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Re: What does it matter if oil is traded in US$ or other?

Unread postby sjn » Sat 11 Aug 2007, 09:28:02

$this->bbcode_second_pass_quote('darren', '[')i]highly trained people
is right
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Re: What does it matter if oil is traded in US$ or other?

Unread postby darren » Sat 11 Aug 2007, 23:37:18

$this->bbcode_second_pass_quote('sjn', '')$this->bbcode_second_pass_quote('darren', '[')i]highly trained people
is right


Are you suggesting that since they are all highly trained, they must all be wrong? How delightfully anti-intellectual! Personally, I have little use for education either, preferring to trust in the wisdom of the common man in all complex matters.

(Look, I have a Master's in Economics.... there is plenty wrong with the discipline, but I think they have some of the basics right, and this "petrodollar" question is about as basic as it gets. I think that economics is the only field where Joe Sixpack feels he has every right to criticize the professionals without making the slightest effort to understand their reasoning first.)
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Re: What does it matter if oil is traded in US$ or other?

Unread postby darren » Sat 11 Aug 2007, 23:41:44

$this->bbcode_second_pass_quote('manu', '
')I guess you are the economic brain in the world. Why is it so hard for you to understand that the U.S. $ is not backed by gold, but it is backed by oil.


In the words of physicist Wolfgang Pauli: "This isn't right. This isn't even wrong."
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Re: What does it matter if oil is traded in US$ or other?

Unread postby CrudeAwakening » Sun 12 Aug 2007, 00:12:03

$this->bbcode_second_pass_quote('darren', '
')$this->bbcode_second_pass_quote('', 'W')ell, as I understand it, it provides artificially increased demand for the USD, since dollars are required for the transaction, keeping the dollar value higher than it would be otherwise. In terms of the effect on the value of the USD, it's almost as if the US was the sole exporter of all of the world's oil.


This is exactly and totally wrong. If the buyer and the seller both prefer to hold Euros but oil sales are denominated by convention in USD, the buyer changes from Euros to USD, buys the oil, and the seller switches the USD back to Euros. The USD gets thrown back into the global FX markets like an unwanted fish.

If you'd bothered to consider my entire post you would have seen that I qualified this remark thus:
$this->bbcode_second_pass_quote('', '.').it does appear to depend to a large extent on oil exporters opting to retain their earnings as USD or USD denominated assets

Unless there is some incentive for oil exporters to reinvest their USD earnings in alternative currencies, then there will be some positive impact on the USD.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby manu » Sun 12 Aug 2007, 03:38:19

[quote="MrBill"]
[quote]IYes, and if it mattered in what currency oil was traded, and you accepted that demand for USD to pay for oil made the USD stronger, then you would have higher oil prices AND a stronger USD needed to pay for it. Not a weaker USD that makes oil in euros, yen, yuan and Sterling cheaper.

That depends on how many $ they decide to print each week, and give out on credit. Again, even from an exchange point of view it matters.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby manu » Sun 12 Aug 2007, 04:01:09

$this->bbcode_second_pass_quote('darren', '
')In the words of physicist Wolfgang Pauli: "This isn't right. This isn't even wrong."


Should I know who Wolfgang Pauli is? How about Joe Sixpack?
Your degree in economics explains it all, you have been brainwashed.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby darren » Sun 12 Aug 2007, 08:59:14

$this->bbcode_second_pass_quote('CrudeAwakening', '')$this->bbcode_second_pass_quote('darren', '
')
If you'd bothered to consider my entire post you would have seen that I qualified this remark thus:
$this->bbcode_second_pass_quote('', '.').it does appear to depend to a large extent on oil exporters opting to retain their earnings as USD or USD denominated assets

Unless there is some incentive for oil exporters to reinvest their USD earnings in alternative currencies, then there will be some positive impact on the USD.


The part of your post I picked on was completely and utterly wrong, it could not be helped or qualified by anything correct you wrote afterwards.... it was still wrong.

In fact, the value of the USD depends ENTIRELY on foreigners (not just oil exporters) willingness to RETAIN USD assets.... which is in turn governed by many factors (and yes, those factors give many good reasons to worry about the USD and many smart economists are duly worried).

The currency in which oil is sold is NOT one of those factors (there's a giant FX market out there... if you need USD or EUR or rupees or whatever to buy oil, you can get them). Two offsetting USD transactions will have no effect on USD (except for an absolutely minute increase in USD liquidity). Changing the timing of a single USD transaction from after the oil sale to before the oil sale has no effect on USD. Therefore the currency that oil is sold in doesn't matter. QED. That's what this thread is about.

$this->bbcode_second_pass_quote('', 'T')hat depends on how many $ they decide to print each week, and give out on credit. Again, even from an exchange point of view it matters.


Yes, monetary policy affects the USD (ie the interaction of the fed funds rate, domestic demand, the banking system, the international macroeconomy, etc etc). But the currency in which oil is sold has no effect on any of those things. Why would it?

$this->bbcode_second_pass_quote('', 'Y')our degree in economics explains it all, you have been brainwashed.


Thanks for proving my point yet again. Economists' arguments can be dismissed out of hand, without even making the tiniest effort to understand them first.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby Euric » Sun 12 Aug 2007, 09:51:22

$this->bbcode_second_pass_quote('MrBill', '.')..... in fact, what does it matter if oil is traded in US$ or other?


Not much anymore.

In the not so distant past, the requirement to use dollars only for oil sales forced everyone to accumulate dollars as reserves and to invest the excess in US stocks and bonds. Thus supporting the US economy at the expense of others. Sure there was nothing keeping anyone from buying other currencies, but the fear of losing value and paying conversion fees kept the major portion of the reserves in dollar.

Now, nations and central banks are willing to take a risk and diversify their dollar holdings. So even if most OPEC nations still accept only dollars, there is less of a chance they will hold onto those dollars and use them to support the American economy.

Allowing for the sale of oil in other currencies would only accelerate the trend away from the dollar and facilitate its collapse.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby Euric » Sun 12 Aug 2007, 10:04:38

$this->bbcode_second_pass_quote('IrrationalExuberanceMonky', '
')No you don't, if I wanted to buy a million barrels of oil and I went to say Saudi, Russia, Libya or whoever and I only had Euros/Yen would they say NO DAS IST VERBOTEN DOLLAR ONLY COMPRENDE?

You're nuts. :roll:


That depends. They may take them if they needed the money badly. If the US made a threat that accepting payment in currencies other then the dollar would mean no more military equipment then they could insist on dollars only.

Then again, they could tell the Americans they will buy their future equipment with euros from France and Russia or whoever else is selling them.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby manu » Sun 12 Aug 2007, 10:30:26

Yes, or even better, they could bomb the country into oblivion or back to the stone age, as P.Bush would say.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby manu » Sun 12 Aug 2007, 10:38:32

The Fed can also manipulate the markets (oil futures) when they are in $, and the Fed is printing $.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby CrudeAwakening » Sun 12 Aug 2007, 18:36:02

$this->bbcode_second_pass_quote('darren', '
')The part of your post I picked on was completely and utterly wrong, it could not be helped or qualified by anything correct you wrote afterwards.... it was still wrong.

There is a two-step argument involved here. All I was saying was that the first step (exchange of currencies for the USD) raises the value of the USD, something of a no-brainer. Your argument appears to rest entirely on the assumption that all of those USD will be exchanged back into another currency. Obviously, there would be no net effect on the USD value if that were the case. But history shows that much of these "petrodollars" have been retained and reinvested as USD assets, and of course there are many reasons why this has been the case, most if not all of which would pertain even if oil was priced in another currency.

But unless you can show that the volume of petrodollars retained as USD assets is equivalent to the value of USD assets that oil exporters would choose to invest in if oil were priced in some other currency, then it seems there is a case to answer? Or, in other words, if the world switched to, say, a petroeuro, would there be no net change in global holdings of USD assets? This seems to be the crux of the matter?
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Re: What does it matter if oil is traded in US$ or other?

Unread postby jedinvest » Mon 13 Aug 2007, 00:05:23

$this->bbcode_second_pass_quote('', 'd')arren wrote:

$this->bbcode_second_pass_quote('', 'I')n the words of physicist Wolfgang Pauli: "This isn't right. This isn't even wrong."


Should I know who Wolfgang Pauli is?


Any economist who can correctly quote famous physicists gets my vote of confidence. The physicist meant that the answer has to at least be in the ballpark of plausibility.

I incorrectly (without too much thought that is) also assumed that what currency oil was sold in is significant in itself for that currency. It is probably significant only in that there is some stability implied by this relationship: That the Saudi will continue selling oil at the USD rate. The Saudis clearly do so because of the U.S. military presence on the high seas (and on land as well). I wonder if that is why China does so as well?? My other thought is that China does not want to reevaluate its currency relative to the USD in order to insure the continued technology flow from the West to the East. At some point (soon), they will have all our factories and so the seventh fleet will be the only remaining agent of influence of the U.S.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby MrBill » Mon 13 Aug 2007, 04:14:55

$this->bbcode_second_pass_quote('manu', 'T')he Fed can also manipulate the markets (oil futures) when they are in $, and the Fed is printing $.



The Fed can offer money at 5.25% through its Open Window operations. They can sell tbills and take free cash out of the market. Or they can buy tbills and inject liquidity into the market. But they cannot manipulate oil markets.

Crude is produced and consumed around the entire world in a variety of local currencies over which the Fed has no control. They can only influence the value of the USD vis a vie these currencies by their own anti-inflationary fighting credentials (or lack of them).

It is the global supply and world wide demand for crude oil and petroleum products that determines their price. Not the Fed. If the Fed screws up and adds too much money supply to the market then that is likely to weaken the USD making oil cheaper in yen, euros of Sterling, for example.

However, then that excess money supply flows somewhere, perhaps Asia that grows more quickly, and that extra economic growth adds to the demand for crude oil and products, so the price then goes up in real terms. But due to GDP growth in Asia, not because the Fed manipulated the price of oil directly by printing US dollars.

If oil producers find increased demand for their oil due to excess global liquidity created by the Fed (and the US government deficits) then they are quite happy. Still, they might not want to hold their savings in US dollar if they perceive it is likely to weaken further.

So once again, you get a very clear break between making oil sales in US dollars and the conscious decision to save your export earnings in US dollars. They are clearly different.

If you produce your oil in Iranian dinars, sell it in US dollars internationally, and then sell US dollars to buy dinars, then you have created zero extra demand for US dollars, but you have used it as a transaction currency, while choosing to re-invest your revenues domestically.

But the same would hold true if you sold that oil in euros. The difference is in which currency you decide to hold your profits. If the Fed prints US dollars (a simplification) then they might decide that the US dollar is not a good store of value and choose euros or dinars instead.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby darren » Mon 13 Aug 2007, 21:20:36

$this->bbcode_second_pass_quote('CrudeAwakening', 'O')r, in other words, if the world switched to, say, a petroeuro, would there be no net change in global holdings of USD assets? This seems to be the crux of the matter?


Yep, that's exactly right, and I assert that if the world switched to the petroEuro tomorrow (for whatever reason), there would be no net change in global holdings of USD assets. Why would there be a change? Portfolio managers/central banks/etc who do not have an immediate need for a specific currency to buy something from country X like to hold on to foreign currencies that are liquidly traded and have stable and well regarded monetary policy (ie Argentina's currency is not too popular ;)... to what extent that is true of the USD may change in the future, but is utterly unaffected by the currency oil is traded in as far as I can tell, both in theory and empirically.

If Iran wants to spit in Uncle Sam's eye, they can dump their USD holdings, yes (or modify the mix, or simply stop adding to them, or whatever)... but the decision to do that is COMPLETELY independent of what currency they are accepting for oil sales. They could continue to sell oil in USD and then promptly dump the USD for Euro, and it would be as if they sold oil in Euros in the first place.

Please remember that the global FX market in the major currencies is absolutely freaking huge, and the transaction costs are quite low... there are a thousand trading desks in the world that are eagerly vying for your FX business. There is no need whatsoever to "hold on to USD to be sure you can buy oil".
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Re: What does it matter if oil is traded in US$ or other?

Unread postby darren » Mon 13 Aug 2007, 21:24:17

$this->bbcode_second_pass_quote('CrudeAwakening', 'O')r, in other words, if the world switched to, say, a petroeuro, would there be no net change in global holdings of USD assets? This seems to be the crux of the matter?


Yep, that's exactly right, and I assert that if the world switched to the petroEuro tomorrow (for whatever reason), there would be no net change in global holdings of USD assets. Why would there be a change? Portfolio managers/central banks/etc who do not have an immediate need for a specific currency to buy something from country X like to hold on to foreign currencies that are liquidly traded and have stable and well regarded monetary policy (ie Argentina's currency is not too popular ;)... to what extent that is true of the USD may change in the future, but is utterly unaffected by the currency oil is traded in as far as I can tell, both in theory and empirically.

If Iran wants to spit in Uncle Sam's eye, they can dump their USD holdings, yes (or modify the mix, or simply stop adding to them, or whatever)... but the decision to do that is COMPLETELY independent of what currency they are accepting for oil sales. They could continue to sell oil in USD and then promptly dump the USD for Euro, and it would be as if they sold oil in Euros in the first place.

$this->bbcode_second_pass_quote('', 'M')r. Bill: So once again, you get a very clear break between making oil sales in US dollars and the conscious decision to save your export earnings in US dollars. They are clearly different.


Mr. Bill is exactly right.

Please remember that the global FX market in the major currencies (YEN, EUR, USD, to a lesser extent GBP) is absolutely freaking huge, and the transaction costs are quite low... there are a thousand trading desks in the world that are eagerly vying for your FX business. There is no need whatsoever to "hold on to USD to be sure you can buy oil".
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Re: What does it matter if oil is traded in US$ or other?

Unread postby manu » Tue 14 Aug 2007, 02:48:47

$this->bbcode_second_pass_quote('MrBill', '')$this->bbcode_second_pass_quote('manu', 'T')he Fed can also manipulate the markets (oil futures) when they are in $, and the Fed is printing $.



The Fed can offer money at 5.25% through its Open Window operations. They can sell tbills and take free cash out of the market. Or they can buy tbills and inject liquidity into the market. But they cannot manipulate oil markets.

Crude is produced and consumed around the entire world in a variety of local currencies over which the Fed has no control. They can only influence the value of the USD vis a vie these currencies by their own anti-inflationary fighting credentials (or lack of them).

It is the global supply and world wide demand for crude oil and petroleum products that determines their price. Not the Fed. If the Fed screws up and adds too much money supply to the market then that is likely to weaken the USD making oil cheaper in yen, euros of Sterling, for example.

However, then that excess money supply flows somewhere, perhaps Asia that grows more quickly, and that extra economic growth adds to the demand for crude oil and products, so the price then goes up in real terms. But due to GDP growth in Asia, not because the Fed manipulated the price of oil directly by printing US dollars.

If oil producers find increased demand for their oil due to excess global liquidity created by the Fed (and the US government deficits) then they are quite happy. Still, they might not want to hold their savings in US dollar if they perceive it is likely to weaken further.

So once again, you get a very clear break between making oil sales in US dollars and the conscious decision to save your export earnings in US dollars. They are clearly different.

If you produce your oil in Iranian dinars, sell it in US dollars internationally, and then sell US dollars to buy dinars, then you have created zero extra demand for US dollars, but you have used it as a transaction currency, while choosing to re-invest your revenues domestically.

But the same would hold true if you sold that oil in euros. The difference is in which currency you decide to hold your profits. If the Fed prints US dollars (a simplification) then they might decide that the US dollar is not a good store of value and choose euros or dinars instead.


My arguement here is that the Feds do control other currencies as they see fit. China is not in full agreement with them nor is Russia. They do control the oil markets because they control OPEC. By your arguement it would make no difference if the Saudis only exchanged their oil for gold. The $ would still be used in transactions all over the world the same as it is now. I think not. I do agree that what you do with the petro $ does also make a difference. Let's say the Saudis decided to build a MidEast Bank and only take gold for oil and keep it there instead of put it in a European or U.S. Bank. Iran and Ven. are bucking the system and the powers that be want change in both countries. When the Shah of Iran was in power, Cheney, Wolfowitz,ect. gave him nuclear technology. Now that Iran is not playing ball, they want to attack them over it. So I guess as Wolfgang Pauli would say " its all relative".
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Re: What does it matter if oil is traded in US$ or other?

Unread postby MrBill » Tue 14 Aug 2007, 03:47:43

manu wrote:
$this->bbcode_second_pass_quote('', 'M')y arguement here is that the Feds do control other currencies as they see fit. China is not in full agreement with them nor is Russia. They do control the oil markets because they control OPEC. By your arguement it would make no difference if the Saudis only exchanged their oil for gold. The $ would still be used in transactions all over the world the same as it is now. I think not. I do agree that what you do with the petro $ does also make a difference. Let's say the Saudis decided to build a MidEast Bank and only take gold for oil and keep it there instead of put it in a European or U.S. Bank. Iran and Ven. are bucking the system and the powers that be want change in both countries. When the Shah of Iran was in power, Cheney, Wolfowitz,ect. gave him nuclear technology. Now that Iran is not playing ball, they want to attack them over it. So I guess as Wolfgang Pauli would say " its all relative".


Once you get into geo-politics and what financial interests a country feels compelled to protect then this is no longer economics. I am not saying who gave who nuclear technology. Or who fought against whom. That is literally history. If you go back far enough most countries have been both allies and enemies of one another at one point or another. The examples are too numerous to list here. We all recognize the geo-political importance of energy, and oil specifically. And many countries dislike a uni-polar world and seek their own advantage through whatever means available to them.

But the reality is that with freely converted currencies (CHF, EUR, GBP, SGD, USD, etc.) it does not matter in which oil is priced as a transaction currency. What matters in which currency the revenue is re-patriated or saved.

Of course, if a country lacks a convertible currency, employs capital controls, and have an under-developed domestic banking system then it is not likely to be a popular choice as a transaction currency or a place to invest.

Would the US like to fund its $2.1 billion per day current account deficit? Yes. Clearly they would like that. That means that relative to everyone else they have to be at least nominally attractive as an investment destination in order to cover that deficit.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby darren » Tue 14 Aug 2007, 22:22:12

$this->bbcode_second_pass_quote('manu', '
') By your arguement it would make no difference if the Saudis only exchanged their oil for gold. The $ would still be used in transactions all over the world the same as it is now. I think not.


You're wrong. The USD would be used all over the world even if the Saudis exchanged oil for gold only.

There is no difference between: the Saudis sell oil for USD and buy gold with the USD.
and
the Saudis sell oil for gold and keep the gold.

I'll say it again: Both empirically, and in theory: The asset class or currency in which they KEEP their earnings is EVERYTHING. The asset class or currency which they accept in EXCHANGE for oil is IRRELEVANT.
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Re: What does it matter if oil is traded in US$ or other?

Unread postby manu » Wed 15 Aug 2007, 04:20:29

O.K. I will accept defeat from Mr.Bill and Darren if you can answer these questions. Why did Russia change to accepting only Rubles for their oil?
Why did the U.S. put pressure on the U.N. to put sanctions on Iran as soon as they decided to take Jap. yen?
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