The number of people linking to articles such as this one: Cash-strapped Iran asks Japan to pay for oil in yen over the past several days has been enormous. I was expecting to see a lot of “We are about to invade Iran” calls but those invasion calls never came. (If it happens it will be Bush arrogance not an oil pricing unit that causes an invasion).

It’s time we finally put to bed two ideas.

  • We invaded Iraq because Iraq was about to price oil in Euros
  • The pricing unit itself actually matters

People seem to be having an extremely hard time distinguishing between a pricing unit and a holding unit. The difference is significant.

In Iran asks Japan to pay yen for oil I see the following text: “Most Japanese refiners pay dollars for the oil they purchase from Iran, according to Kyodo.

Clearly Iran has already been taking Yen for oil. Obviously there is not an absolute requirement to trade oil in dollars even though oil is priced in dollars.

I am still staggered by the fact that people just cannot see the difference even though anyone in London can walk into a gold dealer and buy gold in the British Pound or Euros even though gold is priced in dollars. For some strange reason people think that oil trades only in dollars even though currencies are totally fungible. Furthermore it would not matter one iota even IF oil only traded in the pricing currency given that currency trades can execute in less than a second.

Asking Japan to pay for oil in Yen is a political sideshow. In and of itself it is meaningless. Iran can convert dollars to Yen in one second flat. Nonetheless, add Iran to the list of countries attempting to divest themselves of dollars.

If no one is willing to hold dollars, then we have a problem with dollars, do we not? Thus it is lack of faith in the US$ that is the real problem, not the pricing unit. The pricing unit is nothing but a sideshow even as the significance of the event is missed.

The significance is that that someone (in this case Iran) appears to want to hold the Yen vs. the US dollar when the two weakest currencies have been the Yen and the Dollar. This puts downward pressure on the dollar and upward pressure on the Yen even though the announcement itself is pure politics. In the end it is Iran’s actions (refusal to hold dollars) as opposed to Iran’s words (in regards to the pricing unit) that matters.

Mike Shedlock / Mish/