When the US relies upon the kindness of strangers to float our enormous deficits — both trade and budget — we look to the Asian central banks. Oil exporting countries don’t send us their surplus profits anymore the way they did in the 1970s. When OPEC countries were making money hand over fist back in the “malaise days” (obviously not terribly languid from their point of view), they shoved a lot of it in Citibank accounts and then Citibank loaned it hither and yon, ultimately leading to the early 1980s debt crisis. This time, however, they just don’t trust US banks to look after their profits.

Private Middle East investors are believed to be worried about the prospect of US-held assets being frozen as part of the war on terror, leading to accelerated dollar-selling after the re-election of President George W. Bush.

The BIS data, in the organisation’s quarterly review, state that Opec countries’ stock of dollar-denominated deposits has fallen by 4 per cent in cash terms since 2002 in spite of Opec revenues’ surging to record levels this year. . . .

Hans Redeker, global head of foreign exchange strategy at the French bank, said the Patriot Act, introduced after September 11 to stop US financial institutions being used by terrorists to launder money, was worrying private investors.

“If you trade with what the US regards as a ‘dodgy’ bank, you are at risk of your assets in the US being frozen,” he said. “After the re-election of George Bush, the Middle East started to sell dollars like crazy due to the fears of assets being frozen.”

Just as well. I wouldn’t trust Citibank and George W. with my money, either. However, the US relies upon the kindness of Middle Eastern strangers quite a lot when it comes to their choice of currency in pricing oil. With the dollar falling nearly 9% against the euro over the last eight weeks and Middle Eastern countries far more dependent on the European market for their exports, the oil sultans are starting to consider abandoning their practice of pricing strictly in dollars.

Middle Eastern central banks have reportedly switched reserves from dollars to euros and sterling to avoid incurring losses as the dollar has fallen and prepare for a shift away from pricing oil exports in dollars alone.

In 2003 the US net imported 56% of its petroleum, up from just 28% twenty years ago. Oil priced in dollars removes from a big risk factor from the US economy — exchange rate risk. And this risk factor is growing leaps and bounds.

To show how much the US benefits from oil priced in dollars, let’s do a little non-rigorous thought experiment. Oil prices began skyrocketing in November 2003, so let’s pretend that on November 3, 2003, oil pricing switched over into euros. Let’s also pretend that oil prices (per the NYMEX) would have ebbed and flowed exactly the same as they actually did over the last 13 months. What would we have been paying for oil under a “petroeuro” regime?

As you can see from the above chart, from November 2003 to September 2004, little would have been different. At most we would have been paying about $4 more per barrel in January and February 2004, which would have amounted to less than the magic $40/barrel.

Once the dollar begins its dive in October 2004, however, things would have gotten quite ugly. At the end of November the price gap would have swollen to $8/barrel and prices would have surged in late October to over $61/barrel! Today they would still be well into the mid-$50s rather than low-$40s. The price shock alone of more than 2 months above $50/barrel (rather than the actual one month) would surely have begun strangling the US economy.

Now OPEC is hardly going to switch into the euro overnight, and almost as little likely to abandon the dollar altogether. Nonetheless, beware the petroeuro. Our gas guzzling days are under the Sword of Damocles.