OPEC to Study Currency Basket for Pricing
October 28th, 2007More good news for U.S. Dollar holders. —Sarcasm.
Via: Yahoo / AP:
OPEC is likely to discuss creating a basket of currencies for oil pricing at its next summit due to the steady decline in the dollar, Venezuela’s Energy Minister Rafael Ramirez said on Friday.
“The need to establish a basket of currencies … will probably be a point of discussion in the next OPEC summit,” Ramirez told reporters during an evening event in the presidential palace.
“The dollar as a benchmark currency has been weakening quite a lot and it creates distortions in oil markets.”
The cartel is slated to hold a summit of the heads of state of OPEC nations in in November and a meeting of ministerial delegates in December.
Ramirez added that world oil markets are well supplied with petroleum inventories above average, reiterating suggestions earlier this week that OPEC is not likely to hike output to calm record-high prices.
“We have enough oil in the market, the inventory levels are above the average of the last five years,” he said.
Oil prices have soared in part because of a weakening dollar that tumbled in the wake of an interest rate cut by the U.S. Federal Reserve.
Officials from the United States and China — the world’s two largest oil consumers — have expressed concern that current crude prices are too high.
Research Credit: PD
Once our beloved dollar is worth .94 Canadian dollars and worth .66 euros (that means a Canadian dollar will cost you 1.05 US dollars to buy and a euro $1.50), they would be foolish not to do so. Economics is about people looking after their own interests, not about bowing to the will of the USA.
There are plenty of threats to the dollar. However, this particular threat to the Dollar is a joke. They can’t price something in a basket of currencies. They can measure it against a basket of currencies but it is not credible to price it like that. What are they going to ask a country like Japan to do? Can you pay me 50 dollars, 40 euros and 15,000 yen for a barrel? Ridiculous!
This is probably just a publicity stunt by Venezuela because it makes no economic sense. Actually the whole argument of the world needs our dollars because they are used to buy oil is not exactly a strong one either. Because of instantaneous convertibility of currencies the pricing of oil can be in any currency that is frequently traded and has a liquid market – like yen or even AUD. The only thing of importance is what currency the currency reserves are held in after the purchase is completed. If they are held in USD then there is a demand for USD as a reserve currency. If after the sale of Oil in USD is complete they are immediately converted to JPY then there is a much more limited demand for USD except for a brief transaction period. In this case the USD loses value while JPY rises. USD price of oil simply increases to compensate for lost value of USD and there is no need to switch from pricing oil in USD at all. Or at least not yet 🙂