Best Financial Markets Analysis Article Once again everyone is hyperventilating over "secret" moves to trade oil in currencies other than the US dollar. Please consider The demise of the dollar by Robert Fisk.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

Supposedly Robert Fisk knows the plans but "Americans have not discovered the details".

Such "secret" talks surface about once a year and nothing ever happens. Yet, even if these talks led to actual actions, they are irrelevant for the simple reason it does not matter one iota what oil is priced in.

I discussed this concept in Oil Pricing Unit Red Herring on November 18, 2007. At the time everyone was going gaga because Venezuela and Iran would supposedly not take dollars for oil.

Ten 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.

War Over Pricing Unit?

Fisk concludes with "Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq."

Iran has virtually no trade with the US, nor is there US foreign direct investment in Iran. Pray tell what does Iran need to hold dollar reserves for? Iran's statements amount to political hot air and nothing more. It announced something the world already knew, they already held no dollar reserves. Who should care?

Note that it takes less than a second for Forex trades to take place, and 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency. Logically, it makes no difference if US dollars are converted into Euros one second before a purchase or one second after the a purchase.

Given that it is irrelevant what oil is priced in outside of something illiquid like Yap Island stones, the logical conclusion is the US did not go to war over oil being priced in Euros.

Currencies Are Fungible

Let's put the horse in front of the cart where it belongs.

You can get a price of oil in any major currency you want today because all major currencies are fungible. However, pricing oil in a basket of currencies would do nothing but cause confusion. The idea is ridiculous.

Saudi Arabia, China, Japan, and any other country can hold whatever reserves they want in whatever currencies they want regardless of the pricing unit of oil. Reserves are based on trade relationships not pricing units!

Pricing oil in Euros (or even sillier - a basket of currencies) will not cause anything to happen. If pricing unit changes do happen, they will be a result of sentiment changes in regards to existing dollar hegemony and not the other way around.

Dollar Armageddon is not coming over a pricing unit, nor did the US invade Iraq for that reason. The story is nothing meaningless hype.

By Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

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Comments

feral reserve
07 Oct 09, 00:38

mish mash

duh, i beg to differ. oil sold in $ means a lot of dollars are in circulation outside the US. $ are held by other countries for purchasing oil, among other things. If oil sales took place in another currency, demand for foreign holdings of $ would decline, those $ would find their way back to the US, the dollar value would decline (more), and inflation would go up in the US.

Dave
07 Oct 09, 03:18

It does matter in which currency oil is priced!

While it is clearly possible to change $ into other currencies, this does not happen so easily in a world where military pressure is applied.

To suggest that it does not matter in which currency oil is priced does not seem right. In theory, it should not matter, but we do not live in a theoretical world.

Gulf countries are not allowed to massively change their $ reserves. Yes, Iran is an exception. As is Venezuela.

How funny these 2 countries seem the most at risk from foreign military interventions? A coincidence...really?

That said, even if the oil price was replaced by a basket of currencies, this would not mean a crash of the $ as long as other countries (via their central banks) continue to support the $, leading to the sinking purchasing power of currencies altogether (drowned down by the $).

However, the US debt would then more and more by in Euros and other currencies, as it would not be possible to pay only in $ printed in the US...and this would be quite a challenging event for a massively indebted country....used to pay in its own currency thanks to the printing press!

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