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Home Publications Blogs Beat the Press It Doesn't Matter that Oil is Priced in Dollars # 78,254

It Doesn't Matter that Oil is Priced in Dollars # 78,254

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Tuesday, 01 February 2011 17:54

The NYT told readers that:

"A stronger euro blunts the effect of rising prices for oil and other commodities, which are traditionally priced in dollars." Actually, it does not matter at all that the oil and other commodities are priced in dollars, the point is that the euro has gone up in value. If the euro were to rise in value against other currencies then people in the euro zone would pay fewer euros for their oil even if oil was priced in euros.

In this story, the dollar is simply the medium of exchange. Oil is not fixed in price in dollars, the price of oil is fluctuating in dollars and all other currencies. The only question that matters is the value of the euro relative to other currencies, it doesn't matter which currency is the basis for the purchases.

The piece also includes the interesting comment that:

"German wages have not started rising to alarming levels yet, Mr. Chaney said, 'this is something that is on the radar screen.'” It is likely that most people would not be alarmed by the plausible rate of growth for German wages in the near future. The people who would find such wage growth "alarming," are likely a very small subset of NYT readers or people in Europe and the United States.

Comments (3)Add Comment
...
written by izzatzo, February 01, 2011 7:33
If the euro were to rise in value against other currencies then people in the euro zone would pay fewer euros for their oil even if oil was priced in euros.


This makes my head hurt Bubba. Flip the channel to Fox so we can hear more about why cotton and rubber and oil commodities are on fire due to Helicopter Ben, unions and demand-pull inflation under full employment, just like it was before the last financial crisis.
You (and Krugman) have it backwards
written by Ken Houghton, February 01, 2011 10:07
It's not that there is an advantage to pricing in dollars--it's that there is a disadvantage to being the World Reserve Currency.

Ask David Beckworth, who is doing the recent research. If you're the WRC, everyone follows you. You have to be able to do more to have the same effect as the non-WRCs can have domestically.

If you don't believe me, check Britian's performance from ca. 1896-1914 (post-Real First Depression, pre-War--pay special attention to trade balance ex-IP).
...
written by Calgacus, February 03, 2011 4:05
Being the world's reserve currency is an unquestionable advantage - if you take advantage of it, which governments frequently do not. Being the WRC means there is a lot of international demand for your currency. This gets you lots of imports, but deflates your domestic economy - so you should always run a domestic government budget deficit at least as big as your trade deficit.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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