Abu Dhabi, UAEFriday 6 December 2019

Oil producers unlikely to abandon US dollar

US remains the world's most important reserve currency despite the emergence of the yuan as an alternative in the oil trade

The US' predominance in the oil trade influences its ability to ability to sanction countries. Bloomberg
The US' predominance in the oil trade influences its ability to ability to sanction countries. Bloomberg

Saudi Arabia and the UAE on Monday shot down suggestions that they were considering moving away from trading their crude in dollars - a move that would have had wide ranging implications for the oil markets.

Much of the world’s trade in crude and futures is carried out in US dollars and the economies of Opec heavyweights such as Saudi Arabia, the UAE and Kuwait are all pegged to the world’s main reserve currency.

Earlier reports by Reuters suggested that Saudi plans to un-peg itself from the US dollar would be in retaliation to a little-known but potentially vexatious bill being pursued in the US.

The so-called No Oil Producing and Exporting Cartels Act introduced by a group of US legislators seeks to remove sovereign immunity from Opec states and their national oil companies and accuses the group of functioning as a cartel and manipulating prices, exposing it to antitrust legal action in the US.

While the Saudi energy ministry put out a strongly-worded statement that the dollar had served the kingdom well in selling oil for decades and the UAE ruled out any overnight transition to trading in other currencies, what are the consequences, if they should?

While the immediate impact on the oil markets would be minimal, it nevertheless could accelerate a trend to move away from the US as the most important reserve currency in the international system, said Randy Bell, director, Global Energy Centre at Washington-based Atlantic Council.

"Having the dollar as the reserve currency gives the US a significant amount of power both in economic and foreign policy, so from an economic perspective, it allows the US to borrow more cheaply and it allows the US to import more cheaply,” he said.

The dollar’s dominance in the oil trade also gives the US considerable leverage on a foreign policy level, enabling Washington to sanction countries, since much of the world’s oil trade would touch the US financial system in one way or another.

US energy secretary Rick Perry has warned that a bill to limit Opec could have “unintended consequences”. Reuters
US energy secretary Rick Perry has warned that a bill to limit Opec could have “unintended consequences”. Reuters

US' clout in the oil trade was most recently seen in its sanctions imposed on Iran. Washington sought to hurt the Islamic Republic where it hurt most - its ability to earn revenue from the sale of oil.

However, while the dollar has been dominant in the oil trade, there has been momentum to strengthen trading in other currencies - the euro and lately the yuan.

China last year for instance established a bank to continue to trade with Iran without falling afoul of US sanctions.

While the country has for years looked to bolster the yuan, analysts say that the dollar’s dominion is unlikely to be challenged just yet.

"China pays for oil in its own currency in very rare situations, mostly when the supplier cannot get a better deal,” said Ellen R Wald, president of Transversal Consultingand author of Saudi Inc.

"There was a time when oil was generally sold for British pounds sterling, so the oil currency does change sometimes. However, it is more likely to change because of a new power rises in the market, not because of minor geopolitical disputes,” she added.

What is Nopec?

The No Oil Producing and Exporting Cartels Act is a piece of US legislation that looks to remove legal immunity from oil-exporting countries that participate in limiting production of crude in order to control prices and influence trade.

Who does it target specifically?

It targets all the member nations of Opec as well their affiliated state entities, such as their national oil companies. The legislators behind the Nopec bill seek to penalise Opec for what they see as its role as a cartel, pushing for higher oil prices that ultimately hurt the US consumer at the gas pump.

Does the bill have much support in the US?

The bill has been introduced around 16 times over the last two decades only to be successfully lobbied against by the energy industry in the US. Energy policymakers and industry executives have been wary of the bill and its possible larger implications for their business. US energy secretary Rick Perry has warned that the bill could have “unintended consequences”.

What could be the consequences of the bill?

If passed, the bill would add to the volatility of the oil markets and expose US energy assets abroad to vulnerability over retaliatory measures by other governments. Qatar, a former member of Opec, was said to have quit the group earlier this year fearing possible litigation as a result of the Nopec legislation.

Does the bill have support of the Trump administration?

While US President Donald Trump has gone after Opec, accusing the group of manipulating prices and urging member states, particularly Saudi Arabia, to allow for the free flow of oil, his position on the legislation is unclear. While Mr Trump has been publicly sympathetic to price-sensitive US consumers, successfully nudging Opec to boost production to lower prices last year, he also does not wish to be seen as against Riyadh, one of his closest allies.

Why does the bill concern Opec?

In February, a US House of Representatives committee approved the bill, though it is unlikely to receive wider approval. The measure has concerned Opec at a time of high volatility in the oil markets, which has seen loss of production from Venezuela as well as Iran because of sanctions.

How has Opec responded?

Opec has publicly said it was engaged in lobbying efforts in the US to persuade legislators to disavow the bill. Mohammed Barkindo, Opec’s secretary general, said last month that the legislation will not “serve the best interests of the United States nor the global oil industry”.

Updated: April 10, 2019 12:37 PM