Why are Oil prices in $US Dollars?

CCCP^

I have this question, and I don't know much about the economics or politics of it. Why is it that Oil is always quoted in US Dollars? Has it always been this way? Why not the Euro or Yen? Does it mean that everytime somebody wants to buy Oil, they must pay in US Dollars? I don't understand....a friend of mine told me that the Iranians wanted to begin exporting Oil but in Euros, which is the real root of the current American/Iranian clash and not that Iran may or may not be building Nuclear power to build the bomb. Granted, my friend is just an ordinary bloke and probably made it up, but it sounded interesting.

And if the Euro was to be the new currency for trading in Oil, what would that mean for the US economy? Obviously now that Oil is in the Dollar, it means that the Americans have considerable economic clout globally, but since their economy is going to hell in a handbasket, and the EU is on the rise, would it mean that the EU had finally arrived on the scene as a....dare I say it? Superpower....atleast economically?

Scofflaw

Hopefully, someone with a better head for economics than mine will come along and answer this, but in the meantime...you're essentially correct. Oil is pretty much sold only for dollars (supposedly the result of a secret deal between the US and the Saudis/OPEC in the 1970s), which means that nations needing oil (nearly all of them) need to buy dollars to buy oil.

In essence, because only the US government prints dollars, this means that the purchase of oil pays the US government a levy - call it the US' "imperial tax" or tribute, if you like, a way in which almost everyone in the world hands over a certain amount to the US to get their hands on a vital commodity. That's very much a cartoon version, mind you - the actual effects are somewhat more complicated!

Whether that, in turn, is the reasoning behind the US interventions in the Middle East (from propping up Israel to invading Iraq), is open to debate. You might find this article interesting.

cordially,
Scofflaw

sceptre

In a historical sense, oil is priced in dollars because the US buys more of it than any other country. Sell it in dollars and only in dollars and at least you know how much you're getting for your oil. It's simpler for a seller in any market to have one price per product, whether that buyer is a corner shop or a country. Otherwise they're receiving foreign currency from all over the world which varies in value from day to day. Obviously the dollar varies in value from day to day as well but if you're an oil producing nation and you also take the step of pegging your currency to the dollar and also buy most of your stuff from the US, your risk is almost zero if you also sell only for dollars.

So it's simpler. That's the simple answer.

Of course you can buy oil from Iran in euros and Venezuela are thinking about it. Iraq was reportedly considering it as well before they got invaded the last time. These countries, as you may notice, can sometimes be more concerned with dealing less with the 'evil American devils' than simply increasing their short-term wealth though, Venezuela in particular is something of a renegade in OPEC.

Auditor #9

Now that is a great question CCCP^ , historically and economically. Sceptre's answer is very true about the amount of oil America buys. If you make a pie chart of world oil consumption then the USA will be slightly more than half that pie. Maybe that doesn't sound too impressive but think of what countries are in the other half - Germany, Japan, Italy, the UK, France, Canada - the rest of the G7 among others. The populations of those countries alone have more population than the US itself and they consume about one third of the oil America does and we haven't included Russia and China yet. What are the Americans doing with it ??

That it's simpler as Sceptre says seems also to be true but consider this: if China wants to buy oil from Venezuela then China must get their hands on dollars in order to buy that oil. Venezuela is an OPEC member however, which is an organisation worth looking up in wiki or elsewhere. The implications are weird for NYMEX oil but there's also Brent which is the London-quoted oil and finally there's Iranian-quoted oil recently established (Iranian oil Bourse - google it) which could God knows bring war to that country very soon. With NYMEX quoted oil, countries in Africa have get their hands on dollars to buy it and countries like Nigeria are OPEC members... Iran itself used to have to get dollars in order to buy its own oil probably. A country getting its hands on dollars means they have to trade something with another country which has dollars so ultimately America will be still be involved in the transaction even if a country 6000 miles away wants to buy oil from a country next door to it.

The US only pay about 60 EURO cents per litre up to now too - just over $3 a gallon. This is now changing. They are looking at paying twice as much for it now, I hope with the price of the barrel going up (although it went down yesterday in the light of the sale of Bear Sterns). I hope the price-increase reduces their consumption of it because in the end of the day it is a finite and depleting world resource and the world might soon need what's left of it to establish a global economy to house close to 10 billion people because at the moment it is getting pssed away by people who want to drive from their apartment half a mile to the mall then another half a mile to McDonalds then for a spin around LA then back to their apartment in their 2.5L SUVs.

They'll soon learn or else the world could suffer for it.

duggie-89

yea i agree, with the general idea that american controls it by getting oil traded in the dollar. what ever way you look at it the US has and will always want control of the oil exchange..

i heard that very same opinion about oil and the whole trouble behind the US and IRAN.

edanto

I can't say I know the reason that all oil is traded in $s but I've read a lot of the implications. Here's an extract from an article I just found today - I'd be interested if anyone is knowledgable enough to critique the economic theories in it.

At a glance, this is how it works. The world’s oil and gas is traded in US-dollars. Since 1971 the US has enjoyed the advantage of being the petrodollar supplier to the world. Supplying dollars to foreign countries means, the US can print money and purchase goods, services and investments with it. Since the foreigners need these dollars to buy oil, and keep them also in use in the international trade outside the US, the US has never had to deliver anything in return. Merely supplying money means free shopping. This is how US’ foreign debt grew to 3,200,000,000,000 dollars today. If at some point the world starts selling the trillions of dollars they currently hold, the exchange markets would be flooded with dollars, and, as a result, the value of the dollar would drop to next to nothing. It would trigger a financial crisis, but if the dollar becomes worth next to nothing, it means the foreign debt would vanish. So it is very advantageous to deliver currencies that are permanently needed and wanted abroad. And that is the case as long as the world needs dollars to buy oil and gas.

Liam Byrne

Saddam Hussein did, on a few occasions, suggest that oil be sold in euro......and "coincidentally" the U.S. invaded Iraq not long after both occasions....

http://archives.cnn.com/2000/WORLD/meast/10/30/iraq.un.euro.reut/
http://www.energybulletin.net/7707.html
http://socrates.berkeley.edu/~pdscott/iraq.html
http://www.globalresearch.ca/articles/CLA410A.html
http://www.feasta.org/documents/papers/oil1.htm
http://www.arabnews.com/?p.=7&section=0&article=78138&d=21&m=2&y=2006
http://www.thinkandask.com/news/thedollar.html

Hmmm...

edanto

Someone is bound to be pedantic enough to point out that the reference to Iraq as a member of the Axis of Evil in the State of the Nation address was before Iraq publicly announced the changing of one UN administered Oil-for-food account from Dollars to Euros, so it may as well be me.

I don't think that small point of timing affects the striking point that the three countries know as the Axis of Evil as the same three that had intended to buy/sell oil in Euros. (Iran announced it in 1999)

Manic Moran

Auditor #9 wrote: »

The populations of those countries alone have more population than the US itself and they consume about one third of the oil America does and we haven't included Russia and China yet. What are the Americans doing with it ??

Look at the population densities. It takes a lot more oil to get a train or airplane from one side of the US to the other side of the US than it does to get from one end of Japan to the other end of Japan. There is a whole hell of a lot of empty space in the US. I drove through Wyoming last month, it was over 450 miles, and for the first 300 miles I ran into one town. You can pretty much put Ireland into Wyoming, imagine driving from Cork to Belfast and encountering only one town of a population more than a couple of thousand. People often don't appreciate just how mind-bogglingly huge the US is. Canada is bigger, yes, but the main transit routes are localised along the US border, together with the population.

NTM

Maskhadov

They are adding too much value to the US Dollar. If they quoted oil prices in Euro then a lot of value would be wiped off the dollar. its already at a very low level

CCCP^

Liam Byrne wrote: »

Saddam Hussein did, on a few occasions, suggest that oil be sold in euro......and "coincidentally" the U.S. invaded Iraq not long after both occasions....

http://archives.cnn.com/2000/WORLD/meast/10/30/iraq.un.euro.reut/
http://www.energybulletin.net/7707.html
http://socrates.berkeley.edu/~pdscott/iraq.html
http://www.globalresearch.ca/articles/CLA410A.html
http://www.feasta.org/documents/papers/oil1.htm
http://www.arabnews.com/?p.=7&section=0&article=78138&d=21&m=2&y=2006
http://www.thinkandask.com/news/thedollar.html

Hmmm...

Just been reading through those articles, only as far as the second one but it's very interesting although it is dated. Thanks!

edanto

Manic Moran wrote: »

Look at the .....

Also...

The US Department of Defense (DoD) is the largest oil consuming government body in the US and in the world

Although maybe they get it for cheap now that there are 14 megamilitary bases in all the main areas with oil in Iraq. Well, anyways, that kind of stuff is probably offtopic in this thread.

Venezuela have found a way to trade oil without having to use dollars (and in using those dollars paying interest on every dollar to the Federal Reserve); they barter with Cuba; oil for well-trained doctors to run very effective (and appreciated) clinics in the barrios.

Riddle101

The reason why oil is sold by the dollar is because the Dollar is a stable currency. The dollar has been used for years as the currency for trade, the EURO is only 5 years old now so it's considered new, The yen isn't partically stable and other countries don't have a stable enough currency so the dollar is really the only option. Also because it's easier to understand

edanto

If the dollar is such a stable currency, then how has the US gone from a nation that used to loan money to other countries only twenty years ago to a country that now owes over 25% of its GDP and is fast on course to be owing 50% of it's GDP by 2020?

Then again, I'm no economist, but like your friend I think that the real reason for the war in the Middle East (Iraq, plus threatening Iran with nukes) has been to protect the dollar. If they neocons can just hold on a little more - maybe one more little war somewhere - then by the time the economy comes crashing down a Democrat will be in the White House and the GOP can just blame 'high taxes' for the meltdown.

CCCP^

Wouldn't it have been more advantageous for the OPEC nations to insist that Oil be denominated in their own currency or in some kind of OPEC credit/currency? But seemingly a secret agreement between the US and Saudi Arabia prevented that move, that and the threat of force the US has always maintained.

Right now 1 US dollar is worth Euro 1.57839. Wouldn't it make more sense for Oil trading nations to switch to the Euro and get more?

gurramok

CCCP^ wrote: »

Wouldn't it have been more advantageous for the OPEC nations to insist that Oil be denominated in their own currency or in some kind of OPEC credit/currency? But seemingly a secret agreement between the US and Saudi Arabia prevented that move, that and the threat of force the US has always maintained.

Right now 1 US dollar is worth Euro 1.57839. Wouldn't it make more sense for Oil trading nations to switch to the Euro and get more?

Yes it would.

One mishap is that alot of Arab states are allies of the US and the pressure to keep the dollar would be enormous.
A combination of 'rogue' nations buying in euro via Iran exchange to start the ball rolling and the plummeting of the value of the dollar will change their minds.

I wouldn't like owning a 20mpg gas guzzler in the US right now, they've been getting the oil far too cheap for donkeys years and they do need a lesson on the environment

Auditor #9

CCCP^ wrote: »

Wouldn't it have been more advantageous for the OPEC nations to insist that Oil be denominated in their own currency or in some kind of OPEC credit/currency? But seemingly a secret agreement between the US and Saudi Arabia prevented that move, that and the threat of force the US has always maintained.

Right now 1 US dollar is worth Euro 1.57839. Wouldn't it make more sense for Oil trading nations to switch to the Euro and get more?

Iran is doing this now so is Russia. Iran : http://www.mathaba.net/news/?x=580907

One of the theories surfacing in this thread now may be that the US used the threat of force against the Saudis and OPEC generally. I wonder how much substance there is in this given the Cold War and the background threat of Nuclear strikes..?

Boston

CCCP^ wrote: »

Wouldn't it have been more advantageous for the OPEC nations to insist that Oil be denominated in their own currency or in some kind of OPEC credit/currency? But seemingly a secret agreement between the US and Saudi Arabia prevented that move, that and the threat of force the US has always maintained.

Right now 1 US dollar is worth Euro 1.57839. Wouldn't it make more sense for Oil trading nations to switch to the Euro and get more?

No it wouldn't. Another reason for pricing in dollars is that the vast majority of the goods purchased by these opec countries are bought either from the US or from other countries that also deal in dollars. If what you're buying is in dollars and what your selling is in dollars then the variations in the value of the dollar has less of an impact. Counties which have sweet fa trade with the US but a lot of the EU (Iran and France for instance) would be more likely to price in Euros as they need euros anyway to buy things like nuclear reactors and the like.

LostinBlanch

Well look at this.

Currency exchanges in Amsterdam are refusing to change dollars for euros. Now when was the last time you heard of dollars being refused anywhere?

edanto

I'm stunned at the currency traders in Amsterdam - that's pretty serious.

At the Taj Mahal and over 100 other tourist sites in India, they have been refusing dollars as payment since November. They made that change so as not to suffer too much from fall off in revenue.
http://news.bbc.co.uk/1/hi/world/south_asia/7098370.stm

P_ONeil

The people above are correct. Originally, oil was traded in dollars because of the amount of oil America was buying. To this day they still are the main buyer of oil.

In fact, check this poster - look at the pie chart on the bottom right showing the 2004 stats on the distribution of oil worldwide. America uses more oil in a year than every other country on the planet added together.

http://www.oilposter.org/posterlarge.html

That being said, the big issue is as also mentioned above, is what is known as the petro-dollar recycling system.

Ever wonder how the America government can run a few hundred billion dollar deficit like they are now?

It works like this...

http://en.wikipedia.org/wiki/Petrodollar_recycling

OPEC sells oil in dollars. This means EVERY country has to buy dollars to buy oil. Just like when you go on holiday outside of the EU, you have to purchase that currency. All countries have to pay a fee to America to buy dollars to purchase oil for their own country. This means EVERY country in the world has to pay a charge to America everytime they buy oil. America 'borrows' from other nations, and never has to pay it back. Why? They simply deduct the money they owe from the nations money transfer fees when they buy oil. It doesn't cost America anything to convert their currency, but every other country has to pay America to transfer funds.

Also, OPEC nations then have all their profits in dollars. If they convert them to invest outside America they too then pay a conversion fee, which is why you see Iran and Venezuela still having large accounts in American banks even with the current rhetoric - it would cost them billions to move their money. This keeps American banks fat and happy, and allows them to borrow, run up huge deficits, and not have to pay it back. They know whoever they borrow from will have to buy oil sometime, and they use that as an economical weapon of sorts.

This is why America is the richest nation. However, times are changing - countries are looking to trade oil in Euros, and that scares the **** out of America because they then lose their edge, and a few trillion a year in made-up fees they currently are getting. It's like a scam, only legal. Sort of like paying the mafia for the building rights in New York, everyone has to pay for using dollars to buy oil.

Saddam switched his oil to be backed by Euros the day before America invaded. The FIRST act of the American 'improvised government' was to switch this back after the Americans captured the oil ministry - the FIRST building secured by the American forces. Thats why they skipped the fighting and sent the troops right into Baghdad.

Either way, if other nations follow suit, then the American economy will collapse. They know this, which is why they keep israel in place and columbia - they act as surrogates which they use to apply pressure to anyone who starts talking of messing with the scheme of things in the petro-dollar recycling system.

Any government even mentioning this or trying to change things finds itself paying even more for dollar conversions, or finds themselves completely cut out of the loop, leaving their country thirsting for oil. Lack of oil can keep a nation from developing.

I could go on for hours, but just check the wiki and Google the term - there is lots of material out there on this.

Next time you go to the pump, know that 1/4 of the price you pay isn't going to the middle east - its going into American coffers and that your paying for the right to buy oil through the American petro surtax.

Kev_ps3

Excellent thread guys, a very interesting read. I cant believe there isnt tv programmes about this! Why dont we see more on tv about this issue?

edanto

Dunno. It seems to be the kind of thing that you have to go and find out yourself. Although one of the best videos that I've seen about it was a television show - it was on More4 two years ago, and is now on Google Video - Robert Newman's History of Oil It will knock your socks off.

By the by, he has also started selling this as a DVD on his website. http://www.robnewman.com/shop.html

A great Christmas present for anyone that might be interested to know that one of the first British regiments deployed in the FIRST World War was sent to protect the oil in Basra. Yes, that Basra.

Auditor #9

This Graph from the Economist from a few years ago says a lot and is one of the most shocking statistics on relative oil use by nations on the face of this earth.

gurramok

Good find Auditor #9. Never realised the US used up so much petrol, more than the combined consumption of all the next biggest economies put together.

No wonder they are sh1t scared of oil been priced away from dollars, it will bankrupt them mercilessly!

Ardent

P_ONeil wrote: »

The people above are correct. Originally, oil was traded in dollars because of the amount of oil America was buying. To this day they still are the main buyer of oil.

In fact, check this poster - look at the pie chart on the bottom right showing the 2004 stats on the distribution of oil worldwide. America uses more oil in a year than every other country on the planet added together.

http://www.oilposter.org/posterlarge.html

That being said, the big issue is as also mentioned above, is what is known as the petro-dollar recycling system.

Ever wonder how the America government can run a few hundred billion dollar deficit like they are now?

It works like this...

http://en.wikipedia.org/wiki/Petrodollar_recycling

OPEC sells oil in dollars. This means EVERY country has to buy dollars to buy oil. Just like when you go on holiday outside of the EU, you have to purchase that currency. All countries have to pay a fee to America to buy dollars to purchase oil for their own country. This means EVERY country in the world has to pay a charge to America everytime they buy oil. America 'borrows' from other nations, and never has to pay it back. Why? They simply deduct the money they owe from the nations money transfer fees when they buy oil. It doesn't cost America anything to convert their currency, but every other country has to pay America to transfer funds.

Also, OPEC nations then have all their profits in dollars. If they convert them to invest outside America they too then pay a conversion fee, which is why you see Iran and Venezuela still having large accounts in American banks even with the current rhetoric - it would cost them billions to move their money. This keeps American banks fat and happy, and allows them to borrow, run up huge deficits, and not have to pay it back. They know whoever they borrow from will have to buy oil sometime, and they use that as an economical weapon of sorts.

This is why America is the richest nation. However, times are changing - countries are looking to trade oil in Euros, and that scares the **** out of America because they then lose their edge, and a few trillion a year in made-up fees they currently are getting. It's like a scam, only legal. Sort of like paying the mafia for the building rights in New York, everyone has to pay for using dollars to buy oil.

Saddam switched his oil to be backed by Euros the day before America invaded. The FIRST act of the American 'improvised government' was to switch this back after the Americans captured the oil ministry - the FIRST building secured by the American forces. Thats why they skipped the fighting and sent the troops right into Baghdad.

Either way, if other nations follow suit, then the American economy will collapse. They know this, which is why they keep israel in place and columbia - they act as surrogates which they use to apply pressure to anyone who starts talking of messing with the scheme of things in the petro-dollar recycling system.

Any government even mentioning this or trying to change things finds itself paying even more for dollar conversions, or finds themselves completely cut out of the loop, leaving their country thirsting for oil. Lack of oil can keep a nation from developing.

I could go on for hours, but just check the wiki and Google the term - there is lots of material out there on this.

Next time you go to the pump, know that 1/4 of the price you pay isn't going to the middle east - its going into American coffers and that your paying for the right to buy oil through the American petro surtax.

Awesome post. I must read into this more, fascinating stuff.

biko

edanto wrote: »

Although one of the best videos that I've seen about it was a television show - it was on More4 two years ago, and is now on Google Video - Robert Newman's History of Oil It will knock your socks off.

+1000

Sir Digby Chicken Caesar

'what was that my friend? I couldn't hear you because someone was driving by shouting 'death to america in my ear' '

edanto

Oh dear, now Chinese exporters are refusing to accept dollars.

By the by, if anyone wants to read an interesting blog post on the US economy (not just related to the topic of this thread) - have a look at http://www.falkvinge.com/2008/03/why-us-is-collapsing.html

Kev_ps3

edanto wrote: »

Oh dear, now Chinese exporters are refusing to accept dollars.

By the by, if anyone wants to read an interesting blog post on the US economy (not just related to the topic of this thread) - have a look at http://www.falkvinge.com/2008/03/why-us-is-collapsing.html

Excellent news! Lets hope more follow suit!

It has been paying rapidly growing VISA bills using MasterCard and vice versa for 37 years. The creditors are catching up, and the US is about to go extinct as a superpower

meathstevie

The reason for oil being quoted in dollars is purely historical as far as I can determine. In the mid 20th century the only big strong economy with a sufficiently strong and stable currency was the US unless you were inclined the use USSR - Stalinist Rouble . Europe was only recovering from WWII with the USSR's cold war treath fairly lively on the border of West-Germany, Austria and Finland. Throw that in with the decolonisation troubles all over Africa and Asia and there's your explanation why the Dollar was the only realistic option. It's worth noting that the Dollar more or less took up the position Sterling left vacant as Brittain left the scene as a global super power.

All these situations have changed now of course and Europe has never been as stable as it has been for the last decades and since it has a uniform currency as well now it could very well be that international commodity markets will shift to Euro in the near to mid-term future as the US is showing a lot of symptoms of a super power in decline. In fact the only thing the EU lacks to become a super power is a uniform foreign policy and a thorough military integration. Two things of which the development is in it's firts tentative stages.