Debunking the Dumping-the-Dollar Conspiracy

On Monday, the Independent reported that a number of countries are conspiring to dump the dollar as the primary oil trade currency, spelling disaster for the U.S. economy. But the United States wouldn't need to fear -- even if it were true.

BY DEAN BAKER | OCTOBER 7, 2009

For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq's decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran's threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country's nuclear program.

The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday, as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.

But they really shouldn't be concerned. Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States.

With the United States' ascendancy as the pre-eminent economic power after World War II, the dollar became the world's reserve currency: Most countries held dollars in reserve in the event that they suddenly needed an asset other than their own currency to pay for imports, or to support their own currency. Much international trade, including trade not involving the United States, was carried through in dollars. In addition, most internationally traded commodities became priced in dollars on exchanges. However, the dollar was never universally used to carry through trade (even trade in oil), and the pricing of commodities in dollars is primarily just a convention.

Any market -- a stock market, a wheat market, or the oil market -- requires a unit of measure. The importance of the U.S. economy made the dollar the obvious choice for most markets. But there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market. It's simply an accounting issue.

Suppose that prices in the oil market were quoted in yen or bushels of wheat. Currently, oil is priced at about $70 a barrel. A dollar today is worth about 90 yen. A bushel of wheat sells for about $3.50. If oil were priced in yen, then the current price of a barrel of oil in yen would 6,300 yen. If oil were priced in wheat, then the price of a barrel of oil would be 20 bushels. If oil were priced in either yen or wheat it would have no direct consequence for the dollar. If the dollar were still the preferred asset among oil sellers, then they would ask for the dollar equivalents of the yen or wheat price of oil. The calculation would take a billionth of a second on modern computers, and business would proceed exactly as it does today.

It does matter slightly that the trade typically takes place in dollars. This means that those wishing to buy oil must acquire dollars to buy the oil, which increases the demand for dollars in world financial markets. However, the impact of the oil trade is likely to be a very small factor affecting the value of the dollar. Even today, not all oil is sold for dollars. Oil producers are free to construct whatever terms they wish for selling their oil, and many often agree to payment in other currencies. There is absolutely nothing to prevent Saudi Arabia, Venezuela, or any other oil producer -- whether a member of OPEC or not -- from signing contracts selling their oil for whatever currency is convenient for them to acquire.

KHALED FAZAA/AFP/Getty Images

 SUBJECTS: OIL, ECONOMICS
 

Dean Baker is codirector of the Washington-based Center for Economic and Policy Research.

GRANT

6:57 PM ET

October 7, 2009

I notice that the trustworthy

I notice that the trustworthy news sources kept links with large headline like "Dollar falls on oil plan report" without even a mention of 'fake' or 'unconfirmed'. There is a reason some people have more trust in Jon Stewart, he doesn't need to sensationalize things when the BBC does it for him.

 

JAMES BROWN

3:16 AM ET

October 8, 2009

I've noticed reading helps ...

Your POV might be more credible if you had bothered to notice it was the Independent newspaper that published the Robert Fisk piece and not the BBC, which simply reported the financial movements that appeared to have resulted from the story's publication.

As for the notion that the US would be essentially "unaffected" if the world's oil producing nations drop the dollar in what is a likely first step towards de-coupling from the dollar as "reserve currency" ... I guess you are following the old dodo proverb: "if the truth be buried in the sand, why not stick your head down there too ..."

 

GRANT

8:02 AM ET

October 8, 2009

My point was that until many

My point was that until many hours after the story had begun to spread the major news sites kept reporting in headlines, summary, and majority of the text as though it were fact. It wasn't until the end of the story that they reported that Kuwait, Saudi Arabia, and Chinese bankers denied it. What do you think the average reader who just skims things will notice?

 

EJSPENCER

11:49 AM ET

October 8, 2009

strange logic

Mr. Baker contends that a high estimate is that 4.2 billion US dollars might be spent on buying oil from producers daily. He then compares this to 1 trillion US dollars which China holds as reserve. That's no comparison. The real question is at what rate does China buy US dollars for its reserve? The fact that China has 1 trillion US dollars is irrelevant to the actual demand for US dollars. Oil sales supposedly accounts for 4 billion US dollars in daily demand. I'm pretty sure that China does not buy 4 billion US dollars for its currency reserve on a daily basis. If it did, it would acquire more than 1 trillion dollars each year.

The bottom line is that, while there may indeed be nothing to fear as Mr. Baker suggests, it is not because China can reduce its holdings by more than is spent on oil on a daily basis. The demand for US dollars for the purchase of oil is more or less assured and continuous. Were China to reduce its holdings at a similar rate to the spending on oil it'd run out of dollars pretty quickly.

 

GOEDEL

7:51 PM ET

October 8, 2009

A dollar debacle would end US imperialism

One of the few ways in which long-standing autocracies are destroyed is through a sharp decline in the exchange value of their currencies. Though I am not an historian, I believe that the French Revolution occurred when the French peasants and workers could no longer afford bread ("Let them eat cake"!) The Bourbon king's treasury was empty and his ministries and agents unfunded. The Weimar Republic, for all its faults, lost credibility in 1923, from wild inflation and finally fell when inflation and unemployment returned after a mid 1920s pause in the crash of world stock markets.

A rejection of the US dollar in foreign exchange would be very punishing to the American middle-class, which at present is relatively complacent about the military extravagances of our government and ruling, corporate class. Loss of savings and pensions, sky-rocketing prices for food, gasoline, all these would finally make Americans realize how poorly they are governed and there would be considerable social unrest.

Of course, such a catastrophe could install a military dictatorship and harsh repressions, but one result would undoubtedly be the end of US bases around the world and invasions by us of foreign countries with consequent killing of large numbers of innocent civilians and some of our own poorer citizens.

 

EXOTTOYUHR

1:35 PM ET

October 12, 2009

Doubtful

Because that approach really worked for Weimar Germany, didn't it?

 

VIV GOV

8:01 AM ET

October 13, 2009

False Logic

I spend about $100 a day, does that mean that I need to only hold $100 cash?

Also the main reaon that a shift would be significant, is its implications for the dollar as The reserve currency. What would happen if the US government had to borrow in Euros? That is the real danger of the move.