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Monday, October 25

Putin: Why not Price Oil in Euros?

"President Vladimir Putin said Thursday Russia could switch its trade in oil from dollars to euros, a move that could have far-reaching repercussions for the global balance of power -- potentially hurting the U.S. dollar and economy and providing a massive boost to the euro zone. "We do not rule out that it is possible." -Moscow Times

The US Dollar enjoys its satus of the world's reserve currency largeley because of the fact that oil is priced in US dollars. To buy oil, the most necessary of all industrial inputs, one has to buy US Dollars. The US therefore enjoys a structural demand for its dollar as a reserve currency. This allows the US to accumulate seignorage revenues, or literally "steal" value on dollar holdings by inflating away the value at a slow and steady rate.

There must be some serious arm-twisting going on in the Kremlin, because just a few weeks after expressing his government's intent to ratify the Kyoto Treaty, Vladimir Putin is rumored to try pricing Russian oil in Euros. It doesn't necessarily make economic sense, as the US Dollar is sliding against the Euro, so the impact of high oil prices is not as bad in Europe as it is in the US. It is a power game.

Vlad is on the verge of literally exacerbating the US dollar's slide into oblivion by striking at the heart of the dollar's hegemonic hold on international reserves. The last evil genius to try this was Saddam Hussein.

Richard Douthwaite
puts it best when he says:

The dollar is the world reserve currency. This gives a huge subsidy to the US economy because if a country wants to hold lots of dollars in reserve they must supply the US with goods and services in return for those dollars. In return the US creates a bit more credit. The more dollars there are circulating outside the US, the more goods and services the US has imported virtually for free. This is how the US manages to run a huge trade deficit year after year without apparently any major economic consequences. No other country can run such a large trade deficit with impunity. It is in effect getting a massive interest-free loan from the rest of the world.

One of Europe's primary objectives, if not the primary objective, of setting up the Euro was to try and get some of this free lunch for Europe. If the Euro became a major reserve currency, or better still replaced the dollar as the major reserve currency, then Europe too could get something for nothing."




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