Tuesday, December 07, 2004

What Middle Eastern governments hold in their relatively tiny foreign reserve accounts is not important. What currency OPEC members decide to price oil in, however, is.
Oil exporters have sharply reduced their exposure to the US dollar over the past three years, according to data from the Bank for International Settlements.

Members of the Organisation of Petroleum Exporting Countries have cut the proportion of deposits held in dollars from 75 per cent in the third quarter of 2001 to 61.5 per cent.

Middle Eastern central banks have reportedly switched reserves from dollars to euros and sterling to avoid incurring losses as the dollar has fallen and prepare for a shift away from pricing oil exports in dollars alone.
Because oil is priced in dollars, the US faces no exchange rate risk in securing its vital energy supplies, net imports being 56% of total US petroleum consumption in 2003 (twenty years ago net imports were only 28%). Over at the American Street today I do a quickie non-rigorous thought experiment (please, economists, don't point out the errors of my "model") in which oil is priced in euros rather than dollars. How does $61/barrel grab you?

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