Rugoz wrote:The petro-dollar demand is tiny compared to the total dollar demand. Someone did the math here:
https://foreignpolicy.com/2009/10/07/de ... onspiracy/
I read your article (and of course this is nothing personal as I consider you a knowledgeable poster on economics, and like much of what you have to say, but I disagree with your assessment of this article and this situation).
You said someone did the math there. Let me recommend some light reading material myself.
I'll get to the so-called math first.
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 tab.
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.
The author leaves something out here. Leaving aside the disincentives for China to act in this way (which the writer partially goes into), he left out a key phrase. Let me reword it for him. "(...) if China reduced its holdings of dollars by just 0.5 percent per day
, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil."
Foreign Policy is basically just a neocon rag in my opinion, which incidentally I sometimes do enjoy reading.
This article is full of problems.
Lets look at some other of my criticisms.
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.
The author leaves out a critical aspect behind the ascendancy of the US dollar as the international reserve currency after WW2. There is no mention here of Bretton Woods. No mention of the gold-exchange standard, which was centered on the US dollar.
Granted this system is not the only cause for the dollar's ascendance, and the reasons mentioned by the author are part of the story, but no proper understanding can be attained absent this critical background factor (which might have even been the pivotal factor).
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.
Here now the author is confounding the function of the dollar as unit of account with that of means of settlement. This is probably just a dishonest effort to confuse readers not sufficiently versed in economics, by filling up space in the column with a reassuring sounding paragraph.
It's ironic though that he mentions bushels of wheat, given the discussion in recent posts in this thread about barter! (That isn't really to mean anything, other than to point out that irony is fun.)
Only one more quote. The author moves into this.
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.
The author begins to breach the topic, but deviates immediately. This article is not intended to be a serious piece of analysis. This article is merely intended to push a pre-determined conclusion.
By the way, I'll do a little math now.
According to the author's reckoning, the DAILY tab for oil, transacted in dollars, is $4.2 billion.
$4.2 billion x 365 = $1.533 trillion.
China's holdings of US treasury notes in 2008 when this article was written, according to the author, amounted to $1 trillion.
So in actuality, China would need to dump $1.533 trillion of it's $1 trillion of holdings, per year, to have the same impact on the dollar as the complete abandonment of the US dollar as means of settlement for oil contracts (supposedly anyway, based on the author's reasoning, although treasuries don't really equal dollars--and in the real world would still find buyers but the effect would be a discounting of US treasuries. By the way, the author dishonestly calls these treasury notes 'currency reserves' in the piece).
If this looks like good math to you than, well, we have quite different conceptions of good math I suppose, to put it as politely as possible.