Opec and the Denomination Fallacy

Okay, let’s try and make this clear, for the umpteenth time. If countries with

large dollar-based foreign-exchange reserves increasingly invest those reserves

in euro-denominated assets rather than dollar-denominated assets, that’s bad

for the dollar. That’s true whether the country in question is an oil importer,

like China, or an oil exporter, like Saudi Arabia. And in general a weak dollar

is bad for countries which export to the US – and it

can be bad for the US as well, in the longer term.

The fact that oil is denominated in dollars, on the other hand, Does

Not Make The Slightest Bit Of Difference to the value of the dollar, the

value of a barrel of oil, or the value of anything else. So when you read a


about Opec and the dollar, beware this kind of thing:

Oil is priced in U.S. dollars on the world market, and the currency’s depreciation

has concerned oil producers because it has contributed to rising crude prices

and has eroded the value of their dollar reserves.

Um, why would an oil producer be "concerned" about rising

crude prices? If the fact that oil was denominated in dollars meant anything

at all, those producers would surely be elated about rising crude prices.

And then there’s this:

Iran and Venezuela have proposed trading oil in a basket of currencies to

replace the historic link to the dollar, but they had not been able to generate

support from enough fellow OPEC members – many of whom, including Saudi Arabia,

are staunch U.S. allies.

If oil traded in "a basket of currencies", that would have symbolic

value but no real-world effect. And it would be almost impossible to implement

anyway. So the fight here between Iran and Saudi Arabia is entirely about symbolism,

not about anything with real economic repercussions.

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