“The glory days of the petrodollar are over,” says Brad Setser CFR fellow.
Petrodollars. Myths and Reality
Please considerPetrodollars. Myths and Realityby Brad Setser, emphasis mine.
The foundation of the dollar’s global role, it is sometimes argued, rests on the willingness of the Gulf countries (but not Russia) to price their oil in dollars.
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But it was never quite clear why oil pricing mattered quite as much as some claim.
To be sure, there are network effects around dollar pricing.But it isn’t hard to pay for oil in a global currency like the euro, even if the underlying contract is priced in dollars. There is a deep and liquid market for converting euros into dollars, and a firm aiming to lock in the euro price of oil 3 months forward can buy oil forward in dollars and dollars forward with euros, thereby locking in a euro price.
Dollar settlement is a problem for countries that are sanctioned by the U.S. and the EU and for frontier economies that cannot settle their oil bill in local currency, but it hasn’t required most European oil importers to build up big stocks of dollar reserves just to pay for oil.
What has mattered at times is how the big oil exporters manage their surplus funds when there is a surge in the global price of oil.
Yet the myths around petrodollars persisted long after they had lost most of their substance:the 1970s deal between Saudi Arabia and the United States to price oil in dollars never dictated the accumulation of dollar reserves in East Asia, and it should be clear by now that the U.S. commitment to defend the Saudis is based on much more than dollar pricing of oil.
Source: SGT Report
