The Oil Drum

I have no doubt that the ability of the US to run deficits and have others fund (not pay for) them is coming to an end, probably fairly soon. I do think the dollar is headed down and could possibly face some threat regarding its reserve currency status, although it is hard to see what would replace it.

The point is that it makes almost no difference what currency oil prices are denominated in. Firstly, oil can only be priced in one currency. All other citations are just a translation, or else there are arbitrage opportunities.

However, the price is just a price. Oil can be quoted at $70/barrel and paid for in Euros, Yuan, or pretzels if the two parties agree. I haven't seen any one produce evidence that EU countries pay Russia, Saudi or Iran in dollars.

However, even if they did, it still does make any difference. The value of the dollar is propped up by foriegn countries holding US assets, such as treasury notes. If countries reduce these holdings, which is quite possible, then the dollar will be threatened. If they maintain the holdings, it won't.

Price in this case is really just a measuring unit. Saying that quoting prices in Euros would hurt the US economy is like saying that converting highway measurements from miles to kilometers would threaten the auto industry.

Iran does not want to touch dollars because the US places restrictions on their ability to move capital.

I argued at great length almost two years ago that Iran would never successfully launch and oil bourse. I argued a year ago that Russia would not be able to launch a bourse that serves as anything beyond a local clearing house. So far this seems accurate. The bourses and dollar pricing of oil are non-issues and conspiracy fodder.

So, yes, the dollar could weaken, crash and/or cease to be the world's reserve currency. However, the threat comes from waning demand for US denominated assets, not from how oil is priced or traded.