Listening to NPR heard this morning I heard NPR mislead their listeners on this issue twice in less than an hour. That's pretty good in the misinformation department. The first time was in their top of the hour news. They told listeners that the dollar was falling in world currency markets. Then they told audiences that because oil is priced in dollars, the falling dollar meant higher oil prices. This should have led to a huge "huh?" from NPR's audience. A lower value of the dollar means that it will take more dollars to buy oil regardless of what currency it is priced. In fact, we would have to pay more dollars for oil even if it were priced in pig intestines. Later, during a Market Place segment, there was a discussion of the impact of the falling dollar on the states in the Persian Gulf, all of whom tie their currency to the dollar. The report noted that this is leading some countries to consider breaking the link between their currency and the dollar. It then said that the biggest countries, Saudi Arabia and Kuwait, are not considering this move, because oil is priced in dollars and a falling dollar means a lot more money. Again, get out the huge "huh?" These countries get no more money, in either dollars or any other currency, by virtue of the fact that oil is priced in dollars. Let's try this one more time. Oil is priced in dollars as a convention. We have international markets for a huge range of resources and commodities. They generally use dollars as the unit of account. That's because we have the biggest economy and the dollar was the world's preeminent currency at the time that these markets were created. (It's sort of the same story with the dominance of English internationally.) But this is just a convention and the dollar is simply a unit of accounting. If a bushel of wheat sells for $5, then it makes no difference to people in the United States, or anyone else, if oil is priced in dollars and sells for $100 a barrel or whether it is priced in wheat and sells for 20 bushels a barrel. The price is the same. It is also important to realize that no one is forced to trade oil in dollars. This is also a convention. But, there are many cases where governments and companies will sell oil for euros, yen, or any other currency in which they find it convenient to carry on business. For example, if Kuwait wants to sell a million barrels of oil to a Japanese company for 10 billion yen (approximately the current price in yen), there is absolutely nothing to prevent the transaction. The vast majority of oil is still traded in dollars, but there is still a large and growing amount of trade in other currencies. This shift has almost no impact on either oil markets or the dollar. It simply removes an unnecessary exchange of currencies for the parties involved in the trade. So the next time you hear NPR, or anyone else, say that something is the case because oil is priced in dollars, get on the phone or Internet and tell them that they don't know what they are talking about.
--Dean Baker
