The Oil Price and the Declining U.S. Dollar

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A note from one of our readers: 

“Is it correct to assume that the raise in the oil price – from $20 to $80 in two years – saves the U.S. dollar from further depreciation? I assume this because more then 75% of the oil traded outside the United States is paid in U.S. dollars. So to pay for oil, you need U.S. currency.

“Because the oil price quadrupled in the last two years, it takes four times more U.S. dollars to pay for oil outside the United States; and for a foreigner to obtain U.S. dollars, they need to exchange their native currency, thus creating demand for the U.S. dollar.

“On the contrary, if the price of oil dropped to $20 a barrel, wouldn’t that cause enormous downward pressure on the value of the U.S. dollar?”

We have never understood the argument. If oil is priced in U.S. dollars, so goes the point, then oil consumers need dollars to buy it… and demand for dollars goes up. But transactions now only take a few seconds. It is not as if oil buyers need to show up with suitcases full of $100 bills. One account is debited. Another is credited. The credited account can then be put into dollars… pounds… or whatever. It all happens electronically – at the speed of light – 186,000 miles per second. It is not the currency in which oil is priced that counts… it’s the currency that people want to hold when the transaction is completed that really matters.

Of course, oil priced at $20 a barrel would be a big change… it would probably mean that the world economy had entered a major depression. By definition, dollars – which would buy four times as much oil as they do today – would be much more valuable.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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