Pricing crude oil in euro? That’s a barrel of laughs …

By Maria Kielmas

Date: 11/12/03

COULD oil be priced in euro? Victor Khristenko, the Russian deputy prime minister, and François Lamoureux, head of the European Commission's energy and transport directorate, agreed last month that pricing Russian oil exports in the EU currency "would be a clear signal of the deepening relations of Russia and the European Union" in the sector.

International oil traders think otherwise. "People price crude oil on whether the US buys it or not," says Jackie Bullimore, head of oil markets at the London-based International Petroleum Exchange.

World financial markets are robust enough to handle any foreign exchange risks. "The euro-dollar contract is the biggest contract in the world," he adds.

Crude oil benchmarks, which enable traders to compare prices from different producers, are in dollars.

Bullimore believes the only scenario under which euro oil prices could be possible would be if the crude is produced and sold in the same market and does not travel at all.

Markets want to stick with dollars. So the EU's ambition of having oil priced in its currency would require serious political intervention.

Only Saddam Hussein's Iraq and Fidel Castro's Cuba have priced oil trade in euros. Iran has toyed with the idea, while Saudi Arabia has discounted it. However, if the Organization of the Petroleum Exporting Countries (OPEC) were to adopt the euro as a reserve currency, it would make a big dent in the dollar's power - especially at a time when there is international concern about US vulnerability in its external current account.

But the virtual collapse of the EU's Stability and Growth Pact has not inspired confidence in the euro either.

Recent speculation on euro oil prices was triggered by the weak US dollar and followed an October meeting between German Chancellor Gerhard Schroeder and Russian President Vladimir Putin. Schroeder suggested the possibility of euro-priced Russian oil exports to the EU, as Putin has acknowledged.

The then European Central Bank President Wim Duisenberg did not rule out the idea.

"The feeling in Russia is that the EU is using this opportunity to boost its presence on the currency markets," says Chris Weafer, chief strategist at Alfa Bank in Moscow.

Russia may agree to euro-priced oil for long-term contracts to EU countries, but the price would have to be higher than the market, says Christian Egenhofer, a research fellow at the Brussels-based Centre for European Policy Studies.

This means that EU consumers would have to pay extra for Russian oil, whatever the world price.

"They [Russia] are playing a game and telling the EU what it wants to hear. It's just pandering to the EU like it panders to OPEC," says Bob Ebel, head of energy research at Washington think- tank, the Center for Strategic and International Studies. Chris Weafer adds: "Russia is extremely good at playing the middle ground and paying lip-service to OPEC, while at the same time talking to the US, the EU and China about long-term supplies."

Russia has never cooperated with OPEC about oil production cuts to maintain higher oil prices.

Ebel says Russia's real priorities are to restore the country as a great power and to become a member of the World Trade Organization.

So it is neither going to damage its economic prospects, such as by ratifying the Kyoto Protocol on climate change, nor its relations with the US.

Alexander Rahr, research fellow at the Berlin-based German Institute for International Relations, believes that the overriding relationship is Russia's security alliance with the US.

"This security agenda will be decided over the heads of the EU, and that includes energy security," he says.

• Maria Kielmas is a freelance journalist specializing in the energy sector.

The European Commission and the Russian Deputy Prime Minister agreed in November 2003 that pricing Russian oil exports in euro 'would be a clear signal of the deepening relations of Russia and the European Union'. However, international oil traders want to stick with dollars.