Right now, with oil rising to $80 a barrel, it is important to recognize that the price of oil does not reflect the value of oil but the value of the dollar. There is still fairly weak demand for oil.
Meanwhile, the fate of the greenback is being tugged in different directions by different international coalitions with very different agendas. East Asia, which has so much trade with the US and a lot of dollars in the individual reserves, has an economic incentive to help keep the dollar strong. And as the dollar falls, so does the Chinese yuan, making China’s exports more competitive than smaller countries in the region. Europe too is worried that as the buck falls, the euro will rise, meaning that continent’s exports will be priced out of some markets.
Ironically, the US itself has little incentive to prop up the currency — a weaker dollar makes American exports more competitive (good for the economy), even as the government prints more money (making each dollar supposedly inherently less valuable) for the stimulus and other projects. Of course, too weak would be bad — it’s a balancing act. Excessive debt can lead to some distrust of the future strength of the American economy.
The anti-dollar people have a more political agenda. Many of them are oil exporters who are not particularly politically cozy with the US, and some would like to see the dollar replaced altogether when it comes to paying for oil. This wouldn’t change how much oil was inherently worth, it’s just an opportunity to dig at the US.
The grumbling has been going on for months. In early October, there was a report out of London that a number of countries from the Middle East and China and Russia were planning to trade oil in a different currency. Even before that, it was not a secret that these countries have been unhappy with using dollars. Russia, China and others have suggested creating a global alternate currency to the dollar, which sounds like financial Esperanto and about as likely.
Others like Iran and the irrepressible Hugo Chavez of Venezuela are more interested in regional currencies. The regional currencies sound more practical and popular; but unlike Europe, there just isn’t a lot of trade between Latin American countries to make it useful. This reminds me of the old idea of import substitution — infinitely more appealing as an idea than needed as a practical reality.
Oil is priced in dollars but it isn’t tied to the value of the dollar. Countries can complain there are transaction costs and other considerations in converting other currencies to dollars to actually pay for the oil. But that’s what happens with any reserve currency.
The dramatic weakening of the US economy has undoubtedly offered opportunity to those who chafe at America’s global position (especially given the level of American financial irresponsibility that cause that weakness and would certainly have sunk many other countries) and those with ambitions to use its diminishment in search of their own aggrandizement. There’s nothing as informative as hard times.
