What does an end to trading oil in US dollars mean?

Discussion in 'Business & Economics' started by Michael, Nov 19, 2007.

  1. Michael 歌舞伎 Valued Senior Member

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    Iran leader dismisses US currency

    Iranian President Mahmoud Ahmadinejad has suggested an end to the trading of oil in US dollars, calling the currency "a worthless piece of paper".

    While this may be part posturing - really, I think all US Citizens, being the good capitalist that we are - would whole heartedly support switching from the USD to the Euro? I mean, yeah we might be totally f*cked and our economy crap-out even more BUT hey, OPEC must act fiscally responsible and squeeze as much money as is possible out of oil as they can - for their share owners and partners - like Halliburton. And so what if the USA economy craps out? China and India will be more than happy to pick up the slack as their middle class booms.

    It'd be great for the European Union too...
     
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  3. jlocke Registered Senior Member

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    Odd quote coming from someone whose own currency is at an exchange rate of 9000 Rials to 1 US Dollar....
     
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  5. Baron Max Registered Senior Member

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    Dollars and Euros are traded on the world markets ...which ultimately sets the relative prices of the currency. Thus, if something is priced in Euros, a person with Dollars would have to abide by that rate of exchange. Thus, ...it don't matter one iota how one sets the price of his goods on the world market.

    The bullshit that people discuss is only good for political propaganda. For example, SAM here thinks pricing things in Euros is a major blow to the US economy. It ain't. It's only a minor blow to a highly patriotic buyer, that's all.

    Baron Max
     
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  7. Michael 歌舞伎 Valued Senior Member

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    Well the BBC Economic report suggested that the USD could drop in value even further if oil were priced with a different currency. Which equates to a lower standard of living in the US. Also, the report said that OPEC members have lost 15% of the value of their money simply because the USD dropped 15% this year - no one wants to lose money! So they will have to move away from the dollar or other "arrangements" will need to be made. This is when the USA shuts up about human rights and starts selling our most sophisticated fighter jets to KSA.
     
  8. quadraphonics Bloodthirsty Barbarian Valued Senior Member

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    How do you figure? It'll make imports from (and travel to) Europe and Japan more expensive, but it will also stimulate American exports, providing more jobs for Americans to earn money doing. And, since China employs a soft-peg, it won't raise the prices of our imports from them, so it's not going to show up at the cash register at Wal-Mart.

    Only if you equate "value" with "Euros." It all depends on what you want to spend those dollars on. Their value in American goods and services has changes very little over the past year.
     
  9. Michael 歌舞伎 Valued Senior Member

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    Wouldn't fuel prices go up ... A LOT? We use fuel to make stuff so .... ....
     
  10. quadraphonics Bloodthirsty Barbarian Valued Senior Member

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    We don't buy fuel from Europe or Japan, and the countries we DO buy fuel from have their currencies pegged to ours, so there hasn't been any change in the exchange rate with them.

    Which isn't to say that fuel isn't becoming more expensive, but that's because of rising worldwide demand, limits on supply and refineries and so on. It is not happening because the dollar is down against the Euro and Yen.
     
  11. Michael 歌舞伎 Valued Senior Member

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    But lets say oil is priced mainly in Euros, given that the dollar would slide even further, wouldn't the price of fuel go even higher than it already is? A double whammy?
     
  12. quadraphonics Bloodthirsty Barbarian Valued Senior Member

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    Yes and no. For oil to be denominated in Euros does not inherently mean that it'll cost any more or any less in any particular place. It's the transition from dollars to Euros that would cause prices to go up, but this would be a transitory phenomenon. Once people had all gotten rid of the extra dollars they kept around just to trade for oil, and accumulated enough extra Euros to trade for oil, there would no longer be much effect. Of course, such a transition could be very painful, if it was sudden, unexpected, or mismanaged.

    On the other hand, it's extremely unlikely. The only places talking about Euro-denominated oil trade are those with extremely poor political relations with the United States; the rest of OPEC is not interested. For all of Iran's pronouncements about the subject, they have yet to do anything concrete. And for all of Chavez's bluster, his currency remains pegged to the dollar.

    Another thing worth considering is that the more the dollar sinks with respect to the Euro, the smaller America's trade deficit gets, and the less competitive Europe's exports are. Since the EU still depends on the exports sector for economic growth, this is extremely problematic for them. Go read some of the reporting in the European presses about the strong Euro; you won't hear any trumphalism. Most countries in the world, including the EU, go to great pains to keep their currency *low*, as this helps with the balance of trade. So, one shouldn't be too alarmed at the prospect of a weaker dollar, at least not for America's sake. I'd worry more about its affects on other countries that depend on access to America's consumer market or compete with America's exports. For example, Louis Gallois, CEO of Airbus, recently said:

    "The main threat we have before us is the U.S. dollar [...] When the euro rises 10 cents [against the dollar], we lose 1 billion euros"

    (see article here: http://www.businessweek.com/globalbiz/content/nov2007/gb20071116_300833.htm )
     
  13. iceaura Valued Senior Member

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    Some hidded assumptions in there, most obviously that the US will have something to export to Europe,but also in the alleged benefit to the US of having various currencies pegged to the dollar.

    If China is the world's factory (as Japan's original plan presciently had it), then having their currency pegged to the dollar reduces the benefit of a strong Euro to American exports - it just means China's exports to Europe are cheaper yet.

    And since America has to compete with Europe for access to China's exports, it does drive the price up at Wal Mart.

    And so forth.
    The dollar has been dropping fast and hard, and the trade deficit remains basically unmoved.

    As far as oil exporters switching to Euros, the lesson of Saddam may be still fresh in people's minds. Chavez is on thin ice anyway - he barely survived the last time he actually threatened to yank on the oil lever.
     
  14. Michael 歌舞伎 Valued Senior Member

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    What does this mean?


    So what is your overall assessment a switch to a mixed currency (or the Euro) would have on the USA economy?
     
  15. quadraphonics Bloodthirsty Barbarian Valued Senior Member

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    What is that supposed to mean? America exports over a trillion dollars worth of goods per year; the only other countries in that category are China and Germany. And that's without getting into service exports...

    Which would be important if China and the United States were competing for export markets. In reality, the exports of the two countries are highly complementary (a situation reinforced by the years of trade-spurred structural readjustment that both economies have recently undergone), so this doesn't have much impact. That prices for Chinese toys and clothing have gone down has no effect on the market for American microchips, jet engines or airliners. All that will happen is that all of these things will get cheaper for third countries, and so they will buy more of all of them.

    Also, it bears mentioning that the United States runs a large trade deficit with the EU (almost $100 Billion per year). Simply buying less from the EU will diminish the trade deficit, even if we don't manage to boost exports to them. Interestingly, the total EU trade surplus is very close to the EU/USA trade surplus, which explains why the Europeans are so worried about the declining dollar. The only other country their export-led economy runs a surplus with is... Switzerland.

    True, although this is a secondary effect, and likely to be dampened by the more stringent import controls the EU employs, if it's not entirely swamped by growth in Chinese production in the first place.

    Not true; the trade deficit has been dropping throughout the past year, and is currently at the lowest level in about 2.5 years. Of course, there's still plenty of deficit left where that came from, but the growth in the deficit (which had been consistent for the previous 10+ years) is a thing of the past.

    This does bring up an important point though: the dollar has been dropping against the Euro, Yen, Pound, Canadian dollar, etc. but much of our trade is with countries that use pegged currencies (notably China and various petrostates). And that sector of the market has, by definition, not seen any significant change in exchange rates; indeed, the trade deficit with China continues to *grow*. The point here is that it's disingenuous to say that the change in the trade deficit doesn't match up to the change in the value of the dollar; if you perceive any such disparity, all that implies is that your definition of the value of the dollar is not appropriate to international trade.

    One convenient way to get an accurate view of the situation is to group together all of the dollar-pegged (or near-pegged) countries and think of things in those terms. This puts China and the various petrostates in the same grouping as the United States, and results in the (correct) conclusion that a weaker dollar will increase exports from this group (to countries outside the group) and vice-versa. By definition, the trade within the block won't see any first-order effects. So, a weaker dollar is going to boost the trade positions of the dollar grouping as a whole. However, because the countries in the grouping do significant trade with one another, and this is not affected by the exchange rate, that component of each country's trade position will remain basically constant.

    By comparison, imagine breaking down US trade into individual states. Certain states run big trade surplusses, and others run big trade deficits. Ignore for a moment that there are other countries with pegged currency, and suppose that the dollar was falling with respect to all other currencies. This will cause the trade deficit of the United States as a whole to equalize, but it probably won't cause the trade imbalances between individual states to disappear. Likewise, in the real world, a falling dollar tends to boost the trade position of the entire dollar-bloc as a whole, but won't have any effect on imbalances within the bloc, which are manifestations of comparative advantage.
     
    Last edited: Nov 20, 2007
  16. desi Valued Senior Member

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    It means congress won't have unlimited credit from the Fed anymore.
     

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