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Dollar joins OPEC calculus, hits importers Dollar down against both euro and yen, at record lows against euro Charles Roth The Associated Press
OPEC oil ministers have taken to talking like central bankers and finance ministers. And no wonder, given the swoon of the dollar. Traditionally, when the Organization of Petroleum Exporting Countries decides to restrain its production levels, fuel prices stay firm or rise, supporting member revenues and those of other emerging market oil exporters.
But the dollar’s weakness has tweaked that dynamic, as oil is priced in the greenback, which is at record lows against the euro around $1.2223 and a three-year bottom against the yen of 107.31 yen.
Fareed Mohamedi, chief economist at PFC Energy, an international energy consulting firm, said OPEC states “are going to get hammered by this,” as their payments in euros and yen have risen sharply.
Indeed, Saudi Oil Minister Ali Naimi, among others, was quoted as saying OPEC’s decision Dec. 4 to maintain its collective output target of 24.5 million barrels was based on a current “real value” of $25 dollars a barrel, and not the $28 at which OPEC’s crude basket is now trading.
That’s because, he explained, the dollar has declined 30 percent against the euro over the last two years. OPEC economies, he argued, need high oil prices not to make up for the slide in the dollar. OPEC is also looking to maximize revenues ahead of an expected seasonal decline in oil prices in the second quarter, when demand slackens as the Northern hemisphere moves into spring.
Most OPEC members are Middle East nations, and thanks to the dollar’s fall, have seen their purchasing power decline sharply vis-à-vis their top commercial partners. OPEC kingpin Saudi Arabia sources about two-thirds of its imports from Western Europe and Japan. Many also have euro- or yen-denominated debts, raising their foreign debt servicing costs.
For oil importers, OPEC’s decision means energy import bills will continue to stay hefty, potentially pressuring trade balances and spurring inflation. This is particularly true in many high-growth Asian countries that are highly dependent on oil imports to fuel their industrial sectors.
As Asian countries align their currencies closely with the dollar and have more yen-denominated borrowings, they face both high oil prices — January crude on the New York Mercantile Exchange closed at $32.10 a barrel Dec. 8 — and debt servicing costs. Their purchases of Japanese exports are also more expensive.
Among many other emerging market oil importers, though, the dynamic is far more benign, thanks mainly to currency appreciation against the dollar.
Turkey’s currency, for example, has risen 15 percent against the dollar this year, making its oil purchases that much more affordable. The same is true in Chile, where the peso has climbed 19 percent to a 37-month high against the dollar. Both countries’ dollar-linked debt has also become easier to service.Brazil and, to a lesser extent, Peru fall into this camp, as well. For independent oil exporters such as Venezuela, Russia and Mexico, the value of their dollar-based oil revenues has weakened just as it has with OPEC countries. But at least strong crude prices alleviate that pinch.
Even Russia, which trades primarily with Europe, hasn’t felt any appreciable pain. To the contrary, it’s posting current account and fiscal surpluses thanks largely to high energy prices and expanding oil and natural gas production and exports.
Editor’s note: Charles Roth is a correspondent for Dow Jones Newswires.
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