Arab countries want to sell oil for euros

Apr 22, 2003 02:00 AM

Since 1901, when drillers unleashed a Texas gusher and created the modern oil industry, barrels of oil have been sold for greenbacks. Whether they buy oil in Alaska, Norway or Bahrain, today's customers pay in dollars. But when the United States launched its military attack against Iraq last month, many Muslim clerics began demanding that Arab countries sell oil for euros, not dollars. That move could send shock waves through the world oil market and the US economy.
Newspaper columnists and antiwar activists in countries from Morocco to Indonesia have rallied behind the sentiments shouted in a Nigerian street protest: "Euro yes! Dollars no!"

Using currency to wage economic warfare against the US "has been talked about, off and on, since the Arab oil embargo in the 1970s", said Robert Lynch, senior currency strategist in the New York office of BNP Paribas.
"It is mostly a threat" rather than a real possibility, Mr Lynch said, because switching from dollars could economically harm many Muslim countries that already hold lots of dollars -- notably Saudi Arabia. Still, given the level of Muslim anger directed at the US following the war, "anything is possible", he said. "If oil trading shifted from dollars to euros, it would be a hugely significant event and certainly a negative one" for the US economy, he said.

The US benefits from the global use of "petrodollars " because countries that import oil must have dollars on hand. This global demand for dollars helps keep the US currency strong. Having a strong dollars lets US consumers buy imported goods for less, which helps hold down inflation.
At the same time, countries that export oil receive dollars, which they in turn invest directly in US securities to avoid currency fluctuation risks. Because these oil exporters are willing to purchase huge amounts of US Treasuries, interest rates also are kept low.

When Arabs first started looking for ways to harm the US economy in the 1970s, there was no real competitor to the dollars. That changed on January 1, 2000, when about 300 mm Europeans in 12 nations exchanged their national currencies for the euro.
This campaign against petrodollars was launched by Iraq's ousted leader Saddam Hussein himself. In September 2000, his regime announced it would no longer accept dollars for oil being sold under the United Nation's "oil for food" program. A government statement said that to confront the "daily American-Zionist aggression", oil would have to be paid for in euros. While that move had a negligible impact on the US economy, it gave Iraq a boost when the euro appreciated by 30 % against the dollars in recent months.

Now that US military forces control Iraq, that nation is expected to once again accept greenbacks for its oil. But if other Arab countries make the switch to euros, or even to a dollar-euro blend, the entire global oil industry would become less profitable, said Sean Callow, strategist at IDEAGlobal, a financial research firm in New York.
"Using the dollar is so important because the oil industry must have a deep, liquid market" in which to conduct its world-wide transactions, Mr Callow said. "If you have to use two currencies, it breaks up the market. It would add to transaction costs and be quite unwieldy."

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