De-dollarization and European energy policy: Testing Brent and West Texas Intermediate

Historically most of the oil trade has been made with U.S. Dollars. This has important practical implications because the U.S. Dollar is always a reserve currency since it has to be obtained to trade oil. There were previous attempts to trade in Euros, such as by Iraq however recently there is more support from resource countries such as Russia, China and Iran. A de-dollarization campaign against petrodollar has already been started. This can be done by exporting oil, gas and gold with currencies other than the U.S. Dollar, such as Ruble, Yuan or Rial or most importantly an international reserve currency which could be Euros as a strong alternative to the U.S. Dollar. This is possible due to the monetary policy practice of the European Central Bank and support from the European Union. This increases the value of the Euro, decreases interest rates and helps the European economy with increased interest on European assets. This paper investigates Brent and West Texas Intermediate (WTI) for changes in the value of major currencies. Brent is traditionally a European oil index, and oil is produced in Black Sea whereas, WTI is a Texas based U.S. oil index. Both indices are used as international benchmarks of oil. The data for this research is daily between February 2011 and September 2014. The WTI and Brent are represented by variables from NYSE exchange traded funds namely Teucrium WTI Crude Oil ETF (WTI), and United States Brent Oil ETF(BRENT). The currencies analyzed for the study are EUR/USD, USD/CHF, USD/JPY, USD/RUB, USD/SAR and USD/ZAR. The analysis includes unit root tests, vector autoregression (VAR), vector error correction models (VECM), cointegration and Granger Causality. Finally European Energy Policy implications, and opportunities and challenges of oil trade in Euros are discussed.