Oil prices: Dollar vs Euro

[pgwenthold]

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.

I remember the first time that oil hit $50/barrel a year or so ago, I did a comparison of the price in dollars and euros. Adjusting for inflation, I found that while the price in dollars was hitting record highs, it was still below pre-9/11 levels in Euros. Thus, much of the record high oil price was a result of the weakness of the dollar.

Edited to note: I'm not sure I adjusted for inflation, on second thought.

 

[Rob Lister]

Re: Re: Re: Oil prices: Dollar vs Euro

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.

I don't think you were derailing, I think you hit the nail on the head. Perhaps the reason currency trading is so competitive and professional is because it is such a trendy business. You are not actually betting on the intrinsic worth (yea, I know, no intrinsic worth) but instead on the perceived worth. Deficit spending has an impact on the dollar, to be sure, and that's a real investment concern. It should have an impact.

The fresh smell of a newly printed Euro also has an impact but I consider that more a function of trend. Sort of like internet stocks (but without the hugh bubble expansion).

The question I ask is, which is more stable? The newly formed EU note or the centuries old US note. Either may (will) rise and fall over short spans of time but which one has the proven staying power? Which one growing faster over the short term, mid term, long term? Each are based almost exclusively (in theory) on Economic Productivity. Which team am I going cheer if I have to cheer but one?

I gotta stay with the dollar. If I were richer, and perhaps smarter (or dumber!), I'd even go as far as to short the Euro.

The only smart thing I can see OPEC doing is to hedge their bets and trade on both. I don't see any reason why they couldn't.

 

[jay gw]

Here's what the two richest men in the world say about the dollar (it's going to continue falling):

Decisions by the world's two wealthiest men to bet on a further weakening of the U.S. dollar, coupled with China's lack of confidence in American currency should grab the attention of every working person, says Craig Smith, CEO of Swiss America Trading.

Microsoft Chairman Bill Gates is following the example of Berkshire Hathaway Chairman Warren Buffett, who made a pretax gain of $412 million in the fourth quarter of 2004 by buying foreign currencies.

Citing widening U.S. trade and budget deficits and a federal debt of $7.62 trillion, Gates said in a TV interview at the World Economic Forum in Switzerland last weekend he expects the dollar to extend its three-year decline.

"I'm short the dollar," Gates said, according to Bloomberg News. "The ol' dollar, it's gonna go down."

http://worldnetdaily.com/news/article.asp?ARTICLE_ID=42687

 

[Bjorn]

Re: Re: Re: Re: Oil prices: Dollar vs Euro

Deficit spending has an impact on the dollar, to be sure, and that's a real investment concern. It should have an impact.

IMHO it's the main reason for the dollar fall, but then again, don't listen to me, I'm not Warren Buffet. He is, by the way, betting heavily that the dollar will continue to fall.

The question I ask is, which is more stable? The newly formed EU note or the centuries old US note. Either may (will) rise and fall over short spans of time but which one has the proven staying power? Which one growing faster over the short term, mid term, long term? Each are based almost exclusively (in theory) on Economic Productivity. Which team am I going cheer if I have to cheer but one?

I don't think age is a determining factor - Microsoft came from nothing while Pan-Am was still a giant. Even old companies (or nations) can start losing money, or spend more than they make.

The only smart thing I can see OPEC doing is to hedge their bets and trade on both. I don't see any reason why they couldn't.

Some very important oil producing countries (e. g. Saudi Arabia) have a kind of commitment to trade oil in dollars.

 

[Rob Lister]

Re: Re: Re: Re: Re: Oil prices: Dollar vs Euro

IMHO it's the main reason for the dollar fall, but then again, don't listen to me, I'm not Warren Buffet. He is, by the way, betting heavily that the dollar will continue to fall.

I don't think age is a determining factor - Microsoft came from nothing while Pan-Am was still a giant. Even old companies (or nations) can start losing money, or spend more than they make.

Some very important oil producing countries (e. g. Saudi Arabia) have a kind of commitment to trade oil in dollars.

Last to first:

Commitments change but again, I don't think it matters in the long run. I'm certainly no expert.

True about microsoft but then again, they had something else going for them that the EU doesn't.

Warren is a smart guy, I'll grant you that. Has he put cash holdings in the Euro? If so, I'll have to rethink my (admittedly probably) poor reasoning.

How about a game of sorts. You have a desk drawer holding three notes which each originally cost you one ounce of gold (or some other unit). One note is in dollars. One note is in Yen. One note is in Euros. Beside those notes is a crystal ball but it needs cleaning. You can just make out one of the notes becoming all but worthless by 5 pm today but you can't tell which one it is. You have just enough time to make it to the bank and exchange one of the notes, but not two and certainly not all three. WWYD?

 

[bobman]

I remember the first time that oil hit $50/barrel a year or so ago, I did a comparison of the price in dollars and euros. Adjusting for inflation, I found that while the price in dollars was hitting record highs, it was still below pre-9/11 levels in Euros. Thus, much of the record high oil price was a result of the weakness of the dollar.

Interesting. It would seem then, that the falling value of the Dollar would only impact oil purchasers that already had substantial holdings in Dollars. If the price of oil has only risen as a function of the falling Dollar, then transferring Euros to Dollars just before purchasing oil would give an advantage to European companies vs American ones. Or is this too simplistic?

So, is there a motiviation for the USA to keep oil trading in dollars, other than the short-term loss the dollar would suffer as a result of a change?

 

[Matabiri]

Re: Re: Re: Re: Re: Re: Oil prices: Dollar vs Euro

How about a game of sorts. You have a desk drawer holding three notes which each originally cost you one ounce of gold (or some other unit). One note is in dollars. One note is in Yen. One note is in Euros. Beside those notes is a crystal ball but it needs cleaning. You can just make out one of the notes becoming all but worthless by 5 pm today but you can't tell which one it is. You have just enough time to make it to the bank and exchange one of the notes, but not two and certainly not all three. WWYD?

I don't know about the yen, but it wouldn't be the Euro; there are too many people relying on it not collapsing (and who will act to prevent it doing so) for the Euro to go.

Maybe in another 100 years ;-).

 

[Bjorn]

Re: Re: Re: Re: Re: Re: Oil prices: Dollar vs Euro

Warren is a smart guy, I'll grant you that. Has he put cash holdings in the Euro? If so, I'll have to rethink my (admittedly probably) poor reasoning.

He currently owns over $20B in foreign currency and is saying that "every day US consumes 5% more than we produce…US is like an enormously wealthy family with a very large farm, and we keep mortgaging larger and larger pieces of it to foreigners - foreigners own net $3T of US securities…goes up $2B per day".

You have a desk drawer holding three notes which each originally cost you one ounce of gold (or some other unit). One note is in dollars. One note is in Yen. One note is in Euros. Beside those notes is a crystal ball but it needs cleaning. You can just make out one of the notes becoming all but worthless by 5 pm today but you can't tell which one it is. You have just enough time to make it to the bank and exchange one of the notes, but not two and certainly not all three. WWYD?

Change the dollar into euro.

 

[Rob Lister]

Re: Re: Re: Re: Re: Re: Re: Oil prices: Dollar vs Euro

He currently owns over $20B in foreign currency and is saying that "every day US consumes 5% more than we produce…US is like an enormously wealthy family with a very large farm, and we keep mortgaging larger and larger pieces of it to foreigners - foreigners own net $3T of US securities…goes up $2B per day".

Change the dollar into euro.

Para one: but did he put cash holdings in the Euro?

Para two: I would do just the opposite. We should meet in the middle and just trade notes.

Other posters?

 

[Bjorn]

Interesting. It would seem then, that the falling value of the Dollar would only impact oil purchasers that already had substantial holdings in Dollars.

They all do - they must, because they have to pay the oil purchases in dollars.

If the price of oil has only risen as a function of the falling Dollar,

It has also gone up in Euros, but a lot less.

then transferring Euros to Dollars just before purchasing oil would give an advantage to European companies vs American ones.

I can't see how.

If oil was 50 dollars and 50 euros a barrel a year ago, and 70 dollars and 50 euros today, I would pay 50 euros a barrel or use the same 50 euros to buy 70 dollars to buy the same barrel.

So, is there a motiviation for the USA to keep oil trading in dollars, other than the short-term loss the dollar would suffer as a result of a change?

I would re-write it: The not-so-short-term loss the dollar would suffer as a result of three-four trillion dollars "worth" of dollar bills floating back into the US.

 

[Bjorn]

Re: Re: Re: Re: Re: Re: Re: Re: Oil prices: Dollar vs Euro

Para one: but did he put cash holdings in the Euro?

He's not really saying euros or yen or whichever. Just that (he thinks) the dollar will continue to fall and put 20 billion dollars where his mouth is.

Para two: I would do just the opposite. We should meet in the middle and just trade notes.

Any time.

Real life - I'm making more money in Europe than in the US at the moment, and I hesitate every time I change into dollars, realizing that my European money is worth more day by day.

 

[bobman]

If oil was 50 dollars and 50 euros a barrel a year ago, and 70 dollars and 50 euros today, I would pay 50 euros a barrel or use the same 50 euros to buy 70 dollars to buy the same barrel.

Right, but now consider it from the American perspective, you now have to pay $70 instead of $50, whereas the European only has to pay the 50 Euros. This, of course, assumes that the rising oil price is only a function of the falling Dollar. I suspect its far more complicated than that, but I think you can see the point I was trying to make with regards to the Eurpoean advantage.

 

[Rob Lister]

Right, but now consider it from the American perspective, you now have to pay $70 instead of $50, whereas the European only has to pay the 50 Euros. This, of course, assumes that the rising oil price is only a function of the falling Dollar. I suspect its far more complicated than that, but I think you can see the point I was trying to make with regards to the Eurpoean advantage.

Honest to Ed, dude, I think you're in the wrong forum assuming you're actually going to put any of this advice to practical use. The issue, all by itself, is not at all straightforward and to complicate matters the politics (overt, covert, dilusional and not) is going to color every opinion you get, not to mention a tall cold glass of outright admitted ignorance.

If Drooper (or a few others) chimes in I might pay some real attention but not until.

 

[Bjorn]

Right, but now consider it from the American perspective, you now have to pay $70 instead of $50, whereas the European only has to pay the 50 Euros.

He actually pays 70 dollars - which, as you say, equals 50 euros.

This, of course, assumes that the rising oil price is only a function of the falling Dollar. I suspect its far more complicated than that

Yes and no. The oil price has gone up more in dollars than in euros and also more than it has in an average of world currencies (the dollar is simply less worth). In other words, oil is more expensive than a year ago, but not as much as it seems to be for Americans.

but I think you can see the point I was trying to make with regards to the Eurpoean advantage.

It's not a "European" advantage, it's an American disadvantage because the dollar is worth less (and less). Japanese yens also buy more oil today than a year ago compared to what dollars do.

 

[Mycroft]

Originally posted by Bjorn
Countries have paid for those dollars by selling something to the US without getting back any goods from us.

But once the dollars are traded for oil, they still have to come back to the US. The oil producing nation gets to trade them for something they need.

 

[Bjorn]

But once the dollars are traded for oil, they still have to come back to the US. The oil producing nation gets to trade them for something they need.

Well, since oil buyers still need dollars, the oil producing companies can just as well use the dollars to pay for goods from other countries than the US.

There is at any time a (growing) "pool" of dollars away from home - held by foreign countries either to pay for oil or simply as a part of their currency reserves. We wouldn't like these enormous amounts to be freed up.

 

[The Fool]

Well, since oil buyers still need dollars, the oil producing companies can just as well use the dollars to pay for goods from other countries than the US.

There is at any time a (growing) "pool" of dollars away from home - held by foreign countries either to pay for oil or simply as a part of their currency reserves. We wouldn't like these enormous amounts to be freed up.

I don't think the US would tolerate oil trade in euros...

 

[Matabiri]

Not about oil, but here's an interesting peek at the workings of international currency markets:

http://news.bbc.co.uk/1/hi/business/4335123.stm

The US dollar has fallen after Japan's prime minister hinted that the country could look elsewhere for its foreign currency reserves...

The US's massive deficits are being propped up largely by Asian central banks buying dollars.

Suggestions that South Korea might diversify away from the dollar prompted sharp falls on Wall Street.

Expectations are that the euro, which has been at historic highs, could pick up the slack if the dollar's attraction as the world's reserve currency weakens...

By buying dollars, Japan hopes to keep its own currency from rising too fast against a dollar which has been weakening for months.

But several months in the past two years have seen the pace of purchases of government bonds fall back, intensifying fears that the appetite for dollars may yet prove limited.

So to protect the value of its exports to the US, Japan is buying dollars to try and maintain their value...

 

[Drooper]

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

Bob,

This has been done to death many times.

The answer is - it wouldn't make any difference.

In the first place the currency is simply the numeraire. It is just a way to put a single transferable price on it. In practice you could buy oil in any currency you wanted on agreement with the vendor.

On the "spot market", where you don't buy from any particular (or single supplier), you might be required to settle in Dollars, because that is the convention. But it is a simple and cheap task to take you Euros, buy Dollars and complete the transaction. If the market switched to a Euro contract then anyone holding only US Dollars (or any one of the many other currencies that exist in the world) would do the same.

 

[Drooper]

Well, since oil buyers still need dollars, the oil producing companies can just as well use the dollars to pay for goods from other countries than the US.

There is at any time a (growing) "pool" of dollars away from home - held by foreign countries either to pay for oil or simply as a part of their currency reserves. We wouldn't like these enormous amounts to be freed up.

There is no need to hold Dollars to buy anything, there are reely available to purchase in what are for practicle purposes unlimited quantities.

Foreign Governments (or more normally central banks) don't hold "Dollars as reserves" they will tend to hold US Dollar denominated assets, i.e. bonds, because they don't earn any interest