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Weaker Dollar Contributes To Higher Oil Prices

The Gulf Times (Qatar) is reporting today that the Organization of Petroleum Exporting Countries (OPEC), which produces about 40% of the world’s crude oil, is “quietly content to see oil prices flirt with record highs to compensate for the declining dollar.” Since the U.S. dollar is the dominant currency for global oil transactions, a weakening dollar leaves little incentive for OPEC members to pump more crude to ease high prices amid rising concerns about the impact of the dollar’s decline on their economies. Shokri Ghanem, the head of Libya’s state-run National Oil Company (Africa’s largest holder of oil reserves), told the Gulf Times that, “The only way to compensate for the weaker dollar is a higher oil price.” Manouchehr Takin, a senior petroleum analyst at the Center for Global Energy Studies in London said, “When the dollar is weak OPEC can argue to support a higher price.” Takin added that OPEC was “happy” with oil prices at their current levels.

It is easy to understand OPEC’s hesitation to add to existing oil supplies. According to research by the Credit Agricole Group, one of the world’s largest banks by shareholders’ equity, 36% of imports into Saudi Arabia, Qatar, Kuwait, the United Arab Emirates (UAE), Oman, and Bahrain come from the Eurozone. Hussain al-Nowais, chairman of UAE-based industrial group Emirates Holdings, told the Gulf Times that, “We buy imports from Europe and our purchasing power is eroded by the dollar and to a certain extent it’s adding to inflation.” OPEC members are disregarding calls for an emergency meeting before their September meeting. However, some members are again discussing how the euro may be incorporated into the reference basket for oil to provide more stability to its purchasing power. Shokri Ghanem told the Times that, “Yes, people are talking about how the euro becomes part of the basket mix but we can’t do anything about the value of the dollar. If this goes on for another five years I’d think there will be changes of some kind.”

However, one OPEC member is taking currency matters into its own hands. Iran has asked Japanese refiners to pay in yen for all crude oil purchases, whereas Iran had previously accepted dollars for payment. According to Bloomberg on July 13, Iran wants yen-based transactions “for any/all of your forthcoming Iranian crude oil liftings,” according to a letter sent to Japanese refiners. The new requirement was to take place immediately. Hirofumi Kawachi, an analyst at Tokyo-based Mizuho Investors Securities Co. told Bloomberg, “What else can Japan do but to accept the request, once the oil producer sent its wish?” The switch to yen comes at a time when Iran has declared its intent to cut back on U.S. dollar holdings to less than 20% of its total foreign currency holdings, and to acquire more euros and yen as a result of escalating tensions with the United States, according to its central bank.