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  • Oil Pricing in Dollars: 10 Simple Facts

Economy

18 Nov 2007

Oil Pricing in Dollars: 10 Simple Facts

  • By Bill Conerly
  • In Economy

The price of oil is quoted in dollars.  Does this practice have any real impact on anything?  Here are Mish’s 10 Simple Facts:

1) Oil is priced in dollars.
2) Oil trades in Dollars and Euros right now in spite of the pricing unit being dollars. OPEC has recently admitted this fact.
3)
Clearly oil does not have to be priced in Euros to trade in Euros, or
for that matter priced in Yen to trade in Yen. The same applies to any
major currency.
4) Neither Venezuela or Iran hold any dollar
reserves. To the extent that either is taking trades in dollars, there
is clearly nothing forcing them to hold dollars. By extension there is
nothing forcing any OPEC country to hold dollars if it doesn’t want to.
5)
It takes less than a second for Forex trades to take place. 24 hours a
day, 7 days a week, one can sell any currency they want and buy any
other currency.
6) The above logic applies to any currency and any commodity.
7)
Nothing is stopping anyone at any time anywhere from selling dollars
for whatever currency they want to hold. Nor is anything stopping
anyone anywhere at any time from selling any major currency for U.S.
Dollars.
8) Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.
9)
Dollars are held (or not held) for reasons totally unrelated to pricing
unit. Some of those reasons are political, some are based on sentiment,
some on trade patterns and trade relationships, and some to suppress
the value of local currencies to improve exports.
10) Currencies
float and so do the price of oil and commodities. Pricing oil (or any
other commodity) in Euros will not cause a price change in dollars.
Look at gold which is simultaneously priced in everything as proof.

Read the whole post here.

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