8 Ways to Profit if OPEC Dumps the Dollar

by: Money Morning August 12, 2008 | about stocks: ABB / BA / DBV / DT / PBW / PEP / RPIBX / YUM    

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Iranian President Mahmoud Ahmadinejad dropped a bombshell. And while it wasn’t a nuclear one, it might as well have been.

He stated on the record at a rare gathering of the heads of the Organization of Petroleum Exporting Countries [OPEC] member nations have expressed a real interest in converting their cash reserves from the beleaguered U.S. greenback to the European euro. More specifically, Ahmadinejad referred to the U.S. dollar as "a worthless piece of paper."

Not surprisingly, Ahmadinejad ally and fellow anti-U.S. hardliner Hugo Chavez - the president of Venezuela - echoed a similar sentiment.

What makes their posturing so troublesome, however, is that for the first time there was no rebuttal, or reassuring commentary from Saudi Arabia and other key U.S. petrodollar supporters, in response.

In fact, they didn’t even mention concerns about the falling U.S. dollar in the summit’s final declaration.

Instead, OPEC members formed a working group to study the dollar’s effect on oil prices and to "investigate the possibility of a currency basket" as a means of offsetting declining dollar-based reserves. At the same time, Ahmadinejad and Chavez agreed to set up a joint Iranian-Venezuelan bank and concurrently signed deals to boost cooperation in the oil, petrochemical and general industrial sectors, according to Iranian media.

The timetable for recommendations and action, like many things from OPEC, remains unclear. But the mere fact that they’ve gone so far as to set up a working group to study the currency problem, and that at least two major member states are busy establishing bilateral financial institutions, suggests that changes are in the wind and this time those changes are for real.

Let me emphasize this point: This is not good. In fact, under the circumstances, I can’t think of anything else short of a direct terrorist attack that poses as serious a challenge to our economic future and to any of our investments that aren’t positioned for this possibility.

That said, if you know that something is going to happen, there are almost always profitable plays you can make.

Let’s talk challenges first.

The Fallout From a Falling Dollar

First, OPEC members have long grumbled about the falling dollar and taking payment in euros. This is nothing new. In fact, China already pays for Iranian oil in euros, so Ahmadinejad’s desire to get away from the dollar is hardly unexpected given how much he already banks on the deal. Neither is the fact that both Venezuela and Russia have joined the "euros-for-oil" party, as have Libya, Indonesia and Malaysia, I believe.

But what represents a stark change from past posturing is that this time there was no reassuring voice from countries like Saudi Arabia and Jordan, who have traditionally been our allies in keeping the petrodollar relationship intact since the early 1970s.

This time around, both our "allies" were completely silent on the matter and their silence, as the old adage goes, speaks volumes about how much internal pressure is mounting against such dollar-favorable OPEC members. I’ve met many of the their representatives over the years, and let me assure you that they are very concerned that the oil-for-euros crowd will win.

The reason is that many OPEC countries peg their own currencies to the dollar. By pricing crude the same way, they have their own form of economic benchmark. Should that change in response to a shift away from dollars, each producer would not only have to endure their own economic reset, but they would potentially also have to begin pricing oil on the free market, which is something OPEC cartel members have gone to great lengths to avoid for nearly 30 years. This could result in dramatically higher oil prices as the bigger players squeeze the smaller producers out and the dollar falls even further in response.

How high will crude oil soar? My calculations suggest $197.30 a barrel is possible - not probable - but possible.

[There was talk out of the Middle East this weekend of OPEC boosting output, prompting predictions that oil would fall to as low as $70 a barrel. Even if OPEC boosts production and prices fall that much, I’m telling you right now that any price decline will be temporary, and that oil prices will subsequently resume their upward advance. There’s just too much global demand for the "black gold."]

And that brings me to my second point. A run-up in the price of crude oil to nearly $200 a barrel would imply a dollar falling another 25% from present levels. I’ve personally addressed the issue for years at financial conferences, but many people still don’t connect higher oil prices with the falling dollar… and they should.

The pinch we feel in our wallet is as much the result of U.S. Federal Reserve Chairman Ben Bernanke’s seemingly incomprehensible "attention-to-deficits disorder" as it is to any Middle Eastern machinations.

Whether OPEC members make good on their threats to abandon the dollar completely - or simply shift to a currency basket - is a moot point. The real issue is that OPEC members and other oil producers have had to boost the price per barrel to offset both the corresponding loss in immediate cash payments they receive and the decline in value of the dollar-based reserves they maintain.

And OPEC members will have to continue to do so. This can only put additional downward pressure on the greenback.

Any shift away from dollars into other currencies will effectively imbue the U.S. dollar with an added element of exchange-rate risk when it comes to oil - which is seemingly what the anti-US OPEC members want.

If that doesn’t make sense, think of it this way: Should that change and U.S. dollars are no longer required for oil purchases, the demand for dollars would plunge, sending the greenback into a freefall.

In other words, the global demand for dollars would fall dramatically because there would be only disadvantages to maintaining it as a reserve if OPEC no longer prices oil in dollars.
I don’t know about you, but this is enough to make my head spin… and I do this for a living!

So let’s shift away from this gloom and doom and instead look at the profit opportunities this unceremonious dumping of the dollar would create.

Capitalizing on the Dollar’s Denouncement

One thing is certain in all this: There’s no way that Ahmadinejad and Chavez intended to create profit opportunities for U.S. investors. But in making the greenback an OPEC outcast, that’s precisely what they’ll be doing. Let’s look at some of the best opportunities that I see before us.
Indeed, if OPEC makes good on this subtle threat, make sure to:

  • Grab the Global Titans: Global titans derive a big portion of their sales from outside U.S. borders, and in currencies other than the greenback. Own a few winners here and you’ll suddenly find that you’re literally cheering every time the dollar clicks downward; you’ll be making it up with investments that are booming even as our own markets are tanking. Examples include YUM! Brands Inc. (YUM), PepsiCo Inc. (PEP), Boeing Co. (BA), Deutsche Telekom AG (DT), and ABB Ltd. (ABB).
  • Plug Into Alternative Energy: Big Energy is really expensive right now, but those high oil and gas prices will literally fuel the race to find the eventual winning sources of alternative energy. Unless you really know your stuff, it’s tough for you to pick the winners. This is one of those cases where it’s smart to let the experts make those choices - and to use a fund, with multiple investments, to diversify away the substantial risks. That’s why an exchange-traded fund [ETF] like the PowerShares WilderHill Clean Energy ETF (PBW) is such a great choice. The continued escalation of energy prices will force the transition to alternatives - far more effectively than any legislative conservation measures ever would.

Clean Up on Currencies: Because the dollar forms the backbone of the major currency-trading relationships within the G10, it makes sense to capitalize on potential currency disruptions down the road. The Powershares DB G10 Currency Harvest Fund (DBV) plays that role perfectly. It simultaneously invests in the weakest and the strongest of the G10 currencies and could add a nice kicker as currencies realign themselves in response to a dollar-disadvantaged world. And in this kind of weak-dollar environment, foreign bonds clearly are an attractive investment for U.S. investors. But there aren’t any ETFs specializing in foreign-currency bonds. A good alternative would be a high-quality international bond fund: The no-load T. Rowe Price International Bond Fund (RPIBX), which invests in high-quality, non-dollar-denominated bonds, is a sound choice.

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This article has 26 comments:

  •  
    Aug 12 02:18 PM
    What planet did this writer come from? (Maybe its the same planet that Ahmadinejad and Chavez are sleeping on). The dollar is not falling. The dollar is rising. Oil is not going to $200. Oil is headed towards $100, as demand is plummeting in places as diverse as the US and China.
    The Euro and European economy are headed for recession and the bumbling EUCB still has it's foor on the brake, while the US government has had it's foot on the gas pedal of the the US economy. Meanwhile the US economy and stock markets are showing signs of putting in bottoms, while the Euro and Emerging stock markets have fallen worse and show signs of having farther yet to fall.
    Ahmadinejad and Chavez are singing an old song, and the reporter either does not know enough to comment or is happy to just let their out-of-date comments stand.
    WAKE UP AND SMELL THE COFFEE!!
    Reply | Link to Comment
  •  
    Aug 12 03:28 PM
    The writer may not know what he's talking about but this chart of USD to EUR shows that the USD is going DOWN/ EUR going UP.... where do you get your facts from? A different planet....

    finance.yahoo.com/echa...;range=2y;indicator=vo...
    Reply | Link to Comment
  •  
    Aug 12 04:19 PM
    Uncle Sam may have his foot on the gas pedal, but he's thrown mothballs in the gas tank. Good for 10 miles, after that he'll be a walkin'.
    Get us to Nov. 4.
    Reply | Link to Comment
  •  
    Aug 12 04:38 PM
    Seems to me that this guy is a professional scaremonger.
    Reply | Link to Comment
  •  
    Aug 12 05:51 PM
    diesel
    Reply | Link to Comment
  •  
    Aug 12 05:52 PM
    FYI, in case y'all have been sleeping too, the dollar has reversed and rose against the Euro the past month, and had its biggest day in 8 years Friday as the commodity bubble is bursting. Oil is sown 25% and in a bear market. Gold & silver are sucking wind too, with panic selling today. Gold blew through key support levels and finished below $820 today, and is now closer to $700 than $1000. GLD is now down 19.9% and about to enter offical bear market territory.
    Wake up! and stop looking in the rearview mirror. The dollar is not dropping. It is rising.
    Reply | Link to Comment
  •  
    Aug 12 07:27 PM
    The (apparently anonymous) writer of this blog loses all credibility in many ways, but the most ridiculous part of his ranting is in forecasting that it is possible that the price of crude oil will rise to $197.30! Not 10 cents higher or lower, but $197.30! What fools these mortals be.
    Reply | Link to Comment
  •  
    Aug 12 07:30 PM
    Excellent article. I continue to find the optimists with heads in the sand amusing as I look at data that shows the lost decade of equities even more lost after factoring in the decline of the dollar. Most people dont even know how much the dollar's decline has cost them. Many dont know we are in a bear market with bull rallies, which is interestingly the inverse of the bull market in commodities with a current bear correction. This author has exactly the right idea...but he is ahead of his time and many are not ready for his message. Only in hindsght will people look for an explanation of what happened to US dollar hegemony. The British at the turn of the century also thought that the "sun never set on the British Empire" only to see their currency lose its status of worlds reserve. Arrogance is not wise.
    Reply | Link to Comment
  •  
    Aug 12 08:40 PM
    It's interesting to note that all the commoditiy bears come out'a their holes AFTER we already had a substantial correction.
    Besides, I have yet to meet to person who correcly calls a bubble at the top.
    Reply | Link to Comment
  •  
    Aug 13 12:08 AM
    Anyone who thinks this writer is 'off his rocker' is going to be in for a HUGE awakening... sounds like amerikans to me.. sheeple, who reject truth, because they can't wrap their tiny little brains around it... HE knows what he is talking about, and it will happen alot sooner than later. BANK on it.
    Reply | Link to Comment
  •  
    Aug 13 12:17 AM
    the dollar has been moving up recently, yes. and oil has been moving down considerably, also recently. change your perspective a little (stand back instead of up close) and look at how far the dollar has fallen in the past three years (to the euro) and how high oil has soared in the past two years (not long ago it was at $30).
    of course, NOBODY knows what will happen but, there are other reasons besides oil that the dollar is in trouble:
    the financial/mortgage institutions mess will continue to present us with bad news (yesterday JP Morgan, etc.) for another year or two and the "guns and butter" farce the Bush Administration has hung around our necks will be a long time being paid off.
    you can be a Larry Kudlow if you want, just don't expect me to pony up to your new ETF fund if you do.
    Reply | Link to Comment
  •  
    Aug 13 12:54 AM
    Excellent article that is not actually ahead of its time, but rather a couple years behind. The word of this has been circulating within the inner circles of politics and has been a major impetus on foreign policy with the middle East for quite some time. My Dad was a Diplomat in the US government and I can attest that nothing is as it appears to be. Its mostly fodder for the masses. It is most wise to understand that our reactionary responses as a nation impedes our evolutionary progress both individually and as a nation.
    Reply | Link to Comment
  •  
    Aug 13 01:28 AM
    If Armydijon puts his finger on the Euro button, the US Navy will blast him into outerspace. Also, the USA is the biggest buyer of oil. If the current system is upset, and the Dollar plunges, destroying the US Economy, nobody will be able to afford gas. OPEC will lose it's biggest customer.
    Reply | Link to Comment
  •  
    Aug 13 06:15 AM
    Does anyone realise how much in dept US is???
    Can they afford to buy anything at all???
    Oh sorry, my mistake, another loan will fix it!
    Reply | Link to Comment
  •  
    Aug 13 10:51 AM
    Who knows? Only the shadow knows, but the good thing about the article is that we have a watch list, in case the author is correct. Nice to be ready, just in case
    Reply | Link to Comment
  •  
    Aug 13 12:06 PM
    a bankrupt nation receives the same reaction from it's potential lenders as does the bankrupt individual. neither one will receive much credit for the future.

    good advice, but more emphasis needed on things vs paper--commodities vs stocks, bonds, currencies. all fiat currency based paper will trend towards zero value. people exist on things and will pay whatever for things.
    Reply | Link to Comment
  •  
    Aug 13 02:03 PM
    As we all know the US is in a recession whether you want to admit it or not. The federal defecit is in the trillions of dollars and the real estate market has not reached the bottom yet, when it does more problems will follow. It is no wonder that Iran and OPEC no longer trust the dollar. If I were them I would want a safe haven too until the US demonstrates some fiscal responsibility for what they have created.
    Reply | Link to Comment
  •  
    Aug 13 02:32 PM
    Mr. Hart: sterling's decline didn't come about entirely because of a myopic belief that the sun would never set on the Empire. Getting involved in one too many wars also contributed. On that subject, what are all those extra carrier battle groups going to be doing in the Gulf? Exercises?
    Reply | Link to Comment
  •  
    Aug 13 04:46 PM
    Like it or not, the US is still the economic engine of the world. As we slow, so does everyone else - that includes China and India. As someone else said, oil is denominated in dollars because we buy the most of it. That isn't likely to change soon, but in the meantime we need to get our own financial house in order to help that along. Congress needs to figure out that $10 trillion is too much debt, and $500 billion for one year is too high of a federal deficit.

    Personally I'd like to see the US weaned off of oil, just so that we could send the OPEC nations a huge wake up call: We don't want your product. Stop financing islamic terrorists. Stop providing aid to communist rebels in Columbia. Or else.

    PS: For those not in the know, the fall in our currency has allowed us to boost exports. This June we exported more goods ($164 billion) than we ever have in the history of our nation, and our trade deficit shrunk to levels not seen in over a decade. This has allowed us a mild recession so far despite the economic chaos we're experiencing. Countries that are currently pegging their currencies to the dollar at artificially low levels and gambling their economic futures on trade surpluses with the US need to come up with another plan. We can still make things ourselves and be competitive while doing it, especially when it costs too much to ship cheaper items here.

    Reply | Link to Comment
  •  
    Aug 13 05:04 PM
    This is a good article and for those who thinks its hogwash need to get their heads out of the sand or take some serious medication .My guess most of you skeptics are democrats who want to deny that its their fault that the US is in this situation by refusing all sorts of energy such as drilling and sending all our money to the OPEC nations and china who may also do the same thing or just by up america ,what ever is left .
    Reply | Link to Comment
  •  
    Aug 13 08:22 PM
    Wasn't this news reported about 6 months ago about the iranians an chavez wanting too change to the euro.
    Reply | Link to Comment
  •  
    Aug 13 11:43 PM
    This is a very practical and realistic article. US has already $ 9,000,000,000,000+ deficit and climbing upward every second and thus, weakening dollar strength. Hugo Chavez and Ahmadinejad (and Russia) are our adversaries and they want to destroy US economy/power at any cost. Other so called US friends in OPEC are also losing money by selling their only commodity (oil) in dollars. They are no stupid. Why should they help us when their cost of living going up due to weak dollar?

    Our clueless, visionless moron politicians in Washington just keep on bickering on energy policy since 1972. Right now, we are tranferring over $700 billion wealth per year to purchase oil from OPEC countries. We could have solved this energy problem by now if these morons in Washington acted intelligently. It's time to replace these inefficient politicians with good people who will look after our country's interest rather than their own pocket/power.
    Reply | Link to Comment
  •  
    Aug 14 01:20 AM
    Interesting to review the two viewpoints regarding the direction of the US dollar although supporters of a stronger US dollar going forward were rather shallow with the facts and blind in not considering other components that will lead to a diminishing US dollar . . . . good for AU.

    Whether it is losing the status of world currency reserve, ever-increasing US government expenditures & obligations, US government increasing committment towards existing entitlement programs, US Congressional enticement of additional entitlement programs, US government inability to curb fraud/waste/abuse, US Congressional representatives not being held accountable in regards to financial and monetary activities - including the implementation of earmarks, and increasing local/state/federal taxes.

    Sooner or later the majority will recognize that gold will have the value to buy freedom and benefit. You can have the digital US dollars backed by the integrity & confidence of the US Congress.
    Reply | Link to Comment
  •  
    Aug 14 03:22 PM
    actually the US treasury debt is reasonably low and manageable (measured in terms of % of annual GDP) compared to other first world countries. What is alarming is the drunken sailor spending of congress and the way they want to pander to voters, buying votes with more spendoing funded by debt to be paid by America's young. The democrat candidate would like to blow the lid off public spending. There is no benefit he won;t promise to get more votes. And the bad news is there is no way he can tax the rich to pay for it. They don;t have enough to fund it. The middle class will continue to get hurt, and will have to pony up higher taxes and get hit with more AMT with fewer deductions and lower future SS & Medicare benefits.
    Reply | Link to Comment
  •  
    Aug 19 01:34 AM
    It is difficult to overemphasize the role of trust in a debt relationship. All the oil earnings and Japanese savings are on loan to the US; but the US, thanks to losses in the unregulated financial sector,cost of war, and imprudent consumption, cannot afford to pay anything on these loans. Once the lender starts getting negative returns, he'll look elsewhere. The Euro is the first currency that comes to mind, even though the European economies simply cannot absorb the trillions now in US debt paper. Hopefully, a new chapter is being opened from 2009.
    Reply | Link to Comment
  •  
    Sep 29 02:20 AM
    It seems to me that the general consensus is that the bailout is going to hurt US Domestic Bond Funds. I haven't read much on the bailout's effect on foreign bond funds. Will foreign bond funds get dragged down along with domestic bond funds or will they prosper? I would really like to get some input, specifically on the TRowe Price foreign bond fund (RPIBX).
    Reply | Link to Comment
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