OPEC and US Dollar Devaluation

[Dr. Mojarrad implied] the switch to the euro, which as done during the last few months had helped [Iran] to negate the effects of a depreciating dollar and falling international oil prices. He said that if the country had continued its receipts in dollars, it would have meant large losses, which would have translated into domestic inflation.

This was because large volumes of its imports are . sourced from Europe. The Iranian central bank was keen to avert that situation and had consequently adopted the euro-denominated payments to ensure that the losses were minimised. The country had also resorted to managing its reserves to minimize the effects of the depreciating dollar.

— C. Shivkumar, the Hindu Business Line, June 200313

Oil exporters have sharply reduced their exposure to the dollar over the past three years, according to data from the Bank for International Settlements. Members of [OPEC] have cut the proportion of deposits held in dollars from 75 per cent in the third quarter of2001 to 61.5percent [by the 3rd quarter of 2004].

Middle Eastern central banks have reportedly switched reserves from dollars to euros and sterling to avoid incurring losses as the dollar has fallen and prepare for a shift away from pricing oil exports in dollars alone. [emphasis added]

— Steve Johnson and Javier Blas, Financial Times,

December 200414

A particularly distinctive analysis of OPEC oil-pricing trends was provided by James Turk, founder of www.goldmoney.com. Using data from the US Department of Commerce's report, "US International Trade in Goods and Services," he calculated the euro's average exchange rate with the dollar from 2001 to 2003 in relation to oil prices. While certainly not conclusive, his analysis implied that OPEC may be, at least tacitly, pricing oil in the euro due to its relative stability. The following table is from Turk's article.

Column (4) illustrates that from 2001 to 2003 the price of imported oil rose from $21.40 to $26.97. This 26-percent increase is commensurate with the dollar's decline relative to the euro over the same period. This analysis's most fascinating aspect is that column (6) showed the price of crude oil in terms of the euro had remained essentially unchanged during this time. Based on this simple chart, it appears that OPEC may have used an implicit policy to price crude oil around €24 per barrel during 2001 to 2003. Perhaps this is a coincidence, or perhaps a conspiracy within OPEC to maintain their purchasing power given the dollar's decline. However, as Turk stated:

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.16

US Imports of Crude oil








Quantity (thousands of barrels)

Value (thousands of US dollars)

Unit price

(US dollars)

Average daily US$ per € exchange rate

Unit price (euros)



















5.1: US imports of crude oil — 2001-2003 Source: James Turk,"OPEC Has Already Turned to the Euro."15

5.1: US imports of crude oil — 2001-2003 Source: James Turk,"OPEC Has Already Turned to the Euro."15

Figure 5.1 also shows that US imports of crude oil rose by $25 billion from 2001 to 2003, adding to the US trade deficit. In 2004 the US trade deficit was $665 billion, a staggering increase over 2003's trade deficit of $489 billion. In 2003 crude oil imports represented 20.2 percent of the deficit. If other energy-related petroleum products are included, this grows to 26.5 percent.17 Moreover, these trends are accelerating. Through November 2004 US oil imports were already $119 billion, a whopping rise of $20 billion over 2003. The huge price increase of imported oil contributed in large part to the $176 billion rise in the US trade deficit from 2003 to 2004.

Turk's analysis has important implications, as it shows that a weakening dollar has actually increased the US trade deficit due to our excessive energy consumption. As long as the US continues to consume enormous levels of petroleum imports, it is not plausible that a weakened dollar will significantly reduce its trade deficit. Secondly, the dollar's supremacy for oil pricing is now at risk. In other words, for the first time since World War II, US consumers are no longer immune to effects of currency risk regarding international oil/ energy purchases.

This information provides further evidence that momentum away from the dollar since 2002 reflects the world's growing dissatisfaction with the Bush administration's ideologically driven economic and tax policies. Despite the quasi-mystical claims from "economic fundamentalists" such as Vice President Cheney, who after being informed by former US Treasury Secretary O'Neill that a growing budget deficit for 2003 was threatening the US economy, cut him off and proclaimed, "Reagan proved that deficits don't matter."18 Based on an analysis of the dollar's steep declines in the wake of huge tax cuts from 2001 and 2003 — obviously US deficits do matter.

Likewise, many US economic commentators and the media punditry in general seem to fall into the non sequitur trap of assuming the benefits of both an appreciated and a depreciated US dollar without accounting for the drawbacks of either. One cannot assume the benefits of a weak dollar (trade advantage, modest inflation) while retaining those of a strong dollar (asset values, buying power). One must acknowledge the drawbacks of a declining dollar — capital flight and reduced consumption — alongside the benefits. The idea that a cheaper dollar significantly helps US trade exports is more mythical than realistic. The reason is simple: considering that trade now accounts for less than 10 percent of the American economy, declines in the US dollar are quite marginal from a macro perspective and do not result in comparable declines in imports.

In 2004 several surprising stories appeared in the foreign media that addressed the complex issues of OPEC's momentum toward a potential petroeuro, giving further credence to Turk's theory that OPEC may be tacitly pricing oil in the euro. The following commentary from February 2004 reinforced this assertion:

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes slipped by 8i 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 but 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 lost its primacy in the oil market.'19

Whether this observation was a "bizarre statistical coincidence" or purposeful design, it is clear that OPEC members are trying to maintain their purchasing power in the face of a devalued dollar. The question is, can OPEC be motivated to continue pricing oil exclusively in dollars if under threat from neoconservative unilateralism, or will they gradually move toward a formal euro pricing mechanism? The likely answer to that question was addressed in the following excerpt from a Toronto newspaper, the Globe and Mail, in January 2004:

OPEC is considering a move away from using the US dollar — and to the euro — to set its price targets for crude oil, the highestprofile manifestation of the debilitating effect of depreciation on the greenback's standing as the currency of international commerce.

Several members of the Organization of Petroleum Exporting Countries are seeking formal talks on using the euro, as well as the US dollar, when determining price targets for crude, a senior oil minister within the cartel said Monday. 'There are countries that are proposing this,' Venezuela's Oil Minister Rafael Ramirez said in Caracas. 'It's out there, under discussion.'

Mr. Ramirez did not specify which OPEC members are pushing the proposal, but much of the impetus is believed to come from Persian Russian Gulf producers.20

As a follow-up to Turk's analysis, I conducted a similar currency comparison of the average price of crude oil for 2004 (through November 2004, using the most current data).

Based on this estimation from 2003 to (November) 2004, the average US price of imported oil increased by 27 percent (from $26.97 to $34.27 per barrel), which is greater than the dollar's 17-percent drop in value relative to the euro during this period (a drop of 20 percent by December 2004). Note that the average price of imported oil for the first 11 months of 2004 was

2004 US Imports of Crude oil

Year *










daily US$



of barrels)

of US


per €




exchange rate







5.2: US imports of crude oil — 2004 Source: United States Census21

5.2: US imports of crude oil — 2004 Source: United States Census21

€26.35 per barrel, representing a 30-percent lower price relative to the average price in dollars. Despite its agreement in 2000 for $22 to $28 per barrel pricing band, OPEC may be attempting to retain its purchasing power by using an undeclared euro pricing band of approximately €24 to €28. In essence, it appears the euro might have gained primacy in the oil market due to its relative stability over the dollar.

Additionally, the November 2004 Center of American Progress's study of the dollar, euro, and price of crude oil illustrated that oil prices and the dollar's valuation are now moving in the opposite direction. The economist who analysed this reached the same conclusion previously noted:

To compensate for this loss of buying power, [oil producers] may have raised the dollar price for oil. As a result, while oil prices in dollars rose by 162 percent from their low point in January 2002, they climbed by less than half that rate measured in euros, 77 percent. At that rate, oil prices would have only risen to $34 per barrel in October 2004, instead of the actual $52, without changes in the dollar's value.22[emphasis added]

Since 2002-2003, American energy consumers have felt the effects of higher oil prices far more than EU consumers. This is the opposite of what one would expect if OPEC were pricing oil trades solely on the US dollar. While it is very doubtful that all ten OPEC countries (excluding Iraq) would voluntarily choose to abandon the dollar completely, it is increasingly likely that they, along with Russia, will continue to pursue methods to retain their holdings by shifting currencies in their central banks, increasing the price within the pricing band, or formally denominating oil sales in a basket of currencies.

OPEC contemplated this last option early as the 1970s, following the collapse of the Bretton Woods Agreement, and ongoing macroeconomic trends will result in a formal announcement to price oil in a basket of currencies.23 The dollar's accelerating decline makes this inevitable. This is yet another reason why reducing excessive consumption and subsequently the level of imported energy is in the long-term economic and national security interests of the US.

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