RIYADH () -- Though no mention was made of it in its final communiqu'e, OPEC member finance ministers will be considering the possibility of moving the organization's crude oil trade, which accounts for around 40% of global supply, off the U.S. dollar peg following a proposal put forth by the Iranian, Venezuelan and Ecuadorian delegates at the OPEC 3 Summit in Riyadh to base it on a stronger currency.
The financial merits of such a move are clear with the dollar continuing its descent: the declining dollar makes oil prices rise faster than they would if this were not the case. Moreover, OPEC's dollar-based revenues and accumulated surplus income is declining along with the value of the U.S. currency.
Moving Off a U.S. Peg
Saudi Arabia's foreign minister Prince Saud Al-Faisal noted at the OPEC 3 Summit that non-OPEC oil exporters would have to participate in the establishment of any oil trade currency basket as they account for the majority of world crude oil supply.
He also voiced concern over the potential that word leaking out that OPEC would consider such a move would further exacerbate the US dollar's decline. The US currency continued to strengthen against other majors early Monday as traders are looking to South Africa and news of developments at the G20 conference as well as global stock markets action for direction.
Kuwait in May moved its national currency off a US dollar peg to a currency basket, and it is looking increasingly likely that its fellow Gulf State and OPEC member the United Arab Emirates (UAE) will do the same.
The dollar's ongoing fall effectively imports inflation to nations whose currency is pegged to the US dollar. The dollar's sustained decline has triggered a monetary policy review, UAE central bank governor Sultan Bin Nasser Al-Suweidi told a Bloomberg News reporter in South Korea on Friday. He added that any such plan is "not to drop the dollar peg but maybe to reduce it to a basket which will consist of more dollars, but not totally 100 percent."
The possibility of OPEC doing so should require some time for further study in order to formulate a currency basket, as well as come up with a workable plan to launch a new system without disrupting oil trade, however.
Trading Russian Oil in Euros
"Smoother oil price movements are the main benefit. People do not realize that a lot of movements in the oil price, quoted in US dollars, are caused by fluctuations of the dollar versus the major currencies," Pavel Erochkine of the Centre for Global Studies in London told Resource Investor.
"As the U.S. dollar is likely to continue to fall, oil prices will be automatically pushed up by this trend. So, if dollar falls further, as is widely expected, $100 per barrel oil could become a permanent reality. $100 per barrel oil makes headlines and creates political pressure on OPEC to pump more oil. So, another key benefit of moving to a basket of currencies is to avoid this extra political pressure."
On the other hand, the costs of moving trade to a currency basket would primarily be the technical costs to OPEC and oil traders associated with doing so.
"It is perfectly practical. I have been studying the oil market for many years and see no unsolvable problems. There are technical issues, of course, but it is possible," he added.
Russia, which in 2006 overtook Saudi Arabia as the world's largest oil producer, may be the first to move its oil trade off the US dollar and begin trading in euros, Erochkine continued.
"I actually touched upon this topic myself in my recent book "Russia's Oil Industry", where I argued that Russia is likely to be the first country to start trading oil in euros, especially if the price differential to Urals [crude oil production] were to grow."
The possibility of Russia applying for OPEC membership made the rounds at the OPEC 3 Summit, as was the likelihood that Brazil would do so. Brazil's Petrobras announced the discovery of the Tupi oilfield in ultra-deep water off Brazil's Atlantic coast.
The "super-field" is reported to contain as much as 8 billion barrels of light crude oil, which would launch Petrobras into the ranks of the world's top oil producing companies and Brazil into the rank's of the world's top oil exporters though additional work needs to be done to fully define its potential.
