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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 in

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.