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> This is the petrodollar hypothesis, a debunked theory of global trade. Who debunked this? Because I've seen this posited in dozens of places, so I'd love to

> This is the petrodollar hypothesis, a debunked theory of global trade. Who debunked this? Because I've seen this posited in dozens of places, so I'd love to see the rebuttal

selectodude 7y ago
I’m not sure where there’s a structured rebuttal, but the main reason why commodities are generally priced in dollars is due to currency liquidity and the forex markets. There are only a handful of currency pairs that don’t involve USD. If I have Japanese Yen and I want to buy Saudi Riyals, that trade needs to settled twice, JPY -> USD and then USD -> SAR adding both currency risk and settlement overhead. Pricing in USD cuts all of that out, along with the inertia of everybody being comfortable with dollars and the extremely liquid and large market for both dollars and dollar denominated debt. It’s just easier.
- justicezyx 7y ago
  Why geopolitical is not involved here?
  - selectodude 7y ago
    The US dollar isn’t the largest and most liquid market on earth because the US is mean to people, if anything that would make it less useful for third parties. It’s used because it makes the most sense. Look at the USD as a gift card. If Starbucks only accepted star-bux, requiring me to buy starbux to buy Starbucks, we’d still be valuing drinks in dollars regardless of the exchange rate. Even if I could use those starbux at Target, I wouldn’t start caring about my starbux currency risk as long as I could convert to dollars. It’s the same for other countries. Japan doesn’t care about its exchange rate to the riyal because both float reasonably stably to the dollar. Saudi doesn’t want yen and japan doesn’t want to buy riyals so they split the difference and transact in dollars.
    - roenxi 7y ago
      Your explanation involved a bit of mind-reading here to deduce that the Japanese don't want riyals and that people wouldn't value things in star-bux. Going by actual evidence, if the Japanese are trading with the Saudis it is pretty clearly they don't want riyales, yen or dollars; they want goods and services that they are trading for. They would be ambivalent about what they traded for that oil in as long as they ended up with the most product out for the least yen in. There is evidence that the Japanese want dollars (their foreign reserves are jumping), but there is no particular evidence that they want to trade in dollars. If anything it is more likely that they are trading in dollars because SWIFT is the cheapest way of moving money around internationally and it has some sort of favouritism for US dollars.
      - selectodude 7y ago
        Well no, they’re trading in dollars because that’s what the people they’re buying from want in exchange.
      - christophilus 7y ago
        Another way of putting it is: dollars have a network effect going for them, and it’s stronger than Facebook’s network effect in social media. This network effect was intentionally built during the Cold War. And with the USSR’s collapse, it became that much stronger.
      - User23 7y ago
        Parent is making an accounting point. Unless you have perfectly balanced trade, your balance sheet will continuously expand in either your currency, the foreign currency, or both. The Saudi government either isn’t inclined or can’t find counterparties to run enough of a trade deficit to provide the rest of the world enough riyals to satisfy their demand for Saudi oil. The USA on the other hand is willing to run such a trade deficit, it's pretty much the only game in town. Meanwhile, the USA is able to find counterparties for its massive trade deficit because the USA itself has a huge and incredibly diversified economy and demands dollars in payment. You can buy oil from the USA in dollars for the same price you can get it from the Saudis. You can also buy all kinds of other things you can't buy from the Saudis. The dollar has massively superior optionality compared to the riyal (and most or even all other currencies) and that increases demand for it.
- ta1234567890 7y ago
  Is anyone pricing oil with Bitcoin? It seems that crypto would be the ideal type of currency for international trading. Is that not a thing because government wouldn't want to give up control to a decentralized system that they don't run?
  - chrisco255 7y ago
    Not yet, but maybe they will when the dollar squeeze causes their economies to crash.
    - kebman 7y ago
      I'd say that is a good enough reason to buy. As they say, buy the rumour, sell the news.
  - selectodude 7y ago
    Because, to use a technical term, the fuck is Saudi Arabia going to do with $400bn worth of bitcoin? After 1 year, assuming Saudi Arabia was able to procure every bitcoin that can ever be mined, past present and future, they would be worth $20,000 each. And then they have all the bitcoin that nobody wants.
    - neilwilson 7y ago
      Dollars are similarly useless in Saudi Arabia. They use the riyal there. Outside of the US, dollars are really just government bonds that people hold as a store of savings. They have to be sold before you can do local transactions or pay local taxes.
      - selectodude 7y ago
        Saudi needs dollars to buy everything else since they make nothing and import everything. Everybody else will take their dollars, so it’s a worthwhile thing to have around for them. Sure, you can’t buy a kebab on the streets of Jeddah with them, but the chicken that kebab was made with was almost certainly bought in some way using those aforementioned petrodollars.
- jimmySixDOF 7y ago
  The Saudi Riyal has been pegged to the US Dollar since 1986, as are most Gulf countries: UAE, Qatar, Bahrain, Oman. Kuwait was the only one to break it under pressures from the 2008 GFC. This is the historical backbone of the Petrodollar and has survived decades of political and financial strain. Also, >It's just easier< strikes me as very fragile logic, because it is only True until it isn't.
mannanj 7y ago
the user "JumpCrisscross" just debunked it just now, his evidence was saying "it was debunked". What other evidence do you need?
ajaygeorge91 7y ago
I as an individual prefer to be paid by US dollars over Indian Rupees. Trust me, the Saudis would prefer the same
- gullyfur 7y ago
  That's an outcome/result of decades of policy, not the source of the policy (which I'm trying to understand)
neilwilson 7y ago
Just because something is priced in dollars doesn’t mean it is paid for in dollars. Fundamentally in every real transaction in the world the seller gets the currency they want to hold and the buyer gets to use the currency they earn in. Because otherwise there is no deal. The whole purpose of the global financial system is to sort out those mismatches so deals get done - and make a turn while doing so.
- raytrace 7y ago
  There are at least 96 oil producing countries in the world ([1]). It makes sense to trade oil with USD across the board instead of fragmenting the oil market into 96 different sub-markets (oil to each country's local currency). Now, the buyer and seller can of course convert USD from/to their desired currency on FX markets. Oil trades tend to be big, so that would cause demand for USD liquidity. That demand, and the fact that these dollars are effectively "locked" inside the FX markets (reducing supply), would make the dollar price go up (everything else being equal), hence strengthening the dollar. [1] https://en.wikipedia.org/wiki/List_of_countries_by_oil_production https://en.wikipedia.org/wiki/List_of_countries_by_oil_produ...
  - neilwilson 7y ago
    You can't convert currency. You can only exchange it (outside of those currencies that are fixed to the dollar or whatever). That means that somebody has to want the dollars for you to get the local currency you need to pay staff and pay local taxes. In aggregate that's a wash. Which is the point I'm making - expand your view beyond just buying and selling the oil, and think how you get into the position in the first place. From the ground to where it is used. Whatever currency you hold those selling oil will take for their oil - because there is a big financial system whose job it is to make that happen and to shuffle the currency holdings around until everybody holds what they want to hold. The FX system is part of the oil market. It lubricates the parts oil can't reach.
- Godel_unicode 7y ago
  > and make a turn while doing so. This is called settlement overhead, and is the reason you're incorrect. Every time you change one currency for another on any meaningful scale, it eats into your profit margin.. Tl;Dr - there's no such thing as "no foreign transaction fee!!!1!" in oil baron sized transactions.

> This is the petrodollar hypothesis, a debunked theory of global trade. Who debunked this? Because I've seen this posited in dozens of places, so I'd love to see the rebuttal

selectodude 7y ago

I’m not sure where there’s a structured rebuttal, but the main reason why commodities are generally priced in dollars is due to currency liquidity and the forex markets. There are only a handful of currency pairs that don’t involve USD. If I have Japanese Yen and I want to buy Saudi Riyals, that trade needs to settled twice, JPY -> USD and then USD -> SAR adding both currency risk and settlement overhead. Pricing in USD cuts all of that out, along with the inertia of everybody being comfortable with dollars and the extremely liquid and large market for both dollars and dollar denominated debt. It’s just easier.

justicezyx 7y ago
Why geopolitical is not involved here?
- selectodude 7y ago
  The US dollar isn’t the largest and most liquid market on earth because the US is mean to people, if anything that would make it less useful for third parties. It’s used because it makes the most sense. Look at the USD as a gift card. If Starbucks only accepted star-bux, requiring me to buy starbux to buy Starbucks, we’d still be valuing drinks in dollars regardless of the exchange rate. Even if I could use those starbux at Target, I wouldn’t start caring about my starbux currency risk as long as I could convert to dollars. It’s the same for other countries. Japan doesn’t care about its exchange rate to the riyal because both float reasonably stably to the dollar. Saudi doesn’t want yen and japan doesn’t want to buy riyals so they split the difference and transact in dollars.
  - roenxi 7y ago
    Your explanation involved a bit of mind-reading here to deduce that the Japanese don't want riyals and that people wouldn't value things in star-bux. Going by actual evidence, if the Japanese are trading with the Saudis it is pretty clearly they don't want riyales, yen or dollars; they want goods and services that they are trading for. They would be ambivalent about what they traded for that oil in as long as they ended up with the most product out for the least yen in. There is evidence that the Japanese want dollars (their foreign reserves are jumping), but there is no particular evidence that they want to trade in dollars. If anything it is more likely that they are trading in dollars because SWIFT is the cheapest way of moving money around internationally and it has some sort of favouritism for US dollars.
    - selectodude 7y ago
      Well no, they’re trading in dollars because that’s what the people they’re buying from want in exchange.
    - christophilus 7y ago
      Another way of putting it is: dollars have a network effect going for them, and it’s stronger than Facebook’s network effect in social media. This network effect was intentionally built during the Cold War. And with the USSR’s collapse, it became that much stronger.
    - User23 7y ago
      Parent is making an accounting point. Unless you have perfectly balanced trade, your balance sheet will continuously expand in either your currency, the foreign currency, or both. The Saudi government either isn’t inclined or can’t find counterparties to run enough of a trade deficit to provide the rest of the world enough riyals to satisfy their demand for Saudi oil. The USA on the other hand is willing to run such a trade deficit, it's pretty much the only game in town. Meanwhile, the USA is able to find counterparties for its massive trade deficit because the USA itself has a huge and incredibly diversified economy and demands dollars in payment. You can buy oil from the USA in dollars for the same price you can get it from the Saudis. You can also buy all kinds of other things you can't buy from the Saudis. The dollar has massively superior optionality compared to the riyal (and most or even all other currencies) and that increases demand for it.
ta1234567890 7y ago
Is anyone pricing oil with Bitcoin? It seems that crypto would be the ideal type of currency for international trading. Is that not a thing because government wouldn't want to give up control to a decentralized system that they don't run?
- chrisco255 7y ago
  Not yet, but maybe they will when the dollar squeeze causes their economies to crash.
  - kebman 7y ago
    I'd say that is a good enough reason to buy. As they say, buy the rumour, sell the news.
- selectodude 7y ago
  Because, to use a technical term, the fuck is Saudi Arabia going to do with $400bn worth of bitcoin? After 1 year, assuming Saudi Arabia was able to procure every bitcoin that can ever be mined, past present and future, they would be worth $20,000 each. And then they have all the bitcoin that nobody wants.
  - neilwilson 7y ago
    Dollars are similarly useless in Saudi Arabia. They use the riyal there. Outside of the US, dollars are really just government bonds that people hold as a store of savings. They have to be sold before you can do local transactions or pay local taxes.
    - selectodude 7y ago
      Saudi needs dollars to buy everything else since they make nothing and import everything. Everybody else will take their dollars, so it’s a worthwhile thing to have around for them. Sure, you can’t buy a kebab on the streets of Jeddah with them, but the chicken that kebab was made with was almost certainly bought in some way using those aforementioned petrodollars.
jimmySixDOF 7y ago
The Saudi Riyal has been pegged to the US Dollar since 1986, as are most Gulf countries: UAE, Qatar, Bahrain, Oman. Kuwait was the only one to break it under pressures from the 2008 GFC. This is the historical backbone of the Petrodollar and has survived decades of political and financial strain. Also, >It's just easier< strikes me as very fragile logic, because it is only True until it isn't.

mannanj 7y ago

the user "JumpCrisscross" just debunked it just now, his evidence was saying "it was debunked". What other evidence do you need?

ajaygeorge91 7y ago

I as an individual prefer to be paid by US dollars over Indian Rupees. Trust me, the Saudis would prefer the same

gullyfur 7y ago
That's an outcome/result of decades of policy, not the source of the policy (which I'm trying to understand)

neilwilson 7y ago

Just because something is priced in dollars doesn’t mean it is paid for in dollars. Fundamentally in every real transaction in the world the seller gets the currency they want to hold and the buyer gets to use the currency they earn in. Because otherwise there is no deal. The whole purpose of the global financial system is to sort out those mismatches so deals get done - and make a turn while doing so.

raytrace 7y ago
There are at least 96 oil producing countries in the world ([1]). It makes sense to trade oil with USD across the board instead of fragmenting the oil market into 96 different sub-markets (oil to each country's local currency). Now, the buyer and seller can of course convert USD from/to their desired currency on FX markets. Oil trades tend to be big, so that would cause demand for USD liquidity. That demand, and the fact that these dollars are effectively "locked" inside the FX markets (reducing supply), would make the dollar price go up (everything else being equal), hence strengthening the dollar. [1] https://en.wikipedia.org/wiki/List_of_countries_by_oil_production https://en.wikipedia.org/wiki/List_of_countries_by_oil_produ...
- neilwilson 7y ago
  You can't convert currency. You can only exchange it (outside of those currencies that are fixed to the dollar or whatever). That means that somebody has to want the dollars for you to get the local currency you need to pay staff and pay local taxes. In aggregate that's a wash. Which is the point I'm making - expand your view beyond just buying and selling the oil, and think how you get into the position in the first place. From the ground to where it is used. Whatever currency you hold those selling oil will take for their oil - because there is a big financial system whose job it is to make that happen and to shuffle the currency holdings around until everybody holds what they want to hold. The FX system is part of the oil market. It lubricates the parts oil can't reach.
Godel_unicode 7y ago
> and make a turn while doing so. This is called settlement overhead, and is the reason you're incorrect. Every time you change one currency for another on any meaningful scale, it eats into your profit margin.. Tl;Dr - there's no such thing as "no foreign transaction fee!!!1!" in oil baron sized transactions.