Why?

I do wish someone could explain to me why this would happen:

The dollar could collapse if Opec officially admits considering changing the pricing of oil into alternative currencies such as the euro, the Saudi Arabian foreign minister has warned.

It\’s a standard part of the woo woo case: that the US benefits in some enormous manner because oil is traded in dollars. I\’ve seen it stated as fact that the Iraq War was all started because Saddam was about to sell oil in euros, not dollars.

Now it is true that the US gains from the fact that the dollar is the de facto world currency. By some $20 billion a year in seignorage. But against a $12 trillion economy and a getting on for $3 trillion Federal budget, that\’s peanuts.

But I simply don\’t see that oil being priced in another currency makes any difference. Anyone know what the supposed mechanism is?

14 comments on “Why?

  1. If there is no more foreign demand for the US of A dollar,
    what will be value of that piece of paper?

    Qatar concerned over dollar value
    Dubai: 7 hours and 20 minutes ago
    http://www.tradearabia.com/NEWS/newsdetails.asp?Sn=ECO&artid=134060
    SNIP
    Qatar’s deputy prime minister said he was concerned about the diminishing value of the dollar-pegged riyal.
    He becomes the latest [Gulf Cooperation Council] policymaker to question the wisdom of tracking the tumbling US currency.

  2. There will not only be no more foreign demand for the US of A dollar.

    Foreign central banks will also dump their dollar reserves.
    At what price will they be able to dump those reserves?
    Good question!

    Yes, Harry,
    the dollar is floating on the thin air
    out which the Fed is printing it.

  3. Dump dollar? Talks leak out
    By Maher Chmaytelliand Ayesha Daya
    BLOOMBERG NEWS
    11/17/2007
    http://www.stltoday.com/stltoday/business/stories.nsf/0/7EF8B661148F04E086257396000BCF83?OpenDocument

    ==

    In an article “The relationship dollar/oil at the centre of the OPEC Summit”,
    AFP quoted two hours ago
    Yasser Elguindi, chief oil broker at SIG,
    as saying that
    the publicity given to the discussions concerning the currency in which oil will be traded on Monday
    is a fundamental blunder by OPEC.
    Nobody likes to wash her dirty linen in public, Elguindi explained.

    I don’t find the press-release English.
    Here’s the French text:
    La relation dollar/pétrole en ligne de mire au sommet de l’Opep
    Il y a 2 heures
    RYAD (AFP) —
    http://afp.google.com/article/ALeqM5jUGTNkTBMLGXwARbtrQapU4ezEpA
    C’est une gaffe monumentale. Personne n’aime laver son linge sale en public”, a commenté Yasser Elguindi, responsable du courtage pétrole chez SIG.

    Did OPEC do this on purpose?

  4. This gets debated endlessly.

    I think the most likely major effect would come from the likelihood that the oil exporters would shift the majority of their forex reserves into the currency in which they invoiced (say euros), and out of dollars. It might – although this is less likely – see a similar occurrence in the major oil importers who don’t have a major reserve currency, which are Japan and China.

    I don’t hold to the view that the dollar gains nothing from being the major currency of international trade, but I think given the size of the forex markets the impact will be relatively small.

  5. I guess that to some extent the idiots who believe it make it true. If a major oil producer, or a supermodel, or a rapper are seen choosing to transact in a different currency, then that is seen as a signal that dollars are not worth having. It may fundamentally be irrelevant or negligible, but if enough people believe it, then it will have an impact.

  6. Total oil traded per year is around the $3 trillion mark. Activity on the FOREX markets is aroud half a quadrillion dollars per year. At the size of the transactions that occur on the FOREX markets, currency conversion is essentially frictionless. After all, the oil purchased in a given country is paid for with that country’s currency in the end.

    The real danger comes from the fact that the majority of holders of dollars are not American. Switching savings into another currency would have serious effects on the US.

  7. Ivo, Who in the real world might want American wdollars? It may be true that people who sell them things may not want so many dollars in the future. However, people who want to buy things from America have to pay in dollars. And people want to buy a lot of things from America. America is still a vast source of new products, ideas, services and companies. Look at the computer you are using. Look at the iPod. It is a $12 trillion economy. Those nice Arabs need America, especially American weapons manufacturers now Iran is flexing its muscles.

    Above all Americans will still need dollars. As they sit on a $12 trillion economy, that’s a hell of a lot of demand. Much greater than total oil sales.

    So suppose that the Arabs shifting to the Euro lifted the Euro and dropped the dollar. It would not fall to zero because there will still be people who want to buy Coca Cola and iPods – even outside the US. But the rising Euro would make Europe’s weak economy weaker as their exports suffered – and suffered in both directions. The Indians and Chinese are killing their cheap low-tech exports, and now the Americans would steal their high-tech exports as well. As all those cans of Coke and iPods become cheaper, people will buy more of them. Demand for the dollar will rise. And of course a larger earner for Europe is tourism which would be hit very hard by a cheap dollar.

    So this is a blip. It will pass. The Chinese still do not generate demand at home and will have to export. So they will still try to depress their own currency by buying dollars. The more protectionist Europe becomes the more they will rely on America and have to buy even more dollars. Europe will continue to fail to produce new ideas or products and so will have to import technology from America. Indeed the more they harrass pharmacutical research, for instance, the more it will move to the US.

    The world is not going to end. The sky is not going to fall. Sorry to disappoint.

    Besides, the cheap American dollar may well push the Euro over the edge. It is not rational or stable in that it depends on so many countries all co-ordinating their fiscal policies. Honestly. It will break in the end. Wait for the Italians to scream blue murder over this. I’d sell the Euro short if I had any money. In fact I’d love to sell Italian, Spanish, French, Belgian and Greek bonds short and buy German ones. Anyone got a few billions to spare? It is as close as you can get to a no-risk transaction.

  8. In the meantime, the US of A can print as many dollars as it wants to buy oil.

    There is a rather persistent commenter on one of the Russian blogs who can be relied upon to state under every post that because oil is traded in dollars, the US gets its oil for free by printing off more dollars and handing them to the suppliers.

    I remember the time when I used to wonder why the government didn’t make itself richer by ordering the Royal Mint to print more money. This time came to an end when I was about 14.

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