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Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic.
...
...it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.

His comment about the oil being a virtual drop in the actual dollar bucket by comparing it with a one time reduction of China's holdings is a little specious. If one is going to pshaw a daily removal of oil dollars taken out of the Forex equation, then one must consider the daily reduction of China's holdings; that is lot of 1/2 percent daily drops. Two months is a quarter trillion dollars.

Leaving the US will only continue to get more expensive...most arguably correct. The question is for how long. And for how long will living in the US be expensive - lowering of income, raising of prices even within the borders?

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Thu Oct 8th, 2009 at 09:20:04 AM EST
If one is going to pshaw a daily removal of oil dollars taken out of the Forex equation, then one must consider the daily reduction of China's holdings; that is lot of 1/2 percent daily drops. Two months is a quarter trillion dollars.

Referencing the daily dollar value of oil purchases is misleading. However, assuming that the yearly draw-down in Chinese dollar reserves would be equal to the yearly purchase of dollar denominated oil is also misleading. It would assume that China would either cease or greatly reduce its inflow of US dollars. I have no doubt they would like to reduce their holdings of a currency they know is going to depreciate, but were they to demand currencies other than the US$ for their exports, the US demand for those exports would quickly dry up.  This could be very good news for Mexico, Hati, etc. but it would be a disaster for the Chinese economy.

The policies the US has followed have been flawed, but the USA is hardly the only nation that finds itself in a bind as a consequence. Parts of the US financial sector are the only ones in the USA who have benefited at this point. Only time will tell if they can hang on to their gains. Right now Goldman and Morgan seem to be the big winners, but at the cost of poisoning the water in which they swim.      

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 8th, 2009 at 12:42:06 PM EST
[ Parent ]
I agree that it is extreme to treat any extra demand for dollars as a result of oil contracts being settled in dollars as being as much as one day's transactions, but it is both a conservative value for the purposes of the argument - the amount of extra demand is certainly less than that - and a convenient one, since the information on the value of oil sold per day is readily available.

And by contrast, should China change the weight in its Singapore peg market basket, it would easily amount to a more substantial impact on FX markets than the dollar value of one day's worth of oil.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Oct 8th, 2009 at 04:18:51 PM EST
[ Parent ]

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