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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (71381)	11/19/2007 12:27:31 PM
From: Moominoid	Read Replies (1) \| Respond to of 116555

It doesn't matter what oil is priced in, it matters a bit what currency sellers are willing to accept for it. But in the end I don't think the latter is of much importance either.

To: mishedlo who wrote (71381)	11/19/2007 1:01:30 PM
From: Incitatus	Respond to of 116555

Mish, Let's say that oil is priced 90% Euros and 10% USD. On day one, the Euro and USD are at 1:1 parity. A barrel of oil costs 90 Euros and 10 USD (or 100 WHASITs). Let's also say that the Saudis have a policy of regulating the amount of oil pumped to keep the price of oil stable as measured in WHASITs. On day two, the US devalues its currency so that it takes two USD to equal a Euro. The price of oil is now 90 Euros and 20 USD (110 WHASITs). If the oil had been measured in USD instead of WHASITs, the Saudis, after the USD devaluation, would have been forced to massively increase production to reduce the price of oil from $200 back to $100. Instead, price increase is small and manageable. Additionally, the Saudis haven't lost very much money by holding WHASITs compared to their losses if holding USD. As measured in USD, the price of oil after devaluation has gone from $100 to $190 ($10 USD plus 90 Euros at 2:1 ratio). If the price of oil had been measured purely in USD, the price would have gone from $100 up to $200.