[Euric]

Why can't oil be priced in SDRs? link

SDR valuation: The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-value of the SDR is posted dailyon the IMF's website. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

Even though it is US dollar based (for the time being) it would be a way to introduce at least three other currencies into the sale of oil. Possibly, SDRs can be expanded to include Chinese Yuan, Swiss Francs, Australian and Canadian dollars, and any other currency that is stable. Thus the price of oil to each nation whose currency is in the basket would be determined by the relative amount of their currency in the basket to the other currencies. Thus, if the dollar weakens the price of oil to those paying in dollars would increase and they could chose a different currency in their reserves to pay the oil bill in.

Would such an arrangement work?

[MrBill]

There is no problem with pricing oil in SDRs, however it does present payment problems. For instance, last time I looked the SDR was composed roughly of

35% euro
41% usd
12% yen
12% gdp

So anyone wanting to purchase oil (from who by the way?) would have to have accounts in these four currencies and make payment in each of these four currencies. This is not very efficient.

Unless you have other goods & services produced and sold in SDR units you always have to break out its component parts. That means many businesses and individuals would have to have multiple currency bank accounts and the ability to easily shift amounts between accounts, as I assume they will still mostly likely earn their salary in one main currency. You'll turn every business and individual into a currency speculator or at the very least a keen participant. Do they have the time and resources to make themselves aware of all the developments that affect currency markets on a daily basis?

I know in some countries with semi-converted currencies that individuals can become very aware of currency fluctuations. For example, in Russia almost everyone knows the value of the ruble in dollars and euros and keeps this in mind when buying or importing goods. Maybe not a bad thing.

Okay, but suppose you have oil in SDRs (again who is the seller?) won't other countries want to have their currency also included in the basket? The IMF has 184 members. If you have oil priced in SDRs and each major country wants their currency included in the basket, would it not become a nightmare to monitor and execute transactions? Any payment system has to be transparent and efficient to be widely adopted.

Who would monitor all oil sales and purchases and administer this program in SDRs? I see administrative problems in such a plan. A Big Brother Agency overseeing all oil sales & purchases. I take it many do not trust the World Bank to be unbiased and fair and accuse it of being a policy arm of the US government and Wall Street. Imagine the uproar if such an Agency was also now responsible for all sales of oil which is now quite decentralized and controlled by hundreds and thousands of firms, so no one firm, other than maybe OPEC, can exert direct influence over the price or availability?

Technically, you can price oil in any unit you wish, including the SDR. The devil is in the details.