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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 cu

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.
- neilwilson 7y ago
  Think a little bit wider than that. How do you pay your staff in the local area you work in? How do you pay taxes to the local government? How do you sell your oil to people who don't have, or don't want to, hold dollars. Are you really going to turn them down just because they hold GBP?
  - Godel_unicode 7y ago
    That's the whole point though, those people don't really exist. Basically everyone who does business internationally is, well, doing business internationally. You can either restrict your market to only people who hold your non-dollar currency, hold every currency in the world, or hold dollars. And keep in mind, everyone else holds dollars... This is sometimes referred to as the network effect.

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.

neilwilson 7y ago
Think a little bit wider than that. How do you pay your staff in the local area you work in? How do you pay taxes to the local government? How do you sell your oil to people who don't have, or don't want to, hold dollars. Are you really going to turn them down just because they hold GBP?
- Godel_unicode 7y ago
  That's the whole point though, those people don't really exist. Basically everyone who does business internationally is, well, doing business internationally. You can either restrict your market to only people who hold your non-dollar currency, hold every currency in the world, or hold dollars. And keep in mind, everyone else holds dollars... This is sometimes referred to as the network effect.