The ‘Oil-Game’

The global oil trade is currently based in dollars. This means that US is the only country in the world that incurs no currency risk when it deals in the oil market. It is also the sole country that can print money to purchase oil. The dollar-based global oil trade gives the United States free reign to print dollars without sparking inflation – it allows the US to fund huge expenses on wars, military build-ups, and consumer spending, as well as cut taxes and run up huge trade deficits. Almost two-thirds of the world's currency reserves are kept in dollars, since oil importers pay in dollars and oil exporters tend to keep their reserves in dollars.

Europe would prefer to see payments for oil shift from the dollar to the euro, which effectively removes the currency risk like it does currently for the US. It would also increase the demand for the euro and thus help to raise its value. Moreover, since oil is such an important commodity in global trade, in terms of value, if the pricing of oil were to shift to the euro, it would have a strong symbolic implication.

In the Baltic region, Russia is a big net exporter of oil, which means that the Russian economy is poised to benefit from higher oil prices. A move by Russia, the world's second largest oil exporter, to price its oil in euros poses a potential downside risk to the dollar as it opens the door for other oil exporters to follow suit. If oil were not priced in dollars, countries have less of a need to hold dollar reserves and may rebalance their currency holdings. The effect of this rebalancing could lead to a sharp sell-off in the dollar as countries shift a portion of their dollar holdings into euros. Iran for example, the world's 5th largest oil exporter has also debated a move into euros.

Who is affected by high oil prices?

Simply put, The US and Japan are the world’s two largest net oil importers. USD and Yen would be worst (negative-impact) affected currencies by higher oil prices. And the best (positive-impact) affected currency would be British Pound.

A thought for you to ponder upon: “Find out the TOP 3 global recessions that have taken place in the past couple of decades and you shall find the grass-root cause of all of them: Rising Oil Prices”

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