Oil Pricing: Oil Priced in Euros. Would It Matter?

Mike Shedlock examines what would happen if Oil Pricing was done in euros, rather than dollars.

WHAT WOULD HAPPEN if oil were priced in euros? Lately, everyone seems to be making a big deal out of that idea. Some people even think the war in Iraq was started because of a threat from Saddam Hussein to price oil in euros. I think the concept is totally bogus. That has been my long-term conviction as well as the subject of many a heated debate on various message boards that I participate on. Today I declare victory in the debate.

As proof of my victory claim I offer this news story (with a complete rationale to follow): “Chavez: Venezuela Moves Reserves to Europe”:

“Venezuela has moved its central bank foreign reserves out of U.S. banks, liquidated its investments in U.S. Treasury securities, and placed the funds in Europe, Venezuelan President Hugo Chavez said Friday.

“‘We’ve had to move the international reserves from U.S. banks because of the threats’ from the U.S., Chavez said during televised remarks from a South American summit in Brazil.

” ‘The reserves we had (invested) in U.S. Treasury bonds, we’ve sold them and we moved them to Europe and other countries,’ he said.

“Chavez, a sharp critic of what he calls ‘imperialist’ U.S.-style capitalism, has often criticized foreign banks for the power they wield in international financial markets at the expense of poorer countries.

“Chavez again proposed the creation of a South American central bank that would hold the foreign exchange reserves of all the central banks in the region.

“‘I’m ready right now with the Venezuelan central bank… to move $5 billion (euro4.15 billion) (of Venezuelan reserves), to a South American bank,’ Chavez said.

“Central bank officials could not be immediately reached for more details.

“Chavez has also argued against central bank autonomy, saying excess foreign reserves should be spent on economic development projects.

“Under his presidency, Venezuela’s mostly pro-Chavez Congress changed central bank laws earlier this year so the government could tap reserves for spending, despite criticism that it would lead to devaluation of the local currency and higher inflation.

“Every year the central bank must now compute an ‘optimum’ amount of reserves and hand over the rest to a newly created national development fund.

“Money held in the fund will be used for overseas purchases and to pay off outstanding debt.

“Foreign exchange reserves held by the central bank stood at $30.434 billion (euro25.27 billion) as of Sept. 28, according to central bank data.”

Oil Pricing: Would It Matter?

Was Chavez able to move his reserves out of U.S. dollars into euros even with oil priced in dollars? Obviously the answer is yes. Could Saudi Arabia or Iran or China do the same? Of course they could. Would it matter if oil were priced in dollars, yen, or Swiss francs? After today it should be perfectly obvious the answer is no. Unfortunately, it will not be. I fully expect to see more nonsense about oil priced in euros within a couple of weeks.

Mish readers, this is the bottom line: Outside of pricing oil in Yap Island stones or some other totally illiquid form, it is 100% meaningless what oil is priced in. If oil were priced in euros, could Venezuela or Saudi Arabia or Japan or China still hold their reserves in U.S. dollars? Of course they could. With that answer in mind, here is the Mish bonus question: Does an oil pricing currency mandate the currency that forex reserves are held in? The bonus question answer should be obvious: Of course not.

Thus we did not go to war because Iraq threatened to price oil in euros. The idea is totally preposterous, but every month that rumor seems to resurface. Whether or not oil is priced in euros or dollars or yen is totally meaningless. Really it is, and Chavez just proved it.

If you disagree and still think whether oil is priced in euros is meaningful, then please explain how oil priced in dollars stopped Chavez from pulling all Venezuelan reserves out of U.S. dollars. It can’t be done because it did not stop Chavez one bit. Could Saudi Arabia or China or Japan move all of their reserves out of U.S. dollars tomorrow? Of course they could. Would it take oil to be priced in euros to do it? Of course not. The idea that oil priced in euros matters should now be shattered.

Oil Pricing: Where a Country Holds Its Reserves

The key points that no one seems to understand can be summarized as follows: What oil is priced in is totally meaningless. However, where a country holds its currency reserves is another story. Venezuela has just spoken. Will anyone else be saying the same thing? If no one wants to hold U.S. dollar reserves, the United States is in a world of hurt and U.S. interest rates will soar. Regardless of what currency oil is priced in, if foreign countries are willing to hold U.S. dollar reserves, then the U.S. dollar is less threatened.

Now that we have resolved the oil pricing issue, we can turn our focus to the real question: Is this the start (or continuation) of a forex reserve trend away from U.S. dollars, or is this just random noise from one left-wing nut job? In other words, how likely is it that Iran, Saudi Arabia, China, Japan, or other countries do the same thing? That is the real question. Whether oil is priced in euros or U.S. dollars is a meaningless sideshow.

Regards,
Mike Shedlock ~ Mish
October 13, 2005

Here Merit be:

“It’s actually worse than you can possibly imagine. The purpose of the bill is to make sure that no one files a Chapter 7 (which forgives all debts) bankruptcy. Every page you turn in the bill has another “kick ’em when they’re down” clause intended to make it more difficult, more expensive, and more time consuming. My wife is a bankruptcy lawyer, so I’ve heard it all.

“But then, what would you expect? The banks and credit card companies spent $400 million on bribes…er, campaign contributions…over an 8 year period to get this bill. Lawyers from banks wrote the bill. It is a mean, nasty, vicious, unconstitutional bill that was bought and paid for. When Bush signed the bill, he turned to Charles Grassley (the senator who sponsored it) and said, “It’s a done deal.”

“The AARP is the only organization that wins in this deal. In return for not lobbying against the bill, the law says Social Security (and unemployment benefits) cannot be counted as income. That will help retirees, currently choosing between food and drugs, to get Chapter 7 bankruptcies.

“Today, just one week before the new bill goes into effect, no lawyer can file a case under the new law. There are no forms, no approved local credit counselors (three nationwide services, one in Texas and one in Florida, of course, but no local agencies), no software packages yet, and the bill has yet to clear the committee that is supposed to clean up all the inconsistencies. So, on October 17, nobody will be able to file bankruptcies — the old law will have expired, and the new law won’t be ready yet.

“Look for lawyers to abandon their bankruptcy practices. The law is so complex and filled with penalties for lawyers, that it won’t be worth it. Can you imagine telling defense lawyers that they can’t advise clients about the best defense? Or making a defense attorney swear under penalty of disbarment that every document filed by the client is absolutely true? Or, as Mish said, “Another provision of the bill places the burden of proof for bankruptcy on the debtor’s lawyer, requiring the attorney’s signature on the petition and verification that they have investigated the claim sufficiently and found it to be solid.” Bankruptcy lawyers have these and more dumb rules hanging over their heads, any of which can lead to disbarment. The purpose is to make it impossible to get a bankruptcy by making bankruptcy lawyers give up the profession and go chase ambulances or do divorces instead.

“The bankruptcy bill is the worst piece of legislation ever purchased in the history of the United States. Not only is it a sham, it proves that the Congress and the Presidency are both for sale. Price for a bill these days: $400 million will get you whatever you want.”

My wife isn’t giving up her practice. She plans to expand it into fair debt collection. That’s when a bank or credit card company harrasses a debtor in violation of the law, and my wife hits them with a big fat lawsuit. Not only is it poetic justice, it couldn’t happen to a nicer bunch of vicious bastards.

By the bye, did you realize that increases in bankruptcy fees are going to pay tsunami victims? Not hurricane victims, mind you. You won’t find that tidbit in the bankruptcy law, though. It was written into the Tsunami Relief Act to hide it from us.

by William Rees-Mogg

This is a critical period for Europe, and a very important one for Europe’s economic relationships with the rest of the world. We are already in the second half of Britain’s six-month chairmanship, perhaps the last chance for a strongly open market power to persuade the European Union of the need for change. A new German government is in the process of being formed under Angela Merkel, the first woman chancellor. This month there will be a “make or break” summit on European social reform. In eight weeks’ time there will be the World Trade Organization’s Hong Kong Summit. Europe still has important trade negotiations to complete with the United States.

This is the framework inside which European economic policy has to be constructed. Yet the problem is much more fundamental. Gordon Brown, the British chancellor of the exchequer for the last 8½ years, has put it this way: “Within a few years, countries labeled ‘developing’ will produce half the world’s manufactured exports, with up to 5 million jobs outsourced from Europe and America to Asia. For 10 years, Europe has grown at not only one-quarter of the rate of China and India, but at half the rate of the United States.” That is the key sentence in his recent article in The Financial Times of Oct. 13. Gordon Brown is the finance minister of a pro-European government, which even signed the centralizing European Constitution, which was subsequently torpedoed by its rejection in the French and Dutch referendums. He calls himself “pro-European” in the article, but should perhaps be labeled a “skeptical pro-European,” rather than a “Euro-skeptic.”

A similar expression of concern is to be found in an interview given by Gordon Brown’s predecessor, Kenneth Clarke, who was the Conservative chancellor from 1993-1997. Between them they have been responsible for British economic policy for the last 12 years. Kenneth Clarke has sacrificed the chance of being leader of his party in 1997 and 2001 to his Europhile views. He is contesting the leadership again at the present time. He gave an interview for the August issue of Central Banking, an authoritative magazine that is now in its 14th year of publication. He was much more critical of the regulatory system of the European Union and of the European Central Bank than he has been in the past. He is still rather more sympathetic to the euro itself, than I suspect Gordon Brown would be, but he doubts if British membership will be “possible for 10 years or more.” Like Gordon Brown, he is concerned at the gap between European and U.S. growth rates.

“If you look at German and French economic growth compared to the United States over the past 20 years or so, you can make a good case for saying that the biggest cause of slower growth overall is that continental Europeans work fewer hours, have longer holidays, and retire earlier! The proportion of the population that is economically active is less than in the United States. And that is mostly forced on them by law – even where people want to work, they can’t!…So politicians do bear quite a share of the responsibility for slow growth.”

These are the views of two successive chancellors, whose periods at the treasury would be regarded by most people as successful. When he came to office in 1997, Gordon Brown largely built on Kenneth Clarke’s policies. They are not the views of Euro-skeptics, even if Gordon Brown is considerably more sceptical than Kenneth Clarke.

The new element in the equation is Angela Merkel, the Christian Democrat leader. Without strong political support from Germany, there is no chance of the economic and social reforms that would raise the competitiveness of the European economy and lead to a path of higher growth. At present, growth is only running at a little above 1% and unemployment is around 10%. The European Union has a total population of 450 million; among the work force, there are 20 million unemployed, of whom 10 million have been unemployed for more than a year. That can be regarded as economic failure.

Unfortunately, the German election did not give a decisive mandate for reform. Angela Merkel is not a brilliant public orator; indeed, she is not an orator at all, but more like a schoolteacher. She does not have a particularly strong grasp of economic issues. She did not fight for the cause of economic and social reform and she did not win the election. She does not have an overall majority, has been forced to form a coalition with the Social Democratic Party, and has conceded some key ministerial posts to the SDP, including that of foreign minister. These are not the political circumstances in which Germany is likely to back reform – a weak coalition, a weak chancellor, an opposition waiting for the chance to regain power.

Yet the pressures of European economic weakness are only too evident. It is no longer fanciful to think that the eurozone might be deserted by one or two of its weaker members. Kenneth Clarke observes – accurately – that Italy is the weak spot.

“I am beginning to worry considerably about where Italy is going. Both its government and its corporate community seem to be oblivious of the need to adjust to being in the same currency area as the rest of continental Europe. In the past, they were always waiting for a burst of inflation, devaluation of the lira and a rapid change of government…. The present Italian government is utterly oblivious of the need to maintain some reasonable fiscal discipline. And it is still running a kind of family capitalism without paying any heed to the level of wages and other costs it is incurring in its determination to keep Italy’s industrial base firmly in shoes, textiles, and minor manufacturing.”

So this is Europe’s position – noncompetitive with the growing Asian exports in manufacturing; with lower growth than the United States; with weak leadership from the strongest economic power, Germany; and with a conspicuously weak economy in Italy, with low growth and high unemployment. The prospects for reform do not look good. Yet the need for reform is staring Europe in the face.