Special Report: Energy: Despite Lots of Talk, Dollar Still Reigns

Certain countries — including Iran, France and Russia — have periodically floated the idea of transforming the markets by settling crude oil transactions in currencies other than the dollar.

But each time the notion is raised, it has been quickly dismissed on technical and economic grounds. And that remains the case today, more than ever.

“It’s a red herring,” said Leo Drollas, chief economist at the Center for Global Energy Studies in London. “The idea should be put back in its box for a while, especially with all the turmoil surrounding the euro.”

Various reasons have been cited for the calls to shift away from the dollar, which remains the world’s reserve unit.

Proponents of change suggest that there is an economic logic, as many countries have been diversifying their foreign exchange reserves out of the dollar in line with an increase in global trade flows booked in nondollar currencies.

Others argue that the decline in the dollar’s value, an on-off trend since the 1970s, justifies such an action, particularly in the light of calls from China, France and even the United Nations to examine the creation of a global reserve currency.

And Chinese leaders have been making the case increasingly vociferously that in an age of many rising powers, the dollar has an outsize importance. As the second largest economy in the world, behind the United States, and the holder of the greatest amount of currency reserves, China is interested in seeing the global economic hierarchy reordered to match the post-Cold War world more closely.

But most analysts do not see a compelling logic for oil markets — or other commodities for that matter — to ditch the dollar. “It’s just politics,” said Bahattin Buyuksahin, a senior oil market analyst at the International Energy Agency in Paris.

The idea of pricing oil in other currencies first surfaced after President Richard Nixon abandoned the dollar’s direct convertibility to gold in 1971 and devalued the currency.

The subsequent decline in the dollar, exacerbated by the economic strain of the Vietnam War, a balance of payments deficit and high inflation, stirred concern among producers, even before the Arab oil embargo of 1973.

Moving away from the dollar and pricing oil against a basket of currencies was debated at OPEC meetings in Geneva during the early 1970s, according to Mr. Drollas. Ultimately the concept was buried because of technical difficulties — and the fact that the dollar recovered ground.

More recently, the idea has resurfaced.

In 2003, the European Union and Moscow discussed pricing Russian energy exports to Europe in euros, winning tentative support from France and Germany, as well as Vladimir Putin.

For the Europeans, buying oil in euros would have meant reduced currency risks (meaning the cost of energy in Europe would not get higher just because the dollar rose against the euro). It would have also signaled the international arrival of the then-new currency. But the talks did not lead to an agreement.

In 2007, Iran persuaded some Asian customers to settle their oil trades in currencies other than dollars. But for the most part Tehran now sets its export prices using a formula linked to dollar-denominated crude oil benchmarks.

Then in late 2009, The Independent newspaper reported that secret meetings were taking place among some Arab states, China , Russia, Japan and France to end dollar dealings for oil and move to a basket of currencies. Nothing was confirmed and much was denied. Since then, the idea has not resurfaced.

Countries that have most actively sought to loosen the dollar’s grip on oil markets have had differing reasons. France has periodically sought to weaken U.S. global economic and political hegemony; Russia is increasingly aware of its powerful role as an energy exporter; and Iran has openly sought to undermine Washington for geopolitical reasons, angry about U.S.-led sanctions against its regime.

Ultimately, though, economic logic has always won the day.

Technical factors suggest there would be significant upheaval after any shift from the dollar. The main benchmark oil contracts — light sweet crude traded on the New York Mercantile Exchange and the Brent contract traded at ICE Futures Europe in London — are quoted in dollars, as are the other important commodities contracts globally like gold, copper and wheat. When the Dubai Mercantile Exchange introduced its DME Oman Crude Oil Futures Contract in 2007, the price was — naturally — in dollars per barrel.

Article source: http://www.nytimes.com/2011/10/12/business/energy-environment/despite-lots-of-talk-dollar-still-reigns.html?partner=rss&emc=rss