Gulf Oil Revenues to Stay in Dollars

Gulf oil revenues to stay in dollars
Reuters
26 July 2007

Core Gulf producers receive 100 % of their oil revenues in dollars and politics makes it unlikely that will change despite the U.S. currency's weakness, analysts said on Wednesday.

OPEC members Saudi Arabia, the United Arab Emirates and Kuwait between them pump about 13.5 million barrels per day of oil, nearly 16 % of the world's supply.

Record revenues from high prices have fuelled an economic boom in the region, but the weak dollar has eroded oil producers' purchasing power in currencies not pegged to the U.S. greenback. The dollar hit an all-time low against the euro earlier this week.

The potential political fallout from the impact on the dollar of any change would likely keep the region's oil sales in the U.S. currency, said Steve Brice, regional economist at Standard Chartered.

"The U.S. would probably be concerned about major producers doing this," said Brice. "Currency reform is much less politically sensitive. It's another thing to move oil receipts away from dollars. That's a very big step."

Kuwait allowed its dinar to appreciate 1.7 % against the dollar on Wednesday, encouraging investors to bet that other Gulf Arab oil producers would review their pegged exchange rates.

But while Kuwait takes small steps to shield its economy from the dollar's weakness, oil revenues in the world's seventh-largest oil exporter will stay tightly bound to the U.S. currency.

"All our oil revenue is in dollars and there is no plan to change this," said a Kuwaiti source.

OPEC's second largest producer Iran caused a stir in financial markets when it asked Japanese oil buyers to pay in yen rather than U.S. dollars two weeks ago. That move was in part politically motivated as the row drags on with the United States over Tehran's nuclear ambitions.

Libya and sometimes Syria also ask for payments in other currencies, an industry source said. But Gulf Arab producers have shown little interest.

"ENTRENCHED IN DOLLARS"

Analysts said it would make economic sense for producers to diversify payment denominations, as it would reduce the volatility associated with the close ties to one currency and better reflect the region's trade relationships.

"The trade partners of the big oil producers have changed," said Julian Lee, senior energy analyst at London's Centre for Global Energy Studies.

"The European Union and Asia are bigger partners than they were and that would suggest the idea of diversifying revenues to take that into account. But breaking the price of the oil and the dollar may be a step too far."

Kuwait gets about 38 % of imports from the euro zone, the UAE 39 % and Saudi Arabia 35 %, according to Calyon.

Anything that weakens the dollar will also hurt the region's massive dollar-weighted investments.

Gulf Arab governments save most of their oil wealth in investment funds, which do not make public the currencies they hold.

Standard Chartered estimates Gulf Arab central banks hold $75 billion to $80 billion in foreign exchange reserves, while $1.5 trillion is in public sector investment funds.

All the major benchmarks that producers use for oil contracts are set in dollars, which also makes it difficult to use any other currencies.

"The oil market is entrenched in dollars," said one industry source. "People are buying oil years out in dollars and it is difficult to see any of those people unwinding their positions and buying oil in any other currency."