What happens if Euro becomes primary oil trading currency?

[scriabinop23]

I'm new to the forums. Welcome me; I've been long obsessed with what seems an inevitable devaluation of the US dollar as the world goes towards more equilibrium as far as wealth is distributed.

I'm really fascinated what would happen to the US dollar if crude oil transactions switched primarily away from USD to perhaps the Euro. I'm under the impression (but someone correct me if I'm wrong) that oil bought from opec countries is bought in dollars. Any non-opec transactions involved in US dollars when the United States is not the recipient of the oil? I infer that any exportation or importation of oil between non-opec countries must occur in their preferred currency. So if Russia sells oil to the European union, Russia is gaining Euros. Correct?

The point of this, of course, is that a lot more dollars are floating out there than otherwise would be. What macro effect does this have on the value of the dollar as well as other currencies? Does it give an artificial boost to the dollar?

(in other words, was Iraq's WMD actually their attempt to sell oil for Euros before we decided to take Hussein out, and not actually nuclear/etc WMD?)

 

[bullmarket79]

I would say nations hold excess dollars in reserve and if there no longer as important then yes the value of the dollar would decline because nations would begin replacing them with some other currency.

 

[gnome]

Quote from scriabinop23:

"... was Iraq's WMD actually their attempt to sell oil for Euros before we decided to take Hussein out, and not actually nuclear/etc WMD?)

Quite likely. When countries reject selling oil for dollars the premise of $USD hegemony is threatened.... and all political/economic aspects of American life.

Should any other oil exporter decide to refuse to sell for dollars, they risk the US making up an excuse to attack them, also.

 

[covered_call]

The euro will not become the currency of trade for oil. European countries themselves loathe the thought as it would push the dollar lower and hurt european economies. If it did occur, it would not 'crush' the dollar by any means but it would have a negative affect. The global economy would suffer terribly if the dollar were tumble significantly. don't forget we have an enornous trade deficit. Without this trade deficit, the rest of the world economies would be pathetic. The world lives off of U.S. purchases and if our currentcy went in the tank, we couldn't buy their goods.

If I did see oil start to trade in Euros, I'd strong suspect the world has accepted an alternative energy source was prime to over take oil as the leading source of energy, so in a way, it's a good thing (buy Corn!)

 

[scriabinop23]

Quote from covered_call:

The euro will not become the currency of trade for oil. European countries themselves loathe the thought as it would push the dollar lower and hurt european economies. If it did occur, it would not 'crush' the dollar by any means but it would have a negative affect. The global economy would suffer terribly if the dollar were tumble significantly. don't forget we have an enornous trade deficit. Without this trade deficit, the rest of the world economies would be pathetic. The world lives off of U.S. purchases and if our currentcy went in the tank, we couldn't buy their goods.

thats certainly true. Its fascinating to see how international markets were so hurt by general inflation prospects. Its easy to see everyone is raising rates because energy prices are adding inflationary pressures everywhere.

In fact, I wonder if its been studied how much impact feds' raising rates 1% (inflation fighting policy) compares to $10 (or any other arbitrarily assigned #) increase in crude oil prices (inflationary pressure) on our highly energy dependent economy ? It just seems another quarter or half point of increases will have very little impact in the face of even more expensive oil.


And I'd imagine the reverse would hold true -- if oil backs down and we're left with these higher rates, I imagine business would still do very well. That would be every stock investor's dream. The only thing left to would be the dropping of rates so housing won't pop. I don't imagine that will happen, since it will take much more serious rate hikes (not a percent a two, let alone 25 or 50 basis points - but probably a few more) likely to cut world economic growth to the point where oil/energy demand is reduced.

I don't think the world markets are fretting about interest rate increases as much as they're realizing energy dependence when energy prices are in a raising environment spell a possible end to the good ole days of cheap growth.

In other words, one political blowup, a hurricane, etc (Iran/etc.) leading to the removal of a few million barrels of oil per day on the market spells financial crisis. Never recently has more oil been demanded than supplied to the market. A few million barrels of day is currently the world supply/demand. $100-$150 oil wouldn't shock me if something happened.

If Bernanke realizes this already (which he likely does), I imagine he sees the only solution as being raising rates hikes not just until inflation slows, but until oil consumption and stock investment (which implicitly also helps fuel economic growth, thus energy consumption growth) slows to the point where we aren't as vulnerable to one political or weather shock.

One thing seems inevitable - one thing will slow down oil consumption and dependence first - interest rate hiking policy, or expensive oil.

So thinking this through, I can only imagine the dollar actually strengthening through this agressive policy, ensuring that in fact oil will stay traded in dollars.

One thing for sure - we're in for a good 5-10 year storm in the markets - that is, unless everyone starts driving electric and hybrid cars, nuclear power plants catch on again, the whole atlantic coast turns into a wind farm, or we just go through an economic recession to the point where oil dependence is reduced.

 

[covered_call]

This isn't completely our to the question but remains improbable. Iran suggested prices oil in Euros last year when $ was tanking and they've suggested it before as well. If I'm not mistaken, Europe (even the French) said 'no'.

 

[scriabinop23]

Quote from covered_call:

This isn't completely our to the question but remains improbable. Iran suggested prices oil in Euros last year when $ was tanking and they've suggested it before as well. If I'm not mistaken, Europe (even the French) said 'no'.

Makes me think about it from another perspective. If the dollar tanks another 10%, oil can still go up another 10% and the EU will still be paying the same net cost for oil.

So I assume EU is betting on exactly this occuring.

 

[dan05]

Hi,

I once read an article that specifically analyzed this issue.

I'l try to find it and post it. But basically in the world energy map, there will be an amazing power shift between US and Europe.

Quote from scriabinop23:

I'm new to the forums. Welcome me; I've been long obsessed with what seems an inevitable devaluation of the US dollar as the world goes towards more equilibrium as far as wealth is distributed.

I'm really fascinated what would happen to the US dollar if crude oil transactions switched primarily away from USD to perhaps the Euro. I'm under the impression (but someone correct me if I'm wrong) that oil bought from opec countries is bought in dollars. Any non-opec transactions involved in US dollars when the United States is not the recipient of the oil? I infer that any exportation or importation of oil between non-opec countries must occur in their preferred currency. So if Russia sells oil to the European union, Russia is gaining Euros. Correct?

The point of this, of course, is that a lot more dollars are floating out there than otherwise would be. What macro effect does this have on the value of the dollar as well as other currencies? Does it give an artificial boost to the dollar?

(in other words, was Iraq's WMD actually their attempt to sell oil for Euros before we decided to take Hussein out, and not actually nuclear/etc WMD?)

 

[niceneasy]

i have read the reason u.s. cannot have non u.s.d. denominated oil is also a cash flow thing. 85 million barrels of oil are transacted per day in u.s.d. there are trillions dollars floating around to affect these transactions. if a signifigant % of this float was dumped on the workld market it would be bad news for usd simply from a cash dump perspective.

eally the only compelling reason to own ANY usd is because its the worlds primary currency for the time being.... i get mighty nervous when people are buyind u.s. dollars as a "flight to quality". equally nervousa last week when the only good news propping up the dow was from general motors. gulp....

 

[covered_call]

----Makes me think about it from another perspective. If the dollar tanks another 10%, oil can still go up another 10% and the EU will still be paying the same net cost for oil.

You are inverted. As the dollar depreciates, it makes oil more expensive. It takes more $$$ to purchase the same amount of oil. That is why Iran wanted oil to be paid for in Euros, not $$$ because as $$$$ depreciates, their (Iran's) holdings of $$$ depreciates.