There is though one major obstacle to this happening: oil. Oil is not just by far the most important commodity traded internationally, it is the lifeblood of all modern industrialised economies. If you don't have oil, you have to buy it. And if you want to buy oil on the international markets, you usually have to have dollars. Until recently all OPEC countries agreed to sell their oil for dollars only. So long as this remained the case, the euro was unlikely to become the major reserve currency: there is not a lot of point in stockpiling euros if every time you need to buy oil you have to change them into dollars. This arrangement also meant that the US effectively part-controlled the entire world oil market: you could only buy oil if you had dollars, and only one country had the right to print dollars - the US.
If on the other hand OPEC were to decide to accept euros only for its oil (assuming for a moment it were allowed to make this decision), then American economic dominance would be over. Not only would Europe not need as many dollars anymore, but Japan which imports over 80% of its oil from the Middle East would think it wise to convert a large portion of its dollar assets to euro assets (Japan is the major subsidiser of the US because it holds so many dollar investments). The US on the other hand, being the world's largest oil importer would have to run a trade surplus to acquire euros. The conversion from trade deficit to trade surplus would have to be achieved at a time when its property and stock market prices were collapsing and its domestic supplies of oil and gas were contracting. It would be a very painful conversion.
The purely economic arguments for OPEC converting to the euro, at least for a while, seem very strong. The Euro-zone does not run a huge trade deficit nor is it heavily endebted to the rest of the world like the US and interest rates in the Euro-zone are also significantly higher. The Euro-zone has a larger share of world trade than the US and is the Middle East's main trading partner. And nearly everything you can buy for dollars you can also buy for euros - apart, of course, from oil. Furthermore, if OPEC were to convert their dollar assets to euro assets and then require payment for oil in Euros, their assets would immediately increase in value, since oil importing countries would be forced to also convert part of their assets, driving the prices up. For OPEC, backing the euro would be a self-fulfilling prophesy. They could then at some later date move to some other currency, perhaps back to the dollar, and again make huge profits.
But of course it is not a purely economic decision.
So far only one OPEC country has dared switch to the euro:
Iraq, in November 20002, 3. There is little doubt that this was a deliberate attempt by Saddam to strike back at the US, but in economic terms it has also turned out to have been a huge success: at the time of Iraq's conversion the euro was worth around 83 US cents but it is now worth over $1.05. There may however be other consequences to this decision.
One other OPEC country has been talking publicly about possible conversion to the euro since 1999:
Iran2,4, a country which has since been included in the George W. Bush's 'axis of evil'.
A third OPEC country which has recently fallen out with the US government is
Venezuela and it too has been showing disloyalty to the dollar. Under Hugo Chavez's rule, Venezuela has established barter deals for trading its oil with 12 Latin American countries as well as Cuba. This means that the US is missing out on its usual subsidy and might help explain the American wish to see the back of Chavez. At the OPEC summit in September 2000, Chavez delivered to the OPEC heads of state the report of the 'International Seminar on the Future of Energy', a conference called by Chavez earlier that year to examine the future supplies of both fossil and renewable energies. One of the two key recommendations of the report was that 'OPEC take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers'5, i.e. OPEC should avoid using both the dollar and the euro for many transactions
Iran Makes Move to Devalue U.S. Dollar - Oil Trade in Euros
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