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delite1

Petro Euro V Petro Dollar

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A popular theory suggests the Iraq war occurred to ensure the US dollar remained the worlds reserve currency.

Iran is now about to trade its oil for Euros instead of dollars. It has invited other Opec nations to join it. If this occurs what will it mean for US inflation if the Petro Dollar cycle is allowed to break down?

Edited by delite1

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My guess would be a falling dollar, causing imported inflation, with interest rates increasing to try to support its value.

EDIT: Does anyone have any good links to the impact on Sterling when oil was moved to be priced in dollars?

Edited by Portent

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My guess would be a falling dollar, causing imported inflation, with interest rates increasing to try to support its value.

EDIT: Does anyone have any good links to the impact on Sterling when oil was moved to be priced in dollars?

Oil has always been traded in dollars.

Without an enormous amount of political will and co-operation between large consumers and producers, it always will be because it always has been. There is too much inertia for change. I have posted ad nauseam on this subject. The Iraq/Euro theory is up there with all the 9/11 conspiracy theories I'm afraid.

This is a very sensible article I found on the subject:

http://www.ccc.nps.navy.mil/si/nov03/middleEast.asp

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A popular theory suggests the Iraq war occurred to ensure the US dollar remained the worlds reserve currency.

Iran is now about to trade its oil for Euros instead of dollars. It has invited other Opec nations to join it. If this occurs what will it mean for US inflation if the Petro Dollar cycle is allowed to break down?

I think the Iran issue is a red herring. Perhaps Americans will blame the falling dollar on Iran. But the real reason the dollar will crash is the huge US public debt. It's just too tempting for the Fed to make it all go away in a puff of inflation.

This is actually a pretty shrewd move by the Americans I think. Look at it this way:

- Borrow a huge load of dollars from the Chinese, Japanese and Germans.

- Use the dollars to fund a massive adventure, destabilising a resource rich region of your choice.

- Slash interest rates so that everyone in the US loads up on gerared assets like real estate and stocks.

- Then print a huge load of dollars to pay back the foreign bond holders.

The resulting inflation will hurt those who have dollars (mostly foreign central banks) and reward those who have dollar-denominated debt (mostly americans).

I guess the downside is a big load of price inflation in the US, but let's face it, the American elite is not going to notice that.

Gotta go, SWAT team outside. :o

frugalista

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As I understand it, only about half the US debt is held by foreigners. If that is the case and the US does go inflation crazy, 50% of the pain wil be felt by 260 million americans, and the other 50% will be shared out amongst a couple of billion foreigners.

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Maybe I'm mistaken? Wasn't oil traded in Sterling before WW2?

No. The oil industry began in the US so the dollar has always been the dominant currency. And oil trading as we know it has only been going since the oil shock of the 70s, before that the big oil firms just told the Arab countries what the price was.

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Oil has always been traded in dollars.

Without an enormous amount of political will and co-operation between large consumers and producers, it always will be because it always has been. There is too much inertia for change. I have posted ad nauseam on this subject. The Iraq/Euro theory is up there with all the 9/11 conspiracy theories I'm afraid.

This is a very sensible article I found on the subject:

http://www.ccc.nps.navy.mil/si/nov03/middleEast.asp

Thanks, this has made me see it in a different way. The quote currency of a commodity is irrelevant. If you're a European oil importer, there's no reason to you can't pay using euros for each transaction and the dealer could convert the currency at the spot level that day as part of the sales process. And conversely the oil exporter receives dollars and converts them back to euros to put in his cash accounts.

Yes there’s a notional amount of dollars used in the transaction, but only for a few seconds, and there’s no net purchase of dollars, no dollar recycling etc. If the dollar appreciates in value, oil will be cheaper in dollar terms, but could be unchanged in euro terms.

If the world changes, (dollar collapses), and the value of things is better expressed in another denomination, then so-be-it. The fact that most commodities are quoted in dollars is a result of the long run stability of the dollar and therefore it’s usefulness as a reserve currency - not the other way around.

There’s no reason for China and Japan to stockpile dollar denominated assets just because it happens to be the quote currency of oil. They will diversify into euros as the long run confidence in the purchasing power of euros improves, and then more euro recycling will take place.

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Thanks, this has made me see it in a different way. The quote currency of a commodity is irrelevant. If you're a European oil importer, there's no reason to you can't pay using euros for each transaction and the dealer could convert the currency at the spot level that day as part of the sales process. And conversely the oil exporter receives dollars and converts them back to euros to put in his cash accounts.

Yes there’s a notional amount of dollars used in the transaction, but only for a few seconds, and there’s no net purchase of dollars, no dollar recycling etc. If the dollar appreciates in value, oil will be cheaper in dollar terms, but could be unchanged in euro terms.

If the world changes, (dollar collapses), and the value of things is better expressed in another denomination, then so-be-it. The fact that most commodities are quoted in dollars is a result of the long run stability of the dollar and therefore it’s usefulness as a reserve currency - not the other way around.

There’s no reason for China and Japan to stockpile dollar denominated assets just because it happens to be the quote currency of oil. They will diversify into euros as the long run confidence in the purchasing power of euros improves, and then more euro recycling will take place.

I read the article too. It seems a bit out of date. Iran has now said it will accept oil payments in Euros (from 20/03/06) and has also set up a rival to NYMEX (the Iranian Oil Bourse).

I think that it is also plain to see (as with China's announcement that it will diversify its foreign exchange holdings away from the dollar) that the world knows that the dollar will devalue one way or another (either by a large move away from the dollar (with China leading the way) or through inflationary measures by Bernanke) and as a consequnce more oil producers/purchasers might just see the Euro as a safer bet than the dollar.

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One counterpoint to this is the OPEC promise to act at the swing oil producer to keep the oil price (in dollars! ) in a certain target range 50 - 60 USD.

If they manage this then oil IS then tied to the USD, and all of the conspiricy theories are then become valid again.

I.E. if the target price is set in EUR, it makes more sense to move reserves to the euro, despite stablity arguments.

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Oil has always been traded in dollars.

Without an enormous amount of political will and co-operation between large consumers and producers, it always will be because it always has been. There is too much inertia for change. I have posted ad nauseam on this subject. The Iraq/Euro theory is up there with all the 9/11 conspiracy theories I'm afraid.

This is a very sensible article I found on the subject:

http://www.ccc.nps.navy.mil/si/nov03/middleEast.asp

All right, then what is this really about? Why is Iran doing this if it isn't going to make any difference? Just a case of folk not knowing what they are doing? Suppose the dollar does weaken; would trade not then switch to a more reliable currency?

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My guess is it will be bad for the US. VERY bad.

Well, very bad for the currency anyhow.

This is actually a pretty shrewd move by the Americans I think. Look at it this way:

- Borrow a huge load of dollars from the Chinese, Japanese and Germans.

- Use the dollars to fund a massive adventure, destabilising a resource rich region of your choice.

- Slash interest rates so that everyone in the US loads up on gerared assets like real estate and stocks.

- Then print a huge load of dollars to pay back the foreign bond holders.

The resulting inflation will hurt those who have dollars (mostly foreign central banks) and reward those who have dollar-denominated debt (mostly americans).

Gotta go, SWAT team outside. :o

Very interesting analysis Frugalista.

What is your take on the effect of all this on the Euro and/or small currencies like sterling?

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Oil has always been traded in dollars.

Without an enormous amount of political will and co-operation between large consumers and producers, it always will be because it always has been. There is too much inertia for change. I have posted ad nauseam on this subject.

No Oil has not always been traded in USD$. It started after the 70's fuel crises when the Americans did a deal with OPEC and in return OPEC agreed to only sell oil in USD$

The Iraq/Euro theory is up there with all the 9/11 conspiracy theories I'm afraid.

Lets just say we disagree on the events of 9-11 but I would be incline to question my believes about 9-11 if oil is allowed to be traded by Iran in euros but by the same token would you then take the time to look at the evidence surrounding 9-11 instead of dismissing it as another Elvis lives on the moon type theory.

Don’t get me wrong I am all for bombing Iran as I don’t trust them with nukes but I’m less than happy with GWB bombing his own people.

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Any worlds reserve currency needs to be stable and not based on a debt laden economy and the USD$ currently has none of these virtues so in pops the euro for now.

USD$ will tank come March if the oil peg is broken and this will drag the GBP£ down some way with it.

My guess is if the currencies stabilise then it will be about

£1.00 = 1.10 euros

£1.00 = $2.20-$2.40

I say ‘IF’ because we could be looking at a total meltdown IMHO

You’re a brave man if you hold on to any USD$ just now as the Japanese are now taking the plunge and also dumping it

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No Oil has not always been traded in USD$. It started after the 70's fuel crises when the Americans did a deal with OPEC and in return OPEC agreed to only sell oil in USD$

Sorry but you're wrong, in fact the fall in value of the dollar after Nixon took it off the gold standard in 1971 was actually one of the triggers of the oil crisis, as Opec members got pissed off with the effective loss of revenue.

Don't forget that it is not until relatively recently that oil has been "traded" as a commodity in an open market. For most of the history of the oil industry, the large companies extracted it, shipped it, refined it and sold it themselves. The price of crude was the one that they told the compliant producer governments that they were going to pay (in dollars). When oil companies all concertedly started lowering these prices, Opec was formed in retaliation. It's only really since the 70s that the supply chain has been split up and trading has emerged, with privately owned trading houses getting into the act, exploiting relationships with producers in ways that big companies could not. It's a fascinating history. Just do a google search for "Marc Rich" or Vitol or Glencore if you're interested.

Lets just say we disagree on the events of 9-11 but I would be incline to question my believes about 9-11 if oil is allowed to be traded by Iran in euros but by the same token would you then take the time to look at the evidence surrounding 9-11 instead of dismissing it as another Elvis lives on the moon type theory.

Sorry I didn't mean to write off all the theories about 9-11, I'm sure there are elements of truth in some of them. I was just talking about the nuttier ones. But the point I'm trying to make is that Iran can offer to sell oil in euros if it wants, but it won't make an iota of difference. It will still have to pay in dollars for all the gasoline it has to import because its refineries are crap. Putin also wanted to sell oil in euros - nothing happened. The market wasn't interested. The price reporting agencies have suggested doing parallel quotes in dollars and euros - again, no interest.

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One last thing to say about this - don't overestimate the importance of Iran as an oil exporter or as a player in Opec.

Opec does what the Saudis want. The Saudis are the big boys. The other Arab states keep themselves pretty quiet and follow the Saudis. The Iranians and Venezuelans turn up to every meeting making a lot of noise about the need for a cut and blah blah blah, but in the end they do what the Saudis say and come out pretending that they agreed all along.

What Iran is doing is posturing. It's trying to make a political point. Just like Venezuela giving free heating oil in the US to poor people. In the world of economics it means almost nothing.

Iran is struggling with its oil production, it can barely meet its Opec quota. It's virtually a declining oil province. It also badly needs oil revenue as it has a large population to feed. Iran's star is falling, Nigeria's is rising, as is Algeria and Libya.

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El_Pirata

"It's a fascinating history. Just do a google search for "Marc Rich" or Vitol or Glencore if you're interested."

Thanks for the info, i will check it out as maybe my view is a little simplified on the subject.

Yes I know Oil has the words Saudi Royals written all over it.

Try Google with Saudi + GWB or Condy Rice

Edited by Justice

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El_Pirata

Thanks for the info, i will check it out as maybe my view is a little simplified on the subject.

Yes I know Oil has the words Saudi Royals written all over it.

Try Google with Saudi + GWB or Condy Rice

If you add in "Chalabi" with some of those names I gave you you'll get some really interesting results ;)

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Sorry I didn't mean to write off all the theories about 9-11, I'm sure there are elements of truth in some of them. I was just talking about the nuttier ones.

And there are some pretty crazy ones

http://www.gpoaccess.gov/911/

I like the catchy chapter titles, very tasteful and not at all emotive.

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:):):)

I hate to be contradictory, but it is not the case that oil has always and only been traded in dollars.

The dollar became a world reserve currency, and thus a natural choice for quoting oil prices, in 1945 as a result of the depression and WWII.

Before that, the world's trading system was fundamentally different. Gold was the "reserve currency" until 1931 and trade was conducted mainly inside each of the various European empires - so for instance a French colony would mainly trade with France and that trade would be denominated in French francs.

The exception was the British (and to a small extent the US), who had trading interests everywhere and so (conveniently for them) believed in "free trade".

As for the oil industry beginning in the USA - get a life, or more accurately a history textbook. Rockefeller himself actually made his first money in Russia (present day Azerbaijan).

:):):)

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:):):)

I hate to be contradictory, but it is not the case that oil has always and only been traded in dollars.

The dollar became a world reserve currency, and thus a natural choice for quoting oil prices, in 1945 as a result of the depression and WWII.

Before that, the world's trading system was fundamentally different. Gold was the "reserve currency" until 1931 and trade was conducted mainly inside each of the various European empires - so for instance a French colony would mainly trade with France and that trade would be denominated in French francs.

The exception was the British (and to a small extent the US), who had trading interests everywhere and so (conveniently for them) believed in "free trade".

As for the oil industry beginning in the USA - get a life, or more accurately a history textbook. Rockefeller himself actually made his first money in Russia (present day Azerbaijan).

:):):)

1. Well, before WW2 (in fact before the 70s), oil was not traded as a fungible commodity, so we're talking about a whole different ball game. If the system was still the same (ie oil companies paying posted prices to producer countries and then refining the oil and selling the products via their own retail networks) then switching to the euro would be relatively unproblematic. It's the rise of trading oil as a commodity in cash markets, otc markets, futures markets etc etc that has caused the complexity that would make a move away from the dollar so difficult.

2. Yes Rockefeller - an American. Anyway Rockefeller did not start making his money till the 1870s, whereas oil wells were drilled in Pennsylvania in the late 1850s. At the same there was work going on in Baku, and refining was invented in Poland. But the important point is that oil extraction, refining and consumption on an INDUSTRIAL scale began in the US.

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