The Oil Drum

45 comments on Who will save us from a 2005 peak?

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Jack on November 28, 2005 - 10:19am

The fear, from an American standpoint, would be that the oil producing countries decided not to hold US denominated assets. In other words, they took back their Petrodollars and invested them elsewhere (I would guess a combination of European, Asian, and Middleastern assets would be most likely).

This would have the same impact that would occur if the Chinese did the same thing. The dollar would fall, US interest rates would go up, and our economy would suffer. I am not claiming that this would be a good thing, but it is entirely unrelated to the Iranian bourse or dollar pricing of oil. It is allocation of assets, which I noted in my original post was a realistic concern.

However, both Asian economies and oil producers do continue to invest in the US for a reason and won't divest unless that reason changes. In either case, their currency and exports would get more expensive and their best trading partner's economy would be damaged.

I recognize that the US benefits from having the global currency and that our current fiscal position makes us vulnerable to changes in the flow of capital. However, this has little to do with the recurrent claim that plans to change the currency in which oil is priced is a major economic issue or the cause of wars.

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joule on November 28, 2005 - 11:20am

International currency exchange dynamics is not something I know a whole lot about, so maybe some of these question are off base.

But it would seem to me that if I were a Middle Eastern oil producer and I sell you a barrel of oil on the Iranian bourse and receive euros instead of dollars, would I not be far more inclined to park those euros in euro-denominated assets rather than have to exchange my euros for dollars, possibly at an unfavorable exchange rate?

Looking at the flip side of this, if you, as a US oil purchaser, have to convert your dollars into euros to buy my barrrel of oil, might that not put you in a less favorable position, again due to possibly unfavorable exchange rates?

And lastly, for those Middle Eastern (and other countries) that are becoming increasingly squeamish about having so much money in US assets, doesn't trading on an Iranian bourse make it all that much easier to avoid US assets?

While I'm not sure this is a big enough issue for the US to start a war over, I don't see how an Iranian bourse can have anything but a negative impact on the US.

Again, I have an open mind about this, and if I am wrong I would welcome being shown where so.

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Luis de Sousa on November 28, 2005 - 11:47am

Joule has somewhat touched the point. The main reason for a country like Iran to put petrodollars away is that they don't have trade with the US, their major partners are EU and Japan. By negotiating with EU in euros, for instance, they would eliminate the risks of currency fluctuations.
Now you have to understand that there are many other countries in the same situation. One of them being the big bear, Russia.
Another consideration is that by looking to the current US economic situation (growing deficits and so on) one wouldn't think owning US assets a good idea, unless of course you'd have to purchase oil.
Also you have to consider the psychological effects of such an event. If you're a central banker with 70% of your reserves in petrodollars, and you get suspicious of a coming dollar fall what would you do? That kind of fears can really drive the market, like in 2004 as more the dollar fell, more dollars where dumped in the open; until of course Greenspan made up is mind. Now imagine Trichet following his steps.
Finally I'd like to point out that a dollar fall won't be good to anybody (at least I don't see how). Besides the obvious consequences for the US, let's suppose that a major shift is made to the euro, that would lead to European unemployment rates which I prefer not to foresee.

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LevinK on November 28, 2005 - 4:18pm

I think you are totally off base here.
If oil starts trading in euros:

There will be no reason for the oil producing countries to lose millions from the conversion to USD.
What is thousand times more important - there will be much less incentitive for every other country to accept USD and to invest in USD assets. If I were a buyer and oil traded in euros, I would hold euros on my account to hedge against exchange rate risk and to avoid conversion charges. And if I knew oil would become scarce I would hold even more euros to have an insurance against future price shocks. Don't be fooled by the price; the real value of oil is not equal to half a GSM, and everyone knows it.
Just to mention here that the whole Breton-Woods system imposing freely tradable currencies is tied with the petrodollar system to force the countries to hold huge reserves of USD for two purposes:

- to protect their domestic currencies from currency runnups (predicated by the Breton-Woods system)
- to buy oil
Reason 1 weakened with the appearance of the euro; can you imagine what will happen if reason 2 also disappears? The resulting shift could be devastating; the world is soaked with 4 trillion of the greenbacks and there is absolutely nothing to cover for them here at home.