International crude oil sales (and market price quotations) are conventionally conducted in US dollars (USD). Many people believe that this has some positive implications for the USD and the American economy in general, and they refer to the USD as the "Petrodollar". The story goes that the use of USD in international oil transactions means that the USD is an "oil-backed" currency, and the end of USD-denominated oil sales would cause a rapid decline in the value of the USD.
Recently, Iran announced that they had stopped accepting payment for oil exports in US Dollars (USD), and would henceforth only accept Euros (EUR) instead. This was seen by many as a grevious blow to American economic hegomony, and the same people commonly believe that Saddam Hussein's imminent plan to do the same thing was one of the main motivations for the US invasion of Iraq. Anti-American leftists have gleefully reported on the coming abandonment of the "Petrodollar" for years.
However, the idea that the US economy is propped up by the "Petrodollar" is complete nonsense. What matters is how many USD foreigners want to retain, and that in turn is driven by demand for US goods and services (plus other factors). The currency oil is traded in is not one of those factors.
Scenario 1 (USD oil sales): You have USD. Iran accepts payment for oil in USD... but they would rather hold Euros instead. So they trade USD for EUR in the FX market.
Scenario 2 (EUR oil sales): You have USD. Iran is not accepting the Great Satan's money anymore, they only sell oil in Euros now. So you trade USD for EUR in the FX market and buy your oil. Iran keeps the Euros.
What's the difference? There is no difference. You could change the buyer's starting currency from USD to CAD or EUR or rupees or ringits or yen or anything else and there is still no difference. (OK, there is a very, very slight increase in the liquidity of the USD in global FX markets, but the global oil market is NOTHING compared to the global market in FX, it makes very little difference).
American foreign policy and international macroeconomics are interesting things to think about.... the "petrodollar" is no help.
Subscribe to:
Post Comments (Atom)
3 comments:
What's FX? Also, what's going on with all this mortgage underfunding or whatever it's called in the US?
ah bubba... ywhy can't I comprehend money talk. there is somefink wrong with me
FX = "Foreign Exchange" (aka currency trading). The bank has long rows of desks of people who do this 11 hours a day (millions at a time).
Subprime mortgages and asset backed securities based on them are being repriced as people are waking up to the fact that a lot of the original borrowers will be insolvent once house price appreciation stops. Smart people saw this coming a while ago, but market psychology is a funny thing. This is leading to a cascading chain of defaults.... A realizes their assets are worthless, so they don't pay B. B suddenly can no longer pay C.... it's a lot more complicated than that and I don't fully understand it myself I must confess.
Fi, the economic world is a complicated place, but it can be imperfectly understood with a few (highly counterintuitive) basic principles. I have a master's in Economics, I'm in the middle of Bay Street, and I don't understand about 85% of what's going on around me! ;) I have managed to pick up a few basics though.
Post a Comment