by the numbers
Are 'Petroeuros' the future?
Strong demand and tense geopolitics mean that oil prices may hit $100 per barrel before the end of the year. But its impact in Europe will be cushioned by the dollar's simultaneous fall against the euro.
The graphs show that a high euro-dollar exchange rate can be a useful bulwark against rising dollar-denominated commodity prices.
In dollar terms, there has been a 74% rise in the cost of oil since the beginning of the year -– almost 20 percentage points more than the increase in euro terms.
A new euro 'Petrobourse'?
The currency in which oil is sold is obviously of little consequence to the seller, as euros are converted into dollars at the point of sale. And since the dollar is the world’s reserve currency and nearly all commodities are priced in and paid for in dollars, most central banks keep most of their reserves in the US numeraire. A weak dollar will only lead to a change in the proportion of currencies stockpiled by countries if members of OPEC -- such as Iran and Venezuela -- successfully push for a euro-based pricing mechanism for oil trading, and persuade other producers to follow suit.
Iran has had some success in asking its petroleum customers to pay in non-dollar currencies, though prices are still expressed in dollars. The country currently receives non-dollar currencies for 85% of its oil exports, with euros composing 65% and yen 20%. Iran is currently planning on moving the remaining 15% of dollar denominated oil exports to other currencies such as the United Arab Emirates dirham.
But the 'Petroeuro' remains unborn -- at least officially. Questions persist over the overall value and stability of the euro, and whether other countries within the union adopt the European single currency. If the UK adopts the single currency, the key Brent benchmark could be redenominated in euros, offering impetus to political agitators within OPEC who want to show that the euro can be a substitute for the dollar in denominating oil prices. The problem here is that Brent may not matter much longer because the field has long passed its peak and UK adoption of the euro is a distant prospect at best.
In the meantime, the European Central Bank would not like to see the dollar drop much further -- even if did make oil cheaper. EU exports are at risk of being priced out of their markets, a worry for Germany in particular. Volatility in the euro-dollar exchange rate is also problematic. Current levels are actually beneficial for ECB efforts at maintaining price stability. Future volatility could bring that benefit into doubt.
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