Adjusted for falling dollar, oil earning less for OPEC

By Javier Blas
Financial Times, London
Tuesday, July 24, 2007

http://www.ft.com/cms/s/d2b3da82-397d-11dc-ab48-0000779fd2ac.html

LONDON -- The falling US dollar is lowering the Organisation of the Petroleum Exporting Countries' purchasing power by up to a third, making the powerful oil cartel more reluctant to increase production and cut prices.

Although oil is trading near last August's record price of $78.65 a barrel, OPEC calculations show that when adjusted for currency fluctuations and inflation, oil prices have fallen in the past year.

The adjusted price averaged only $43.60 a barrel in June this year, compared with $44.30 abarrel in the same month last year, according to the latest OPEC monthly report.

Growing trade between OPEC members, especially those in the Middle East and north Africa, and the European Union, is aggravating the problem because the value of the pound and the euro has risen against the dollar.

The dollar yesterday fell to an all-time low against the euro of $1.3844, down by 4.9 per cent since January, and dropped to a fresh 26-year low against sterling, trading at more than $2.06.

Mohamed Bin Dhaen al Hamli, OPEC president, said at the cartel's latest meeting three months ago that OPEC was "concerned about the continuing weakness of the US dollar" because "this is having a significant effect on the purchasing power of oil-producing countries." Since then the dollar has continued falling against the euro and sterling.

Eric Chaney, a Morgan Stanley economist, estimates that a 10 per cent drop in the value of the US dollar against major currencies cuts OPEC's Middle East members' crude oil purchasing power by about 5 per cent.

Adam Sieminski of Deutsche Bank said the refusal of the cartel to increase its production to force a drop in the oil price is "more understandable if the lower value of OPEC's spending power ... is taken into account."

However, the decline in the value of the dollar is also insulating some countries from high oil prices, providing OPEC with strong demand even as oil prices soar above $75 a barrel.

Non-OPEC members, such as Egypt or Sudan, face problems similar to those of many OPEC countries.

Oil prices fell yesterday on speculation that OPEC would increase production later this year. Brent crude oil, regarded as the best indicator of the global oil market, fell 83 cents to $76.81.

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