Monday, October 26, 2009

Oil and Dollars

The fact that oil is priced and traded in US$ has a mayor impact on the value of the currency. Yes, in forex trading any currency can be sold and bought in seconds, so dollars can always be converted into euros, but buying crude in $ and then selling the $ is not the same thing as buying in - say - euros.

It is not the same at the national level, nor is it the same thing for the individual. If you live in the Euro zone, it is currently impossible to invest in crude oil without having to go through two currency exchanges and submitting yourself to foreign legislation and trade rules. Through a broker one can buy Brent crude in London or US crude on US exchanges, as well as crude-based instruments. When you buy one goes through a currency exchange, and again when one sells. Besides the risk in the primary instrument (crude) one has to go through the risk of currency fluctuations. Having to deal with a US exchange can also be seen as a risk. So, I for one am looking forward to the day when I can trade crude and crude-related instruments in euros on a European exchange following European regulation.

Looks like my desire might come true within a couple of years. Major oil producing countries are cooperating and discussing the move to price and sell crude in non-US currencies, possibly a basket containing the euro, gold, yen, yuan and a Middle-Eastern currency in creation.

When it happens this will cause the US dollar to lose in importance and in consequence in value. What can the US do to avoid it? Bribe Saudi Arabia? Wage war? Or maybe the US will drop the dollar on purpose in order to move to a world currency whereby eliminating their vast national debt.

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