End of the Petrodollar Era?

Iran is urging oil customers to pay in currencies other than the US Dollar. Will this move lure other oil exporting countries in light of the recent decline in Dollar value?

Last month, Iran, one of the major oil exporting countries, started pressuring its oil customers to pay in currencies other than US Dollars in an attempt to disentangle its oil exports from the American currency. The Iranian call, which increased on the heels of the UN Security Council’s new sanctions on Tehran a few weeks ago, has found positive reaction from many companies around the world, especially in the oil-thirsty China, which depends on Iran for about 12 percent of its imported crude oil.
Iranian oil officials have announced months ago that most of their oil customers have switched their payment from Dollars to other currencies, especially Euro. Hojjatollah Ghanimifard, head of international affairs at National Iranian Oil, said last month that about 60 percent of Iran’s oil income was in non-Dollar currencies as almost all of its European clients and some of its Asian customers had agreed to make non-dollar payments. “Even if we get dollars, we directly convert it to other currencies. The Japanese don’t mind paying us in yen, for example,” said Iran’s central bank governor Ebrahim Sheibany. Sheibany also noted that Iran has earned more than US$45 billion (€34 billion) from oil sales during the current fiscal year, which ended March 20.
China was among the first oil importing countries that lent a willing ear to the Iranian call. The Chinese state-run oil company Zhuhai Zhenrong, the world’s biggest buyer of Iranian crude oil, has already started to pay for its oil imports in Euros since the end of 2006, when the Iranian government wanted to diversify its foreign reserves away from US Dollars. The company, which purchases more than tenth of exports from the world’s fourth largest crude producer, has changed the payment currency for the bulk of its contract of roughly 240,000 barrels per day. Iran is China’s third-largest crude supplier with daily volume of 335,000 barrels last year.
This unprecedented shift might influence other oil buyers in other major oil-importing countries like Japan. Despite the fact that Japanese refiners, which purchase roughly 500,000 barrels of Iranian crude oil daily (nearly a quarter of Iran’s 2.2 million barrel daily shipments) continue to pay in US Dollars, are willing to shift to pay in their local currency if they are asked to do so, according to Japanese officials. Japanese buyers, including the country’s top refiner, Nippon Oil, said they had all received informal encouragement from Iran to pay on non-Dollar terms, but were awaiting an official request to start doing so. “We are looking at it so that we can switch the currencies any time, but we have not gotten any official requests from them [i.e. the Iranians]. We are still doing the transactions in dollars,” Nippon Oil chairman Fukuaki Watari told reporters. Obviously, all it will take Japan to switch from the dollar is an official request from the Iranian government, and Tehran can do it at any time.
Iranians say the move comes as an attempt to diversify its currency reserves. However, experts say that the shift comes amid a heightened dispute between Tehran and Washington over Iran’s nuclear program. The Iranian move is reminiscent of Saddam Hussein’s decision in 2000 to stop pricing oil in dollars. Hussein’s economic decision didn’t have any impact on the oil trade, as Iraq was then invaded in 2003. In fact, the Iranian decision of selling oil only for other currencies has offered a challenge to other OPEC exporters. They can get out of the petrodollar by switching to the Euro.
Although the economies of the gulf countries, the main members of OPEC, are suffering from financial pressures due to the fall in dollar value in relation to the Euro, they are still reluctant to follow in the footsteps of Iran. Saleh Al-Noaimi, Saudi minister of oil, said in 2003 that his country would not sell oil in Euros. Today, however, he, along with other oil ministers of the Gulf, should have other thoughts. Officials in Gulf countries are scheduled to meet this month to debate the idea of pricing oil in other currencies instead of the Dollar.
“Every time the Euro rises in front of the US dollar, demands that [Gulf] oil be sold in Euros amount,” wrote Ali Ben Talal Al-Jahni, a Saudi academic in the London-based daily Al-Hayat newspaper. “Suppose that we [in Saudi Arabia] priced our oil in euro instead of the US dollar, would this increase the revenues of oil? [No] because at the end of the day what determines the price of oil is not the currency…rather the forces of supply and demand,” he added.
Al-Jahni concludes that dealing with the Dollar is easier since it serves the Gulf oil countries’ interests, since the “bucks” are widely used in all international dealings.
Iranian economist Mohamed Reza Bahzadian argued that replacing Dollar with Euro in oil deals “is costly. And importing commodities would be also costly since traders prefer dollar to euro.” However, Enayat El-Naggar, an Egyptian financial consultant, sees that the Iranian decision is just a symbolic step that will not affect the Iranian economy or oil prices. “This is just a calculation thing, for the price of oil in Euro will be the same in Dollars. The only change will be in the Iranian currency markets which will sell Dollars and buy Euros instead,” she said.
On his part, Mustafa El-Labbad, expert in Iranian affairs, plays down the Iranian maneuver. “It’s a political decision in the first place and it will not affect the value of the dollar in international markets.”
Egyptian minister of oil Sameh Fahmi said that the relation between Euro and Dollar influenced oil prices. “With the emergence of the unified European currency and its high value in relation to the US Dollar, this had a negative impact on the oil producing and exporting countries and a positive impact on the consuming countries,” he said.
The Iranian move is seen by many as a preemptive strike against the US. But, in fact, any military attack on Iran will produce a spike in oil prices, no matter what currency is used to settle accounts. “The Iranian move will not be influential unless the major developing oil-exporting countries like Venezuela and Nigeria follow in Tehran’s footsteps and shift to the Euro. This, if happened, would bring about the end of the Dollar [in oil trade] and the emergence of a new era where Euro is the main world currency,” El-Labbad noted.

By Mohamed El-Sayed


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