The oil currency

After a longish break — as a consequence of a 5-week sojourn of India-England-Wales-Ireland-France, and the problem of dealing with a massive spam attack on all my blog sites’ comments boxes offering readers, inter alia, instant debt relief, online casino services, and hand jobs — I’d like to return to one of my favourite topics – the price of oil. This, in fact, was the very first topic I ever blogged about, and it has cropped up once or twice since. An article in The Guardian a week or so ago, The real reasons Bush went to war, written by retired civil servant John Chapman jogged my memory about something I’ve been meaning to make a note about for a while; viz. why pricing oil in euros would be bad news for the US.

There have been quite a few articles on this topic from those on the right and the left over the last year or so, and they generally reach the same conclusion as Chapman: if the euro were to become the standard for oil transactions, things could turn very ugly indeed for the US economy.

With the price of a barrel of oil hitting a record high last week of US$44, and the US importing about 70 per cent of its oil (constituting about one quarter of its trade deficit), this is bad news. It would be even worse if they were paying for their oil in euros at a time when the US$ would inevitably be depreciating. Had other OPEC countries followed Saddam Hussein’s lead in 2000, many oil-consuming economies would have to convert large quantities of their central bank holdings of dollars to euros. With the forex market flooded with US dollars, the exchange value of the US$ would fall, foreign investors would abandon the US stock markets and dollar-denominated assets, the price of US imports would rise, and the trade deficit would be blown out further. It is also foreign demand for the US dollar that funds the US federal budget deficits. This could spell more trouble if foreign investors opt for euro-denominated securities instead of US Treasury bonds.

The best piece I’ve read on this topic is an essay by William Clark entitled: The Real Reasons for the Upcoming War With Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth. Look out for a book Petrodollar Warfare: Oil, Iraq, and the Future of the Dollar later this year by the same author.