The BBC had a short article on the possibility that Venezuela will shift from trading its oil in dollars to trading in euros. This article gives me an opportunity to trash two common myths about the meaning of such a shift among producers. The first issue is the importance of the shift to the value of the dollar. A story often circulated across the web is that there will be dire consequences for the dollar if oil producers made this shift. Some simply arithmetic should quickly eliminate such concerns. Currently oil consumption is about 85 million barrels a day. Let�s assume that a bit more than half, or 45 million barrels a day, crosses international borders. Now, let�s say that the bill for this trade is all paid on the same day of the month everywhere in the world. This would mean that if all payments were made in dollars, oil consumers would need to come up with $81 billion (45 million barrels*$60 per barrel*30 days) once a month to pay for their oil. World-wide holdings of dollars currently exceed $2 trillion. This means in this extreme scenario, a switch from dollars to euros would reduce the demand for dollars by about 4 percent. Now to make this scenario considerably less ominous, remember that payments are not all made on the same day of the month � if oil payments are even distributed over the course of the month, then the oil transactions demand for dollars is just $2.7 billion. Furthermore, much of this trade already takes place in euros, yen or other currencies. There is no law requiring that the trade takes place in dollars even now. In short, those who have been worried about this switch should find something else to lose sleep over. The second myth is that oil producers are somehow hurt when oil is priced in dollars, if the dollar falls. The problem with this story is that the price of oil is set in a market; the dollar is just the unit of account. Suppose the price of oil is $60 a barrel and the dollar is worth a euro. This means that oil producers would get 60 euros for a barrel of oil. However, if the dollar is only worth 0.75 euros (roughly the current price), then oil producers will get 45 euros for a barrel of oil. Suppose they decide to price their oil in euros. Then the market price of oil would be 45 euros � no one has gained, no one has lost. (There is a side issue about long-term contracts. If an oil producer signed a long-term contract denominated in dollars, and the value of the dollar fell, then they get hurt. But, if they anticipate that the dollar will fall through time, then they can just write their contract accordingly.)
--Dean Baker
