Oil Money

Oil is currently purchased in dollars. That means that the price is set in dollars, and oil producers accept payments in dollars. There are occasional suggestions that the price should be denominated in some other currency, typically euros. This is generally intended to weaken U.S. hegemony. But does it make any sense?

In today’s financial world, the major currencies can be transformed to another at the press of a button. While the currencies float against one another, there is no immediate penalty to moving from one currency to another. The amount of money which currency speculators move around the world every day is actually far higher than the amount of money which moves in and out of stocks every day. So even if oil is sold in euros, somebody holding dollars can simply conver to euros and buy the oil.

It’s true that since oil is sold in dollars, holding dollars means that even when the dollar falls, you don’t therefore pay more for the oil. If oil were sold in euros, and you were holding dollars, and the dollar fell against the euro (as it has been doing recently), then you would have to pay more dollars for the oil.

However, the price of oil is already fairly volatile, and the volatility in the price seems considerably greater than the volatility in exchange rates. So if you have some other reason to hold dollars, I don’t think stability in the price of oil would be a convincing reason to switch away from dollars.

In short, it seems to me that selling oil in euros would have little or no real effect. It would certainly send a signal that the euro rather than the dollar was the world’s reserve currency. But it wouldn’t by itself make people switch away from dollars. At least, that’s how it seems to me.