The Shift From Petrodollar to Petroeuro is Here

Written By Luke Burgess

Posted December 12, 2006

BALTIMORE, MD – According to the latest quarterly review from the Bank for International Settlements (BIS), oil-producing countries have reduced their U.S. dollar exposure to the lowest level in two years. Crude exporters are reportedly shifting oil income into euros, yen, and sterling as a hedge against a continuing tumble in the USD. This shift from petrodollar to petroeuro will have a catastrophic effect on the American economy.

It’s here.

And it may do more damage to the American economy than peak oil could ever dream to throw at us.

I urge you to prepare.

OPEC and major non-OPEC producers are dumping their dollar-denominated deposits while quietly increase their euro- and yen-denominated deposits.

A complete shift away from petrodollar may pull the entire American economy to a grinding halt and may even ignite mass chaos on an unimaginable scale.

Remember a few weeks ago when holiday shoppers were trampling over each other to get their hands on a PlayStation 3? Well, just imagine what it’ll be like when there’s one loaf of bread on the shelf for every five people.

The major crude producers are dropping the greenback to hedge themselves against a continuing slide in the U.S. currency which has now shed nearly 7% against a Federal Reserve index of seven major currencies. Specifically, the dollar has fallen 11.6% against the euro this year, about 5% in the past three weeks alone. This year’s decline against the euro is the biggest since a 16.7% loss in 2003.

The U.S. Dollar Index, which averages the exchange rates between the greenback and six other major world currencies, has shed nearly 10% over the past 12 months. Notably, about half of that has taken place since mid October.

At last look, the index was sitting at 82.90. A drop below 80.50 would represent a multi-decade low.

A slowdown in the U.S. economy and declining GDP, in tandem with oil-driven inflation and current housing woes, will certainly erode the dollar’s value even further.

Things are bad for dollar bulls now. And they only get worse . . .

Major Crude Producers Flee from USD
The BIS confirms that Russia and members of OPEC have cut their dollar holdings from 67% in the first quarter to 65% in the second. A 2% cut may seem modest. But the move indicates crucial information for the USD outlook.

While dumping the dollar, the oil giants have increased their holdings in euros from 20% to 22% across the board. This shift has certainly added to the dollar’s recent weakness, which has fallen to a 20-month low against the euro and a 14-year low against sterling.

The BIS is generally cautious with its language-unlike Michael Richards. Yet in the quarterly report it noted, "While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks’ liabilities to oil exporting countries."

The review showed that U.S. dollar deposits belonging to residents of Iran and held in banks in developed European countries decreased by $4 billion. Similarly, residents of Saudi Arabia reduced their U.S. dollar deposits in banks in the United Kingdom by $3 billion, while increasing those in yen by a similar amount.

Elsewhere, residents of Ecuador, Indonesia and Qatar reduced their U.S. dollar deposits in BIS reporting banks by $2.3 billion, $1.9 billion and $2.4 billion, respectively.

Overall, OPEC’s dollar deposits fell by $5.3 billion, while euro- and yen-denominated deposits increased by $2.8 billion and $3.8 billion, respectively. Placements of dollars by Russians rose by $5 billion, but most of their $16 billion additional deposits were denominated in euros.

To read the BIS quarterly report yourself, click here.

U.S. equity investors would be wise to add significantly to international holdings as well as into hard assets. In particular, I currently like the upside of Canadian and Australian mining stocks (especially Australian uranium) and Canadian oil and gas stocks.

Until next time,

Luke Burgess
Energy and Capital

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