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The world's USD-settled oil trade is a tiny fraction of overall USD-settled trade. The petrodollar is an interesting theory, but it doesn't really hold up to v

by vkou 4y ago

The world's USD-settled oil trade is a tiny fraction of overall USD-settled trade. The petrodollar is an interesting theory, but it doesn't really hold up to very much scrutiny.

somenameforme 4y ago
Imagine you created a new currency in the US: FidoBucks. Not even a crypto but a regular currency you can print at your whim. Obviously nobody's really going to want your currency and it will have zero value. But now imagine, after some backdoor deals, you make it such that FidoBucks are literally the only currency accepted at gas stations. And not only that both those gas stations agree to spend any extra profits they make buying in FidoBuck denominated treasuries. Now not only are people going to want your currency, but they will literally need it. And since FidoBucks are now directly tied to access of a critical commodity, it will have also have a guaranteed minimum "value" that's tied to the cost of oil. So people can feel pretty comfortable holding and trading Fidobucks. In fact the new stability of your currency means you'd likely see people starting to trade it for far more than oil, to the point that gas becomes just a fraction of its trade. This is essentially what the petrodollar did, but it of course started from a far higher point than zero of course. Once we ended the fixed convertibility of the USD to gold in 1971 [1], demand in the dollar started rapidly declining, and its relative value began decreasing. After the petrodollar this all reversed, hard. It's to assign a specific value to any of these changes, because it's all dynamic - just like in our simplified FidoBucks example so much would depend on the dynamic scarcity of gas, how many FidoBucks you print, the total value of outside trade, and a million other variables. What is safe to say is that it dramatically strengthened the position of the currency, and is a large reason that until extremely recently, if China and Russia were trading - they'd settle that trade in USD. Now they're trying to create the next FidoBuck backed by a combination of land, gold, and other finite resources. [1] - https://wtfhappenedin1971.com/ https://wtfhappenedin1971.com/
- Retric 4y ago
  Total worldwide production of oil is only ~90 million barrels/day and middle eastern production is a fraction of that. That’s not very significant compared to the total value of all USD in circulation. All FidoBucks in circulation might only be worth ~50 Billion in your example and depending on the velocity of money could actually be significantly less. People might start using it for other things, but it’s just as likely to be an odd quark of the oil market. What actually props up the USD is the US taxes being paid in USD. Even transactions like selling burgers for Bitcoins suddenly force someone to not only get dollars to pay their taxes on that sale but set it aside for significant periods. This is the basic mechanism which forces all fiat money to have value, which then causes it to be used for loans and whatnot which further increases value.
  - somenameforme 4y ago
    First, the vast majority of all oil is traded in USD, not just the Mideast. As one example of the impact, take Canada. Their exchange rate against the USD is driven almost entirely by crude oil prices (of which they are a large exporter). The reason for this is that when oil prices are high they end up with a large supply of USD. And so the price of the Canadian dollar increases because, compared to the dollar, it's now in relatively lower supply. You can see how extreme this correlation is here. [1] Beyond that, this is all about international issues. Those gas stations are oil producing countries, and the people buying from them are countries. Being the person who can "print" the world reserve currency gives you immense geopolitical power, and an inability to economically fail regardless of how hard you try. When foreign currencies are no longer so closely tied to the USD, and demand for the USD declines, its international value will likely start to sharply decline, exactly as it did in 1971. But this time I don't really see anything we'll be able to cling onto. [1] - https://www.dailyfx.com/usd-cad/link-between-canadian-dollar-and-oil-prices.html https://www.dailyfx.com/usd-cad/link-between-canadian-dollar...
    - Retric 4y ago
      Even if you assuming 100% of all oil is traded in USD that’s still only ~8 billion dollars a day. As to US Canada currency that relationship would be mathematically identical if oil was traded in Canadian dollars rather than USD with the exact same changes to each currency as oil’s value spiked. It’s a result of the balance of trade not the specific commodity being exchanged let alone the currency the transaction was valued in. Oil happens to have high price volatility and significant value, but wood or maple syrup has similar effects though on a smaller individual scale.
      - somenameforme 4y ago
        The average gross trade of just raw oil products is somewhere in the $1 trillion ballpark, total trade overall several times that. It doesn't really matter much either way, as it's the "value" of oil that matters, not the price. When you are able to lock a door that everybody wants in, your key is priceless. The value of oil doesn't spike, its price does - primarily due to OPEC manipulation or yet another US Mideast invasion. You're absolutely right that balance of trade plays a part in this, but not in the assumption that the currency is irrelevant. If countries were paying Canada in CAD instead of USD, then Canada's reserves of CAD would be constantly increasing while the rest of the world's would be decreasing. The CAD would become extremely strong, extremely quickly. The realistic scenario is that countries would simply stop buying oil from Canada because of this, but if they couldn't (for instance if Canada somehow convinced oil seller's to sell only in CAD...) then the result would be a never-ending and effectively uncapped appreciation of the CAD, subject only to the discretion of Canada itself. This is literally exactly what happened with the ruble. Russia used to sell their oil in the USD. After we did our sanctions stuff trying to tank their economy, they started selling oil only in the ruble. And the value of their currency not only immediately reversed all of the sanctions inflected weakening, but rapidly became even stronger than before they invaded. It led them to the bizarre scenario of having to actually have to try to weaken their currency, while facing 'nuclear' sanctions, to make sure they didn't (as above) price themselves out of the oil market, by having too strong a currency.

by vkou 4y ago

The world's USD-settled oil trade is a tiny fraction of overall USD-settled trade. The petrodollar is an interesting theory, but it doesn't really hold up to very much scrutiny.

somenameforme 4y ago

Imagine you created a new currency in the US: FidoBucks. Not even a crypto but a regular currency you can print at your whim. Obviously nobody's really going to want your currency and it will have zero value. But now imagine, after some backdoor deals, you make it such that FidoBucks are literally the only currency accepted at gas stations. And not only that both those gas stations agree to spend any extra profits they make buying in FidoBuck denominated treasuries. Now not only are people going to want your currency, but they will literally need it. And since FidoBucks are now directly tied to access of a critical commodity, it will have also have a guaranteed minimum "value" that's tied to the cost of oil. So people can feel pretty comfortable holding and trading Fidobucks. In fact the new stability of your currency means you'd likely see people starting to trade it for far more than oil, to the point that gas becomes just a fraction of its trade. This is essentially what the petrodollar did, but it of course started from a far higher point than zero of course. Once we ended the fixed convertibility of the USD to gold in 1971 [1], demand in the dollar started rapidly declining, and its relative value began decreasing. After the petrodollar this all reversed, hard. It's to assign a specific value to any of these changes, because it's all dynamic - just like in our simplified FidoBucks example so much would depend on the dynamic scarcity of gas, how many FidoBucks you print, the total value of outside trade, and a million other variables. What is safe to say is that it dramatically strengthened the position of the currency, and is a large reason that until extremely recently, if China and Russia were trading - they'd settle that trade in USD. Now they're trying to create the next FidoBuck backed by a combination of land, gold, and other finite resources. [1] - https://wtfhappenedin1971.com/ https://wtfhappenedin1971.com/

Retric 4y ago
Total worldwide production of oil is only ~90 million barrels/day and middle eastern production is a fraction of that. That’s not very significant compared to the total value of all USD in circulation. All FidoBucks in circulation might only be worth ~50 Billion in your example and depending on the velocity of money could actually be significantly less. People might start using it for other things, but it’s just as likely to be an odd quark of the oil market. What actually props up the USD is the US taxes being paid in USD. Even transactions like selling burgers for Bitcoins suddenly force someone to not only get dollars to pay their taxes on that sale but set it aside for significant periods. This is the basic mechanism which forces all fiat money to have value, which then causes it to be used for loans and whatnot which further increases value.
- somenameforme 4y ago
  First, the vast majority of all oil is traded in USD, not just the Mideast. As one example of the impact, take Canada. Their exchange rate against the USD is driven almost entirely by crude oil prices (of which they are a large exporter). The reason for this is that when oil prices are high they end up with a large supply of USD. And so the price of the Canadian dollar increases because, compared to the dollar, it's now in relatively lower supply. You can see how extreme this correlation is here. [1] Beyond that, this is all about international issues. Those gas stations are oil producing countries, and the people buying from them are countries. Being the person who can "print" the world reserve currency gives you immense geopolitical power, and an inability to economically fail regardless of how hard you try. When foreign currencies are no longer so closely tied to the USD, and demand for the USD declines, its international value will likely start to sharply decline, exactly as it did in 1971. But this time I don't really see anything we'll be able to cling onto. [1] - https://www.dailyfx.com/usd-cad/link-between-canadian-dollar-and-oil-prices.html https://www.dailyfx.com/usd-cad/link-between-canadian-dollar...
  - Retric 4y ago
    Even if you assuming 100% of all oil is traded in USD that’s still only ~8 billion dollars a day. As to US Canada currency that relationship would be mathematically identical if oil was traded in Canadian dollars rather than USD with the exact same changes to each currency as oil’s value spiked. It’s a result of the balance of trade not the specific commodity being exchanged let alone the currency the transaction was valued in. Oil happens to have high price volatility and significant value, but wood or maple syrup has similar effects though on a smaller individual scale.
    - somenameforme 4y ago
      The average gross trade of just raw oil products is somewhere in the $1 trillion ballpark, total trade overall several times that. It doesn't really matter much either way, as it's the "value" of oil that matters, not the price. When you are able to lock a door that everybody wants in, your key is priceless. The value of oil doesn't spike, its price does - primarily due to OPEC manipulation or yet another US Mideast invasion. You're absolutely right that balance of trade plays a part in this, but not in the assumption that the currency is irrelevant. If countries were paying Canada in CAD instead of USD, then Canada's reserves of CAD would be constantly increasing while the rest of the world's would be decreasing. The CAD would become extremely strong, extremely quickly. The realistic scenario is that countries would simply stop buying oil from Canada because of this, but if they couldn't (for instance if Canada somehow convinced oil seller's to sell only in CAD...) then the result would be a never-ending and effectively uncapped appreciation of the CAD, subject only to the discretion of Canada itself. This is literally exactly what happened with the ruble. Russia used to sell their oil in the USD. After we did our sanctions stuff trying to tank their economy, they started selling oil only in the ruble. And the value of their currency not only immediately reversed all of the sanctions inflected weakening, but rapidly became even stronger than before they invaded. It led them to the bizarre scenario of having to actually have to try to weaken their currency, while facing 'nuclear' sanctions, to make sure they didn't (as above) price themselves out of the oil market, by having too strong a currency.