There is talk of a cabal, consisting of Russia, China, Japan and Brazil that are planning to have the price of oil (now in US dollars) quoted internationally in another currency or a basket of currencies, the latter made up of the yen, yuan, the euro, gold and a unified currency planned for the Gulf nations. There are really two concerns here: pricing oil in another currency and replacing the US dollar as the world’s reserve currency.
This is not the first time we have heard these reports; recall that in 2007 Venezuela and Iran indicated a preference for euros rather than US dollars for their oil exports. There are, what Mike Shedlock in his article, ’Ridiculous hype over secret oil meeting’’ in Mish’s Global Economic Trend Analysis, called ten simple facts that could help us put the oil pricing issue in perspective. Listen.
Oil is generally priced in US dollars and as the ’value’’ of the US dollar fluctuates the price of oil in that currency accordingly moves in sync to compensate for these changes. However, oil is indeed at present traded also in euros though its unit price is quoted in US dollars. In other words the oil price does not have to be quoted in euros or yen to be traded in euros or yen.
Further, there is nothing that demands that Venezuela or Iran or even T&T should hold reserves in US dollars.
In seconds on the Foreign Exchange market (Forex) we can change whatever we wish of our reserves into another fungible (interchangeable) currency. Nothing is stopping ALNG from asking Spain or anybody to pay for natural gas in euros. If even, say, Brazil wished to pay in yen for gas supplied, ALNG can change this instantly into euros if it so desired.
Many countries hold US dollar reserves because it is the customary trade practice (as stated by our Central Bank Governor), for political reasons (e.g. central banks support each other in times of currency runs), and some tie local currencies to a major fungible currency.
Again, gold is quoted in many currencies simultaneously, with no pricing problems. Hence pricing oil in euros will have absolutely no impact on the price anyone pays for oil. The idea of using a basket of currencies including gold to price oil to erroneously control its value volatility is not worth the effort given the instant availability of both the Forex and market demands. Oil can be priced in any major currency or all of them without making the slightest difference to the market.
There are two phenomena that contribute to this concern of maintaining the US dollar as the reserve currency. The first is that the US economy is the major market of the world. We saw that as the US market collapsed the world economy collapsed, though in recovery China is looking inwards for demand growth.
Also, the US consumers and producers do not participate in foreign trade, i.e. they do not use foreign currencies to buy foreign goods or sell to foreigners. A Chinese exporter to the US accepts US dollars from the US consumer for Chinese goods exported to the US and the US exporter to Spain expects to be paid in US dollars for goods supplied-world trade is seen to the US as local trade.
The other is the fact that the US is not exporting as much as it imports and so is traditionally running up a trade deficit-i.e. many countries are holding US dollars, representing the difference between what they sell to and what they buy from the US.
But according to Kenichi Ohmae in his book The Borderless World, the US dollar may be in this trouble because in part we are using economic models that are inappropriate for the present-day global economy. In the conventional economic model the goods that cross the borders of the countries give reliable measures of what trade takes place.
Today the bulk of international trade takes place between large multinational companies and the phenomenon of ’insideration’ has emerged in which the global companies invest in production companies in their export markets to take advantage of certain economic factors.
Are the products sold in Japan by a US company located in Japan exports to Japan? Further, if these US Japanese-based companies export to the US are these Japanese exports? The bpTT exports are counted as contributing to our trade figures and not the UK’s except repatriated profits.
If they were not then we would have a better idea of how we were really doing as an economy. The point, though, is that the large trade deficit of the US may not be so bad since insideration is ignored.
