Oil > gold.
A reserve currency means that other central banks are willing to hold it as a substantial proportion of their reserve assets.
Yes, so in other words, it’s not a binary situation where the USD is either a reserve currency, or not. More likely, it could simply slowly erode and CB’s could hold their assets in gold, CHF, EUR, or wampum in addition to USD.
Right, but that’s not what makes USD the reserve currency. Other countries hold dollars primarily for two reasons: 1) Their debts are more secure when they’re holding USD; and 2) oil is priced and sold in dollars.
Petrodollar warfare bitches!
^ So why not, as a central bank, just hold oil reserves. Reason #2 eliminated. I can’t understand the fascination of holding something nearly completely useless as a reserve. Gold itself is a confidence based currency because its inherent value is only as much as some lady in India wants a new gold chain. Oil on the other hand can be put to productive use instantly, it has inherent value in the energy it contains.
I’ve never been all that sure that the “oil is priced in dollars” argument holds much water (so to speak). If oil had a stable price in relationship to the dollar, I can see that, but if oil were priced in euros, I’m not sure it would make much of a difference, really. If it were priced in riyal or something, that might make a difference, but the problem is that one wouldn’t really be able to purchase much with riyal, other than oil.
Part of the reason that the USD is worth something is because the economy can produce a lot of stuff, and so it’s a claim on the assets or the goods of the economy. If you are going to be a globally used reserve currency, you generally need to have a deep economy with a lot of assets, which is what the problem with CHF and SGD is.
I agree that as the US becomes less hegemonic, it’s use as a reserve currency will decline, but it’s unlikely that there will be a sudden abandoning of the dollar, outside of a war that seriously damages the North American continent, or mass Ebola plague or something like that. What is more likely to happen is that the US will go from being 50% of foreign central bank reserves to 30%, with the slack being made up by a basket of other options, including gold, EUR, maybe a bit of CNY, and some nonperishable commodities.
The US has a pretty good track record of bombing countries that leave the petrodollar.
Putin knows how powerful it is and that’s why he’s been trying to get an exchange set up to sell oil in anything other than dollars. If that happens, you’ll see our military involvement in Eastern Europe rise dramatically. That’s why Putin threatens, but doesn’t actually do it.
You may be right that the actual outcomes might be minimal, but there’s a huge perceived risk is non-dollar denominated oil.
double
Bombing countries that leave the petrodollar? Which examples are you thinking of, other than Iraq. I don’t think we’ve bombed Russia just yet.
To the extent that there is a relation, I think you may be mixing up cause and effect. With Iraq at least, relations were already bad and going off the dollar is a way to say F.U. (meaninglessly, in my opinion) to the US. I.e. the bombing was already on it’s way and so Saddam says “I’m not taking USD” as a way to snub the US. I doubt that leaving the Petrodollar is a major reason to send bombing sorties. There’s not much benefit.
For Putin, it’s a different story. Putin’s access to USD might be constrained by embargos and sanctions and things like that, so if he can get oil priced in some currency that is not linked to NATO countries, it makes those sanctions and embargos less effective.
It is not always practical to maintain huge stocks of materials, so buyers prefer to have some way to claim future deliveries. This is why commodities futures are very important, and is also probably why countries prefer to hold USD, which gives them access to oil, rather than actual oil, which has disadvantages of being hard to trade, degrades over time, and requires large secure storage facilities.
The whole point that USD is not considered to be a useless thing, because it can be instantly exchanged for other things like gold or oil. While there is a possibility that this relationship will be untrue at some point, for now, other countries regard this as an extremely remote possibility. Hence, it is not necessary for them to distinguish between the inherent usefulness of a physical commodity compared to USD.
Libya?
I still don’t see how USD gives you access to oil, practically. If you called up Suncor today (silly example but illustrative) and asked for a million barrels, they’d sell it to you in whatever currency you want to pay in. In fact, owning USD as an option on oil may be a poor choice as the correlation with oil is much weaker versus most currencies compared to CAD or AUD or even GBP. Companies like Suncor are going to be converting much of the USD to CAD anyway. Owning USD does not equate to a stable amount of energy, unlike owning CAD (85% correlated with oil versus yen) or AUD or actual oil. I admit there are storage costs with oil (greater than gold) which cause some issues with holding them as a reserve. Summary: If I was holding a currency for oil, I’d be holding the currency of a major net exporter, or something that net exporter wants. If the USD took a real shit, Canadian or Norwegian producers aren’t going to want your USD, or they’ll buy a lot less oil (obviously).
cost of storage. and transportation if you ever need to actually use it.
a barrel of black gold has a value of ~$93 US. a barrel of yellow gold has a value of $6,811,392 US. you would need facilities that are 73,240x bigger to store the same economic value of oil than gold. the US, and many countries, have have a “strategic reserve” which effectively holds some oil in public possession but a reserve much bigger than the 727 million barrels the U.S. has is tough to justify.
using Canada as an example, as the primary buyers of Canadian oil use USD, if the value of USD goes down, the value of oil in CAD will likely go down even more as oil is a primary export and we will be shuttering 5-10% of our economy overnight. if the U.S. is in such bad shape that their dollar is dying, that means they can’t buy our crap and we will likely be hurt even more as we are a mere knoll on the mountain that is the U.S. economy. in all practicality, as much as we are diversifying our exports away from the U.S., there is an extreme transportation cost to the non-U.S. buyers relative to the U.S. buyers so the U.S. buyers are always optimal and a high level of diversification is impossible.
^ If I was the reserve bank of Importerlandica, I wouldn’t have oil in a vault. I’d just go buy in place proven reserves in a stable, accessible market.
Our crap now is pretty much just oil and gas, two things with fairly inelastic demand ex any monsterous disaster. And due to transport discounting issues now, if US oil demand slowed, they’d important less via overseas before cutting Canadian purchases. None the less, for major net importers (like Japan), holding CAD makes way more sense as a hedge on their energy demands than USD.
an absolutely terrible idea. even if you’re buying in-place, proven reserves that are the lowest cost on the entire planet, there is opportunity that your reserves will be worth much less, if not nothing in a poor economic environment, the exact time you need to bolster confidence among your investors (debt holders, currency holders) that you have sufficient reserves to fight of recession/depression/whatever. the primary reason they are called reserves is that they should maintain their value in the worst of times. to buy oil, or oil companies/fields, is the opposite of reserves. just because oil reserves and central bank FX/Gold reserves share part of the same name (“reserves”) doesn’t mean they serve similar purposes.
I respectfully disagree. The worst possible scenario for Japan economically is a huge run up in global energy prices. I’m talking major energy importers here. If energy prices take a huge dump, Japan’s production just became way cheaper and competitive globally, driving more demand for yen to buy Japanese crap. For an energy exporter, I agree, owning oil as a currency reserve would be a bad idea.
[quote=“geo”]
is their goal to hedge energy demands or is it to hedge their outstanding liabilities (e.g. trade, debtholdings, etc) and have sufficient working capital to do business with its trading partners? furthermore, if you’re looking to hedge energy costs wouldn’t you hold saudi riyals or a currency of an actual energy economy? you do realize Canada and Australia aren’t true petrocurrencies right? we do produce quite a bit more than oil and gas and with most of Canada’s exports going to the U.S. and most of Australia’s exports going to China, don’t you think the currencies would be more tied to the economic health of those two countries instead of oil in general?
saudi arabia: 55% of GDP is oil and gas.
canada: 4% of GDP is oil and gas. 4%!
yeah so let’s make 50% of Japan’s total land strategic oil reserve storage and the other 50% nuclear facilities. sounds like a safe and beautiful place to be if it weren’t for those damn fault lines.