Surprise, Surprise, Surprise, Not: The oil hype story as noted in Ridiculous Hype Over Secret Oil Meetings has blown sky high already, just hours after I wrote the above.

Russia Denies Talks

Please consider Russia: hasn’t discussed changing dlr role in oil.

Russia has not discussed changing the dollar’s role in the global trade of oil, deputy Russian finance minister Dmitry Pankin said on Tuesday. “We did not discuss this at all,” he told reporters. Pankin was asked by reporters about a story in Britain’s The Independent newspaper, which quoted unidentified sources as saying Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in the trading of oil.

Oil States Deny Talks

Inquiring minds are reading Oil States Say No Talks on Replacing Dollar.

Big oil producing nations denied on Tuesday a British newspaper report that Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in trading oil.

It said the proposal was for trade in crude oil to move over nine years to a basket of currencies including the Japanese yen, the Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, which includes Saudi Arabia and Kuwait.

But top officials of Saudia Arabia and Russia, speaking on the sidelines of International Monetary Fund meetings in Istanbul, denied there were such talks.

Asked by reporters about the newspaper story, Saudi Arabia’s central bank chief Muhammad al-Jasser said: “Absolutely incorrect.” He repeated the same response when asked whether Saudi Arabia was in such talks.

Russia’s deputy finance minister Dmitry Pankin said: “We did not discuss this at all.”

Algerian Finance Minister Karim Djoudi told Reuters: “Oil producing countries need to stabilise revenues but…I don’t see a need for oil trade to be denominated differently.

Analysts said that while individual countries would find it relatively easy to stop using the dollar in settling their oil trades, as Iran has already done, replacing the currency in which oil is priced would require a massive effort.

And apart from the strong political links between Gulf nations and the United States, the lack of convertibility for many Gulf currencies and the yuan tops the list of practical hurdles to making such a shift. Saudi Arabia and some other Gulf states now peg their currencies to the dollar.

To be fair, denial of talks does not mean talks did not happen. However, for reasons mentioned, it was easy to see the Fisk story for the hype that it was.

Here is the key sentence in the above article “Analysts said that while individual countries would find it relatively easy to stop using the dollar in settling their oil trades, as Iran has already done, replacing the currency in which oil is priced would require a massive effort.

While conceptually easy to price oil in something else, it might take a huge programming and retraining effort to do so. For what benefit? The answer is none, because outside of Yap Island stones, it does not matter what it is priced in.

Settlement, as stated above (and also by me years ago) is easy enough to do now. Iran does not want to hold dollars so it doesn’t.

Who Wants To Hold Dollars?

I was just asked ” Why Would Anyone Want To Hold Dollars?”

The question is actually moot.

The US runs a trade deficit. As explained in How Will China Handle The Yuan? holding dollars is a purely mathematical result of trade deficits.

The US runs a trade deficit with China. That means China must accumulate US assets. China does not have a choice in the matter; it is purely a mathematical function. When the US runs a deficit, mathematically someone must run a surplus.

There is no choice in the matter other than to raise the price of goods so high that consumers won’t buy them. Pray tell, what would that do to unemployment and civil unrest in China? What would that do to demand in Europe? It is virtually impossible for China to strengthen its currency to the US dollar without affecting every other currency as well.

Some might suggest that China should buy oil with those dollars, but then what would the Mideast exporters do with them?

The reason China is buying fewer US treasuries recently is that the US deficit with China is shrinking. Again this is a simple mathematical equation, not some massive conspiracy to dump the dollar. Of course China could buy US ports and bridges or oil companies instead of treasuries, but such maneuvers have been blocked by Congress and last I checked no ports or bridges are for sale.

Simple Math Lesson

Math dictates that if the US is running a trade deficit someone else mathematically MUST run a trade surplus.

Whether someone wants to hold dollars or not is irrelevant.

That someone MUST be accumulating US dollars is a mathematically certainty. Suppose you suggest China dump those dollars.

Dump them to who, for what? Iran for oil? Surely you jest. Saudi Arabia? What will the Saudis do with them.

So China accumulates treasuries. And eventually those dollars will come home when China buys US assets, perhaps a toll road or a piece of a US corporation, or perhaps the balance of trade changes.

However, even though the question is moot, the reason why China might want to accumulate dollars is to suppress the prices of the RMB to help Chinese exports, the same reason Japan has. China, as noted above is very concerned about export jobs.

Japan is threatening once again to intervene in currency markets. To do so they would accumulate dollars in excess of what balance of trade might suggest.

The European Central Bank and the Fed are involved in currency swaps right now, to help diffuse the credit crunch.

So there are lots of reasons countries might want to hold dollars. Bear in mind, some of them are senseless, but since when do governments have policies that make any sense?

Mike “Mish” Shedlock
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