Since most countries rely on oil imports, they are forced to maintain large stockpiles of dollars 2,3,4 in order to continue imports. 5 This creates a consistent demand for US dollars and upwards pressure on the US dollar’s value, regardless of economic conditions in the United States. This in turn allegedly allows the US government to issue currency below cost of currency production (seignorage) and bonds at lower interest rates than they otherwise would be able to.6 As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries. A stronger US dollar also means that goods imported into the United States are relatively cheap. It appears to be to the US’ advantage to maintain US dollar hegemony.7
If the denomination of oil sales changes to another currency, such as the euro, many countries would sell dollars and cause the banks to shift their reserves, as they would no longer need dollars to buy oil. 8 Forty years of petrodollars would start to get flushed from central bank reserves. This shift in petrocurrency reserve status would lower the volume and velocity of US dollar recycling and thus weaken the dollar relative to the Euro. The EU would accrue the same benefits from Euro-denominated oil sales that the US
What did the CME do?
The CME offered six Euro-denominated oil contracts. The oils are European delivery and the contracts are financially-settled. These are generally for hedging and risk management purposes. At this writing it is unclear if these contracts will be successful (as gauged by turnover). It is unknown if the CME or other energy bourses will offer more oil futures contracts denominated in Euros.
If the contracts are successful, could there then be a move towards Euro-denominated oil sales? There is doubt as to whether oil settlements can really move away from the US dollar. 9 There is evidence that OPEC cannot unilaterally decide to price their exports in Euros. There is no evidence that the network of global oil trade has requested non-US dollar contracts. In the early 2000’s, Russia floated the idea of oil settlements in Euros; the idea died in 2003. Other oil export countries have made more recent pronouncements of movements away from US dollar oil sales that appear to be more political than administrative for now. 10,11
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