Oil prices: Dollar vs Euro

[bobman]

Hey there,

This post was inspired by the "Fuel Prices..." thread

My question is this: what would be the short- and long-term impact on the USA if oil were bought and sold in Euros instead of US Dollars? I assume it would be negative, but why? I would guess that any importer of oil must have large dollar reserves in order to do the buying, so would such a shift cause a free-fall in the dollar as countries sell off their stockpiles of dollars to buy Euro's? Or do the amounts used to purchase oil pale in comparison to a nations stratigic currency reserves?

As a secondary question, what would be the likelyhood of such a Dollar-to-Euro switch happening? What could be a trigger event for such a change?

Apologies if this has been discussed before, I did a few searches and didn't get any results.

Cheers,
bobman

 

[Rob Lister]

Hey there,

This post was inspired by the "Fuel Prices..." thread

My question is this: what would be the short- and long-term impact on the USA if oil were bought and sold in Euros instead of US Dollars? I assume it would be negative, but why? I would guess that any importer of oil must have large dollar reserves in order to do the buying, so would such a shift cause a free-fall in the dollar as countries sell off their stockpiles of dollars to buy Euro's? Or do the amounts used to purchase oil pale in comparison to a nations stratigic currency reserves?

As a secondary question, what would be the likelyhood of such a Dollar-to-Euro switch happening? What could be a trigger event for such a change?

Apologies if this has been discussed before, I did a few searches and didn't get any results.

Cheers,
bobman

And apologies to you for asking what might be a derailing question. If you assume the impact would be negative, but don't know why, then why do you assume it?

Minor derail but I just wanted to know. I personally don't think it would have a long term negative impact, except on OPEC if they decided to continue with it when (or if) it drastically falls. I think this because I believe the Euro is currently experiencing a bubble insofar as it is treated as a commodity. I could easily be very mistaken. It appears to be a trendy investment more than anything else.

 

[Bjorn]

My question is this: what would be the short- and long-term impact on the USA if oil were bought and sold in Euros instead of US Dollars?

There are trillions of dollars kept outside the US, a big chunk of them because oil is traded in dollars. Most of these "petrodollars" never come "home" and this is giving the US a financial advantage.

If oil should be traded in Euro (or any other currecy than dollars) from tomorrow, it would almost certainly have a very negative effect on the value of the dollar since many countries would sell large amounts they would not need anymore.

As a secondary question, what would be the likelyhood of such a Dollar-to-Euro switch happening? What could be a trigger event for such a change?

I don't know. Iraq tried, Iran is trying, Putin mumbled about it a few years ago, some countries barter oil for goods to bypass the dollar. But is it in the best interest of other countries to weaken the dollar even more?

 

[boooeee]

I remember Drooper (who I think is an economics professor) chimed in on this issue once. If I recall correctly, he said it doesn't matter what currency oil is traded in (dollars, euros, rupees, itunes credits, etc.). This kind of makes sense to me, so it must be wrong.

Bjorn - You mentioned that countries would start selling their dollars if this happened. But, doesn't that imply that somebody is buying them? The amount of dollars in circulation still stays fixed, right?

 

[bobman]

If you assume the impact would be negative, but don't know why, then why do you assume it?

Sorry, the basis for my assumption was in the sentance that followed it, though I guess I could have made it more clear. To rephrase, countries who had Dollar stockplies in order to be able to purchace oil would no longer need those reserves and would exchange them for Euro's, thus causing a fall in the value of the Dollar. This seemed like a negative outcome for the USA, tho I am by no means an economist!

I personally don't think it would have a long term negative impact, except on OPEC if they decided to continue with it when (or if) it drastically falls. I think this because I believe the Euro is currently experiencing a bubble insofar as it is treated as a commodity

So, you think the Dollar will be more stable over the long-term than the Euro? What do you base this on? If oil were bought and sold in Euro's, wouldn't this actually help the stability of the Euro?

I don't know. Iraq tried, Iran is trying, Putin mumbled about it a few years ago, some countries barter oil for goods to bypass the dollar. But is it in the best interest of other countries to weaken the dollar even more?

So what is stopping a country from just switching to Euro's? Do they need approval from OPEC?

bobman

 

[Mycroft]

Bjorn - You mentioned that countries would start selling their dollars if this happened. But, doesn't that imply that somebody is buying them? The amount of dollars in circulation still stays fixed, right?

The theory is that if countries are selling dollars but nobody is buying them, then supply and demand will cause the value of dollars to drop.

Personally I'm skeptical. The value of dollars is the same as the value of any nations currency, it allows the holder to do business in that country.

 

[Matabiri]

I remember Drooper (who I think is an economics professor) chimed in on this issue once. If I recall correctly, he said it doesn't matter what currency oil is traded in (dollars, euros, rupees, itunes credits, etc.). This kind of makes sense to me, so it must be wrong.

IANAE but... surely the majority of currency that is used for transfers like this is immaterial - it's figures in a computer, and therefore the currency of the quoted price makes no difference. All that's being traded are credit markers of some sort that currently happen to be refered to as "dollars"*.

Bjorn - You mentioned that countries would start selling their dollars if this happened. But, doesn't that imply that somebody is buying them? The amount of dollars in circulation still stays fixed, right?

If all else fails, I'd have thought the US Government would buy dollars to maintain the price, if they thought it was too low. For a case of this going badly wrong, see Black Wednesday.

(* This is not a comment on the functioning of dollars as a currency, but the nature of international currency transfers.)

 

[Bjorn]

Re: Re: Oil prices: Dollar vs Euro

I think this because I believe the Euro is currently experiencing a bubble insofar as it is treated as a commodity. I could easily be very mistaken. It appears to be a trendy investment more than anything else.

The dollar isn't falling just compared to the Euro, it is falling compared to most major currencies. It's not Euro being a "trendy" investment, but rather dollars being an untrendy (and not profitable) one.

By the way, currency trading must be one of the most competitive and professional businesses in the world - I'm not sure if "trendy" is part of decision-making there. That, however, is derailing.

 

[Matabiri]

The theory is that if countries are selling dollars but nobody is buying them, then supply and demand will cause the value of dollars to drop.

Personally I'm skeptical. The value of dollars is the same as the value of any nations currency, it allows the holder to do business in that country.

But this does happen - currently the value of the dollar is low because US interest rates are low and the economy isn't growing fast, so there is little point in investing there. Hence, investors don't want dollars.

 

[Bjorn]

The theory is that if countries are selling dollars but nobody is buying them, then supply and demand will cause the value of dollars to drop.

Which is how the currency market works, not just in theory.

Personally I'm skeptical. The value of dollars is the same as the value of any nations currency, it allows the holder to do business in that country.

There is a huge difference between dollars and other currencies - dollars don't just allow you to do business in the US, it is a necessity if you want to trade oil even if the two countries involved are on another continent.

Countries have paid for those dollars by selling something to the US without getting back any goods from us. If they don't need them anymore and use them to buy something in the US, we would basically get three-four trillion dollars "worth" of paper money recycled into the US economy - and would have to give them products of the same value.

 

[Bjorn]

IANAE but... surely the majority of currency that is used for transfers like this is immaterial - it's figures in a computer, and therefore the currency of the quoted price makes no difference. All that's being traded are credit markers of some sort that currently happen to be refered to as "dollars"*.

No. If you are an oil importing country (most countries are) you have to pay your oil. In dollars.

Those dollars come from somewhere, and that somewhere is the US. Someone got them by selling something to the US.

 

[bobman]

IANAE but... surely the majority of currency that is used for transfers like this is immaterial - it's figures in a computer, and therefore the currency of the quoted price makes no difference

Well, except that the currency had to be issued by a bank to be in circulation in the first place, and thus is linked to the ability of that bank to "pay" the value of the currency. Doesn't that mean that the currency used for these transfers does matter? Perhaps I misunderstand, as IANAE either

bobman

 

[aerocontrols]

But this does happen - currently the value of the dollar is low because US interest rates are low and the economy isn't growing fast, so there is little point in investing there. Hence, investors don't want dollars.

For some reason I feel quite certain that you're wrong about our economic growth.

Can other large economic entities post numbers like this?

US latest figures
(bumped up estimates from 3.5% annualized to 3.7%)

Eurozone weak growth
(Euro zone GDP grew just 0.2% in both the third and fourth quarters, after growth of 0.7% in the first quarter and 0.5% in the second.)

Germany
(Negative growth in the fourth quarter, very little growth expected in the upcoming first quarter)

 

[Matabiri]

Well, except that the currency had to be issued by a bank to be in circulation in the first place, and thus is linked to the ability of that bank to "pay" the value of the currency. Doesn't that mean that the currency used for these transfers does matter? Perhaps I misunderstand, as IANAE either

Well... dollars aren't; they're fiat currency. They're worth money because the government says they are. Frequently "gold" currencies, like sterling, will also have far more currency in circulation than the bank can "pay". Currency, these days, doesn't have an intrinsic value.

(I suspect the wiki article contains some handy stuff, but don't have time to read it in detail now.)

 

[Matabiri]

For some reason I feel quite certain that you're wrong about our economic growth.

Well... I said "not growing fast", not "not growing". Compare to Asian growth (expected to top 7% on average) and emerging African oil sources - Equatorial Guinea is growing at 20%. Also, no handy graphs, but Russia's economy has been growing faster than the US's, at least for the last five years.

Also, as I said, US interest rates are low.

There are better places to invest large amounts of money at the moment. I had some savings in dollars until recently; the return was pitiful even in equity-based investment accounts.

 

[bobman]

They're worth money because the government says they are

So then the value of the currency is linked to the confidence the holder has in the government and/or economy of the issuing country. So again, the currency used does seem to matter.

 

[aerocontrols]

Well... I said "not growing fast", not "not growing". Compare to Asian growth (expected to top 7% on average) and emerging African oil sources - Equatorial Guinea is growing at 20%. Also, no handy graphs, but Russia's economy has been growing faster than the US's, at least for the last five years.

Also, as I said, US interest rates are low.

There are better places to invest large amounts of money at the moment. I had some savings in dollars until recently; the return was pitiful even in equity-based investment accounts.

I think we're talking about two different things. Why should the dollar be declining relative to the Euro? Certainly it's not because US growth is lower than EC growth. Are our interest rates lower than theirs? I'm not sure which interest rates are directly comparable, but it doesn't seem to be the case.

Emerging markets can see periods of high growth, surely, but our growth is pretty high, historically.

 

[Matabiri]

I think we're talking about two different things. Why should the dollar be declining relative to the Euro? Certainly it's not because US growth is lower than EC growth. Are our interest rates lower than theirs? I'm not sure which interest rates are directly comparable, but it doesn't seem to be the case.

Hmm... relative to the Euro, I'm not entirely sure. It certainly implies that, for some reason, the Euro is a more attractive investment. This may just be because the dollar is thought to be less stable, perhaps due to the perceived possibility of a dollar collapse connected to the US's debt and trade deficit - we'd really need an economist to explain why this is though.

Currently in the UK the central bank base rate is 4.75% and across the Eurozone, 4.5%. In the US it's 2.5%.

My grasp of exactly how these affect large-scale investments is hazy, although I think the base rate is what you'd expect, roughly, on cash investments and you'd certainly expect to beat it investing in equities. It also gives a rough guide to inflation in the country in question.

 

[bobman]

Hmm... relative to the Euro, I'm not entirely sure. It certainly implies that, for some reason, the Euro is a more attractive investment. This may just be because the dollar is thought to be less stable, perhaps due to the perceived possibility of a dollar collapse connected to the US's debt and trade deficit - we'd really need an economist to explain why this is though.

So, if the Euro is a more attractive investment, would this encourage a country to switch from the Dollar to the Euro for oil trade? What other advantages would such a switch bring, other than some independence from the Dollar?

 

[Bjorn]

So, if the Euro is a more attractive investment, would this encourage a country to switch from the Dollar to the Euro for oil trade? What other advantages would such a switch bring, other than some independence from the Dollar?

Imagine I have the choice between holding a hundred million $US or the equivalent value in Euros (I don't have the choice right now because only dollars can buy oil).

If I think the dollar will (continue to) fall, and oil become more and more expensive measured in dollars, it would be a lot better for me to change all my dollars into euros - since oil prices would be (more) stabile measured in that currency.