|Debunking the Dumping-the-Dollar Conspiracy
By Dean Baker
On October 5th, 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.
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
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.
Even if all oil were sold for dollars, it would be a very small factor
in the international demand for dollars, as can be seen with a bit of
simple arithmetic. World oil production is a bit under 90 million
barrels a day. If two-thirds of this oil is sold across national
borders, then it implies a daily oil trade of 60 million barrels. If
all of this oil is sold in dollars, then it means that oil consumers
would have to collectively hold $4.2 billion to cover their daily oil
By comparison, China alone holds more than $1 trillion in currency
reserves, more than 200 times the transaction demand for oil. In other
words, if China reduced its holdings of dollars by just 0.5 percent,
it would have more impact on the demand for dollars than if all oil
exporters suddenly stopped accepting dollars for their oil.
This raises a more serious issue affecting the demand for dollars,
which is the dollar's status as an international reserve currency.
Currently the dollar is by far the preferred currency, but others,
notably the euro, are gaining ground. A switch away from the dollar
will lower its value, but this is hardly anything to fear: In
actuality, it was and is an official policy goal of both the George W.
Bush and Barack Obama administrations.
Both administrations are on record complaining about China's
"manipulation" of its currency. China does this by buying up vast
amounts of dollars to hold as foreign reserves, suppressing the value
of the yuan against the dollar. This, in turn, makes Chinese goods
cheaper in the United States and bolsters China's exports.
If China stopped buying up huge amounts of dollars, as the United
States wishes, then the dollar would fall in value against the yuan,
thereby making Chinese imports more expensive. The result would be
that the United States would buy fewer imports from China, improving
its trade balance. Not too many people would be frightened by this
To summarize, the dollars needed to finance the international oil
trade are trivial compared with other sources of demand for dollars.
The currency chosen for foreign reserve holdings can have an impact on
demand for dollars, but this has nothing to do with the currency
chosen to conduct the oil trade. If Saudi Arabia wanted to hold euros
rather than dollars, it could almost instantly offload as many dollars
as it desired. Plus, the White House wants the dollar to decline
anyway because it would improve the United States' trade balance.
Thus, the conspiracy theory Fisk resurrected might have spooked the
markets, but the reality is that there is nothing to fear. The
dollar's value will likely fall over time (as it has been doing
against the euro for the last nine years). But there is nothing in the
cards to suggest a collapse, even if Saudi Arabia starts selling its
oil for euros or yuan.
-- This article was published on October 7, 2009 by Foreign Policy.