What are the pros and cons for denominating oil worldwide in U.S. dollars?

BY busadmin  June 17, 2008 at 12:12 PM EDT

Oil pump. Photo credit: file photo

Question/Comment: What are the pros and cons for denominating oil worldwide in U.S. dollars, versus in some other currency or basket of currencies?

Paul Solman: For whom? The big pro, from the US point of view, is that if oil is denominated in dollars, it’s paid for in dollars. So we don’t have to sell dollars on the open market to get the foreign currency we’d need to pay for our massive imports.

And the oil exporters are more liable to hold onto dollars if it’s dollars they get for their oil. And other countries that need dollars to pay for oil build up dollar reserves to do so. In short, a switch to Euro- or basket-o’-currencies-denominated oil would put even more pressure on the dollar than already exists. Disastrous pressure, some argue.

The last time I got a question like this, it turns out, my answer was a lot less considered. Here’s an email (from a well-wisher, it seems) that rightly takes me to task.

Paul,

First I wanted to thank you for all your insightful NewsHour segments. Those have been invaluable to me over the years.

I am writing in follow-up of Alan Tuthill’s question, “Will oil ever be priced in a currency other than dollars?” You wrote, “I may be missing something, but I can’t quite see what the big deal is. If the price goes up in dollars and oil is then priced in euros, it should cost us just as much more. The key is how much oil the dollar can actually buy – in euros, or any other currency.”

I offer the following 2003 article for your perusal.

You’ll see this issue is not just about the cost of oil. Much bigger issues are at play.

Respectfully,
David

Paul Solman: Indeed, I WAS missing something, though I think the linked article, while interesting and instructive, may overplay the importance of dollar-denominated oil. But maybe not.