles as soon as 2012 and realistically by 2016. These technologies would spill over into the rest of the world. It's not like the US can hold onto hybrid/electric/ethanol/hydrogen tech for ourselves. In short, OPEC could put themselves out of business by 2025 if they dont watch it.

This is very bad for the "strength" or what is left of it of the dollar. Very, very bad.

nbiggershaft · 12-12-2006, 04:34 AM

I remember hearing a theory that this was a major motivation for the War in Iraq. That Iraq was set to sell all their oil in Euro's when embargos where lifted.

RMNIXON · 12-12-2006, 07:52 PM

Originally Posted by 6SpeedTA95

Well I think UAE is desperately concerned about what happens when the oil money runs out. First they have a dwindling supply of traditional reserves, and secondly they realize that with prices above 70/bbl alternatives look attractive and above 80 its downright foolish not to look at them.

If these changes take place over the next decade it will leave the oil exporting economies scrambling to make ends meet economically.

Politically you'd have a few countries like Iran getting desperate for world attention and you'd also have massive depressions in such economies.

Yes, in the long term they should be very concerned. Our economy has had the advantage of being very flexable, but when almost all your real earning power is in oil I would be weary. Here that Chavez?