Very interesting article about OPEC and dollar vs. euro oil pricing.

[Petrodollar Warfare]

The below article makes the important point that OPEC has begun in some ways tacitly pricing oil in euros, but not actually invoicing oil in the euro (which would require that one of the 3 crude markers, WTI, Brent or Dubai re-denomiate in euros - my guess is Norway/Brent crude marker will do this by 2007-2009, but Sweden is the pre-cursor to Norway's acension to the euro). Moreover, this data shows that 20 to 25% of the US trade deficit is due to oil/energy imports. So, if OPEC continues their effort to 'maintain their purchasing power' by tacitly pricing oil in the more stable euro currency, the weaker dollar will never come even remotely close to reducing the trade deficit, given that our oil imports are going up every year. (Not that I expected a reduction in the trade deficit due to a 'weaker dollar', but this is interesting stuff, as singificantly reducing the trade gap appears to be impossible given our current energy realities). Indeed, almost $100 billion of last years $400 billion trade deficit was oil imports.

What does this mean to US consumers? Well, if the dollar continues is downward trajectory in 2004 similar to 2003, which seems most likely, the price of a barrel of oil will become about $40 or more, and if the euro goes to 1.40 to dollar, we might be paying $3 per gallon of gas at the end of this year, while the europeans keep paying their current rate (about $4 to $5 US). Expect to see more bumper stickers "Bomb their ass and take their gas"

I really thought last week's OPEC meeting could have concluded with a "basket of currencies" pricing mechanism annoucement, but it looks like they are going to delay that for a little longer. However, I did not realize until now that OPEC's $22-28 US dollar pricing band has quietly but effectively been replaced with what appears to be a €24 euro pricing band of sorts, at least from 2001-2003. Will they formalize this arrangement? - with signicant adverse impact to the dollar? My guess? By the end of 2004 they will make a formal annoucment about about a currency basket...but I think Russia will do this too. (BTW, these hypotheticals are in my upcoming book)

http://goldmoney.com/en/commentary.php#current

'OPEC Has Already Turned to the Euro' (Feb 18, 2003)

"It has been suggested that OPEC may begin pricing crude oil in terms of the euro, and further, that OPEC may actually begin invoicing its crude oil exports in terms of euros. This latter step would require shifting out of dollars, with OPEC receiving euros in payment.

These possibilities have been scoffed at by many whose interests are tied to the fate of the dollar, but it seems that OPEC has already taken the first step - it appears to be pricing crude oil in terms of the euro. This conclusion is apparent from the following table. The import data is from the Department of Commerce report entitled U.S. International Trade in Goods and Services. The source for the euro exchange rate is the Federal Reserve, and I have calculated the euro's average exchange rate to the dollar for each year based on daily data.

US Imports of Crude oil
(1) (2) (3) (4) (5) (6)
Year Quantity (thousands of barrels) Value (thousands of US dollars) Unit price (US dollars) Average daily US$ per € exchange rate Unit price (euros)
2001 3,471,066 74,292,894 $ 21.40 0.8952 € 23.91
2002 3,418,021 77,283,329 $ 22.61 0.9454 € 23.92
2003 3,673,596 99,094,675 $ 26.97 1.1321 € 23.82

We can see from column (4) in the above table that in 2001, each barrel of imported crude oil cost $21.40 on average for that year. But by 2003 the average price of a barrel of crude oil had risen 26.0% to $26.97 per barrel. However, the important point is shown in column (6). Note that the price of crude oil in terms of euros is essentially unchanged throughout this 3-year period.

As the dollar has fallen, the dollar price of crude oil has risen. But the euro price of crude oil remains essentially unchanged throughout this 3-year period. It does not seem logical that this result is pure coincidence."

.."The above table is also interesting for another reason. Column (3) shows that the import cost of crude oil has risen by approximately $25 billion from 2001 to 2003. This increase has directly added to the trade deficit. Therefore, the dollar has entered a vicious circle. As the dollar declines, the oil exporters raise the cost of their oil to protect them from a loss of purchasing power, and this rise in the price of crude oil further worsens the trade deficit, which causes the dollar to weaken further and the oil exporters to raise prices yet again."

(on edit, that chart looks a lot more legible on the link)